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4. Claims allowed or to be allowed as preferred prior to the reorganization proceedings in this cause, and such claims shall be subject to further classification, distribution to be made as provided by Section 64 of the Bankruptcy Act of 1898, as amended.

5. General claims against the estate.

Petition for review of this order was filed in the District Court for the Eastern District of Missouri by the United States , but the Government's petition was denied and the order of the referee was confirmed. The United States appeals.

Opinion

The sole question presented by the appeal is whether or not priority may be allowed to expenses incurred in the admin istration of the estate by the trustee in bankruptcy over expenses, including taxes, incurred during the attempted reorganization before the appointment of the bankruptcy trustee.

The provisions of the Bankruptcy' Act which control the priorities to be given in distribution of the proceeds of liquidation in bankruptcy are found in Section 64(a) of the Bankruptcy Act of 1898 as amended. 11 U. S. C. A. Sec. 104; and 11 U. S. C. A. 501 makes the same provisions applicable to the proceedings under Chapter X. Section 64(a) names the debts which are allowed priority and gives the order of payment and it is clear that strict adherence to the provisions requires that the tax claim of the United States here involved be given equal priority with admin istration expenses incurred by the trustee in bankruptcy. State of Missouri v. Earhart, 8 Cir., 111 F. 2d 992; In re Lambertville Rubber Co., 3 Cir., 111 F. 2d 45, 49; In re Humeston, 2 Cir., 83 F. 2d 187; Hennepin County, Minn. v. M. W. Savage Factories, 8 Cir., 83 F. 2d 453; Florida Nat. Bank of Jacksonville v. United States, 5 Cir., 87 F. 2d 896; MacGregor v. Johnson-Cowdin-Emmerich, 2 Cir., 39 F. 2d 574; Michigan v. Michigan Trust Co., 286 U. S. 334, 344; Gerdes on Corporate Reorganization (1936 Ed.), Vol. 3, Sec. 1159. See In re Oshkosh Foundry Co., 28 F. Supp. 412; In re Mid American Co., 31 F. Supp. 601. The refusal to give such parity is sought to be justified on the ground that to do so would, in view of the gross insufficiency of the assets of the estate, unreasonably hinder, obstruct and even prevent the orderly and proper liquidation in bankruptcy, and it is urged that the order appealed from should be supported as within the general equity power of the bankruptcy court.

But in Southern Bell T. & T. Co. v. Caldwell, 67 F. 2d 802, similar contentions were considered by this court and our opinion includes the following:

As this court said in Burton Coal Co. v. Franklin Coal Co., 67 F. 2d 796, decided this term: "Some question is raised as to the equity jurisdiction of the bankruptcy court. That it is a court of equity in the sense that 'its judge and referees, in adjudging the rights or parties entitled to their decision, are governed by the principles and rules of equity jurisprudence,' is beyond question. Larson, et al. v. First State Bank of Vienna, S. D., et al., (C. C. A. 8) 21 F. 2d 936; In re Rochford (C. C. A. 8) 124 F. 182; In re Ben Boldt, Jr., Floral Co., (C.C.A. 10) 37 F. 2d 499. It has not, however, plenary jurisdiction in equity, but is confined, in the application of the rules and principles of equity, to the jurisdiction conferred upon it by the provisions of the Bankruptcy Act, reasonably interpreted. Johnson v. Norris (C. C. A. 5) 190 F. 459, L. R. A. 1915B, 884; In re Kane, (C.C.A.) 127 F. 552. The plain mandate of the law cannot be set aside because of consideration which may appeal to reference or judge as falling within general principles of equity jurisprudence."

We are not persuaded that we should recede from the rule as stated but must apply it to the question here presented. The same question was before the Court of Appeals of the Third Circuit in In re Columbia Ribbon Co., 117 F. 2d 999, and we are in accord with the conclusions stated as follows:

The court in determining the priority of claims against the estate is bound by the provisions of Section 64(a) as amended (11 U. S. C. A. 104a) which specify the classes of debts which are to have priority of payment over general creditors of a bankrupt estate and the order of their payment with respect to each other. Five classes of debts having priority are established. The first class includes "the costs and expenses of admin istration". Since Congress has set up no order of priority within the first class the court may not fix priorities within the class. Missouri v. Ross, 299 U. S. 72; Missouri v. Earhart, 111 F. 2d 292, Cert. Den. -- U. S. --. Consequently all admin istration expenses whether incurred during the reorganization period or during the liquidation period and whether for costs and expenses or for services, must share pro rata in the funds available for payment. In re Lambertville Rubber Company, supra. As this court said in the case just cited (page 50 of 111 F. 2d) with respect to taxes incurred by trustees in an unsuccessful reorganization proceeding and for which priority was claimed: "These debts of the trustee included the claim of the appellant, the taxes and all other expenses of admin istration. All were on a parity before the entry of the order of liquidation and they remained upon a parity after the order of liquidation was filed. All were payable as expenses of admin istration pursuant to the provisions of Section 64 of the Bankruptcy Act as amended."

The order appealed from is reversed with direction to accord to the tax claim of the United States the parity claimed by it.

 

 

[40-2 USTC 9786] United States of America , Appellant, v. Thomas Maniaci, et al., Appellees

(CA-6), United States Circuit Court of Appeals, Sixth Circuit, No. 8319, 116 F2d 935, Filed November 8, 1940

Appeal from the District Court of the United States for the Western District of Michigan, Southern Division.

Lien for taxes.--Lien of United States for income taxes is not valid as against an innocent purchaser of realty, where in filing its lien the United States did not comply with Michigan law requiring notices of lien to contain a description of the property upon which the lien is claimed in order to enable such lien to affect the rights of third parties. Affirming District Court decision, 39-1 USTC 9307.

Francis T. McDonald, U. S. Attorney, and Shelby B. Schurtz, Assistant United States Attorney, both of Grand Rapids, Mich., and Samuel O. Clark, Jr., Assistant Attorney General, Washington, D. C., for appellant. T. Gerald McShane and Smith, Strawhecker & Wetmore, all of Grand Rapids , Mich. , for appellees.

Before HICKS, SIMONS, and AGANT, JJ.

Order

This cause was heard upon the transcript of the record, briefs and arguments of counsel,

IN CONSIDERATION WHEREOF, the court is of the opinion that there is no reversible error upon the record,

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that upon the grounds and for the reasons stated in the opinion of the District Court and findings of fact and conclusions of law filed February 2, 1939 , the decree appealed from be and the same is affirmed.

 

 

[39-1 USTC 9277]In the Matter of Knox-Powell-Stockton Company, Incorporated, Ltd., Bankrupt United States of America , Appellant, v. State of California , V. W. Erickson, Trustee in Bankruptcy of Knox-Powell-Stockton Company, Incorporated, Ltd., Bankrupt, Appellees

(CA-9), United States Circuit Court of Appeals for the Ninth Circuit, No. 8673, 100 F2d 979, Decided January 14, 1939

Upon appeal from the District Court of the United States for the Southern District of California, Central Division.

Priority of State tax lien claims.--Action of the trial court confirming the order of the referee granting priority as a lien claim to claims of the State of California for taxes payable under the Oil and Gas Conservation Act, and for penalties thereon, and for franchise taxes and personal property taxes is correct. Dates on which these taxes became a lien are determined. Affirming District Court decision.

James W. Morris, Assistant Attorney General, Sewall Key, J. Louis Monarch, Lester L. Gibson, Special Assistants to Attorney General, all of Washington, D. C., Benjamin Harrison, United States Attorney, E. H. Mitchell, Assistant United States Attorney, Alva C. Baird, Special Assistant to United States Attorney, Eugene Harpole, Special Attorney, United States Treasury Dept., all of Los Angeles, California, for appellant. U. S. Webb, Attorney General, State of California and John O. Palstine, Deputy Attorney General, both of Los Angeles, Calif., for appellee.

Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.

STEPHENS, Circuit Judge:

This is an appeal by the United States from an order of the District Court confirming an order of a referee in bankruptcy. The order, which was made after hearing upon objections filed by the Trustee in Bankruptcy, affected ten separate claims. By the order eight claims were allowed in full; one was allowed in part; and one was disallowed. The order established the priority of the claims which were allowed. They were grouped as follows: (a) "prior lien claims for taxes" (b) "expenses of admin istration" (c) the claim of the United States for taxes "allowed as prior claim under the provisions of Section 64(b), subsection 6 of the Bankruptcy Act of 1898 as amended [11 U. S. C. A. 104(b)(c)] * * *" and (d) the claim of one Rob ert Gray "allowed as a prior claim * * * under the provisions of section 64(b) subsection 7 of the Bankruptcy Act of 1898 as amended". The trustee was directed by the order to pay to the United States all sums remaining in his possession after the payment of "lien claims" and "expenses of admin istration".

[Priority of State Lien Claims]

The claims designated "lien claims" were five in number: (1) the claim of the State of California for $519.32 for taxes and penalties payable under the provisions of the California Oil and Gas Conservation Act upon oil and gas produced by the bankrupt during the years 1931 and 1932 (2) the claim of California Production Company for $402.66 for taxes for 1933-1934 paid by the claimant upon assets which had been sold by the trustee free of liens (3) the claim of William M. Walsh, Assistant Franchise Tax Commissioner of the State of California for $25.26 for franchise taxes which accrued January 1, 1933, (4) the claim of Ed W. Hopkins, County Tax Assessor of Los Angeles County for $202.26 for personal property taxes for the year 1933 (this claim was for $767.59, but was allowed only in part), and (5) the claim of W. O. Welch, County Tax Collector of Los Angeles County, for $23.27 for additional personal property taxes for the year 1932.

The "expenses of admin istration" claims were two: (1) the claim of Ray L. Riley, Controller of the State of California, for $16.29 for taxes payable under the provisions of the California Oil and Gas Conservation Act upon oil and gas produced upon the property belonging to the bankrupt estate during the year 1933, and (2) the claim of H. L. Alfonso, County Tax Collector of Los Angeles County, for taxes on personal property in the possession of the trustee on the first Monday in March, 1934.

It is stipulated that the trustee has on hand approximately $8,900, which moneys constitute the entire assets of the estate; that said moneys were in large part derived from the sale by the trustee of the bankrupt's interest in the land from which said bankrupt had produced and extracted oil and gas during the years 1931 and 1932. It is further stipulated that no lien arose to secure the payment of the taxes due the United States prior to June, 1933. The adjudication in bankruptcy was on May 6, 1933 .

The position of the United States on appeal is that the court erred in giving priority to the tax claims designated as "prior lien claims" over the tax claim of the United States . 1 The principal attack is directed against the claim of California for taxes and penalties payable under the provisions of the Oil and Gas Conservation Act. It is said that all tax claims are governed by the provisions of section 64(b) of the Bankruptcy Act of 1898, as amended in 1926 (11 U. S. C. A. 104) 2 and that where, as here, the amount of the estate is not sufficient to pay the taxes, it should be prorated between the various tax claimants. It is conceded that if the taxes given priority were secured by liens such as are preserved under section 67(d) of the same Act (11 U. S. C. A. 107), then such taxes would be entitled to payment prior to the payment of those due the United States, but it is contended that they are not, since the section relates only to liens "perfected" at the time of adjudication, and that the lien here involved was on May 6, 1933, the date of adjudication in this case, only "inchoate" and not "perfected".

Section 67(d) provides:

Liens given or accepted in good faith and not in contemplation of or in fraud upon the provisions of this title, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to import notice, shall, to the extent of such present consideration only, not be affected by anything herein.

This section makes it clear that adjudication in bankruptcy does not interfere with existing valid liens, and that the trustee takes the property of the bankrupt subject to all such liens as would have been enforceable against it in the hands of the bankrupt himself. Hiscock v. Varick Bank, 206 U. S. 29; Section 70(a) Bankruptcy Act of 1926, as amended [11 U. S. C. A. 110(a)]. 3

The laws of the state where the adjudication is had are controlling as to the validity and extent of the lien. York Mfg. Co. v. Cassell, 201 U. S. 344; Hiscock v. Varick Bank, supra; Marshall v. State of New York, 254 U. S. 380. And statutory liens come within the provisions of section 67(d). Richmond v. Bird, 249 U. S. 174; In re Brannan, 62 Fed. (2d) 959, 961 (C. C. A. 5, 1933); In re San Joaquin Valley Packing Co., 295 Fed. 311 (C. C. A. 9, 1924). Section 64(a) does not give taxes any priority of payment over liens which are protected by section 67(d), for 67(d) says that liens included therein are not affected by any provisions of the Bankruptcy Act. In re Caswell Const. Co., 13 Fed. (2d) 667, 669 (D. C. N. Y. 1926) [1 USTC 189]. And 67(d) applies against the United States as against any other creditor, since the Act was passed with the United States in the mind of Congress. Davis v. Pringle, 268 U. S. 315; Guarantee Title and Trust Co., v. Title Guaranty & Surety Co., 224 U. S. 152, 160.

To support its position that 67(d) preserves only "perfected" liens, appellant cites: Spokane County v. United States, 279 U. S. 80 [1 USTC 387]; New York v. Maclay, 288 U. S. 290; and Gerson, Beesley & Hampton v. Shubert Theatre Corp., 7 Fed. Supp. 399 (S. D. N. Y., 1934). All of these cases arose under section 3466 of the Revised Statutes, 31 U. S. C. A., 191) which grants priority to the United States over all other creditors when the debtor is insolvent. The cited cases establish that under this section an inchoate lien will not defeat the priority established by said section. But this being a bankruptcy proceeding, the provisions with respect to priority under section 3466 of the Revised Statutes do not apply here. Guarantee Title & Trust Co. v. Title Guaranty & Surety Co., supra; Davis v. Pringle, supra; Claude D. Riene, Inc., v. United States, 75 Fed. (2d) 9 (C. C. A. 5, 1935). And in construing section 67(d) of the Bankruptcy Act our inquiry as to what constitutes a lien thereunder is not embarrassed by the auxiliary consideration as to whether the lien of a tax not presently enforceable is sufficient to avail against a statutory preference which is to be liberally construed in favor of the United States . Spokane County v. United States, 279 U. S. 80, 92, 93 [1 USTC 387], quoting, Price v. United States, 269 U. S. 492, 499 [1 USTC 158].

Applying the foregoing rules to the case at hand we are constrained to hold that the action of the trial court, confirming the order of the referee granting priority as a lien claim to the claim of the State of California for taxes payable under the Oil and Gas Conservation Act (Act 4916, Deering's General Laws) upon oil and gas produced by the bankrupt during the years 1931 and 1932, was correct.

Section 41 of that Act provides:

The assessments and charges levied under the provisions of this act shall constitute a lien upon all the property of every kind and nature belonging to the persons, firms, corporations, and associations assessed under the provisions hereof, and the assessments and charges levied under the provisions of this act upon oil or gas removed from any land in this State shall constitute a lien upon the land from which such oil or gas has been extracted, which lien shall attach on the first Monday in March of each year * * * (Italics added.)

Section 23 of the Act reads:

Every person, firm, corporation, or association operating any petroleum well or wells in this state shall annually pay a charge to the state treasurer at a uniform rate per barrel of petroleum produced for the preceding calendar year at the time and in the manner hereinafter provided, based upon a verified report as herein provided.

[Date Lien Attaches]

Section 29 requires a report by the producer within ten days after the first Monday in March of each year, of the oil and gas produced during the preceding calendar year. Section 34 of the Act provides for the assessment between the first Monday in March and the third Monday before the first Monday in July in each year.

The lien provided by section 41 attaches on the first Monday in March in the year following the year during which the oil and gas was produced upon which the assessment provided by section 34 was based. Thus in the present case there arose a lien for the taxes on the 1931 production on the first Monday in March, 1932; and a lien for the taxes on the 1932 production arose on the first Monday in March, 1933. It is argued contra to this conclusion that no lien attaches until the first Monday in March in the year following that in which the assessment is made because that is the first "first Monday in March" in which there is an assessment to be secured. But it has been held by the California Courts that tax liens attach on the first Monday in March in each year, notwithstanding the taxes are not fixed or payable until the assessment has been thereafter made, it being said that the subsequent assessment does not create the lien, but is merely one of the steps for its enforcement. County of San Diego v. County of Riverside , 125 Cal. 495 (1899); City of Santa Monica v. Los Angeles County, 15 Cal. App. 710 (1911); see cases collected, 24 Cal. Jur. Taxation, 208, p. 218, 219. In other Circuits it has been held that where a lien arose prior to adjudication in bankruptcy it was entitled to priority under 67(d) even though the amount thereof could not be ascertained until after the adjudication. Britton v. Western Iowa Co., 9 Fed. (2d) 488 (C. C. A. 8, 1925); Bates v. Archer, 288 Fed. 182 (C. C. A. 6, 1923); cf. New York-Brooklyn Fuel Corporation v. Fuller, 11 Fed. (2d) 802 (C. C. A. 2, 1926). With these cases we are in accord and we consequently conclude that insofar as the liens represent amounts due for taxes they were preserved by section 67(d).

[Penalties]

We think our conclusion on this point disposes of the contention that insofar as the claim represented amounts due as penalties for non-payment of the 1931 and 1932 taxes no prior lien existed. Said penalties accrued under section 39 of the Oil and Gas Conservation Act, which reads as follows:

The charges levied and assessed under the provisions of this act shall be due and payable on the first Monday in July in each year, and one-half thereof shall be delinquent on the sixth Monday after the first Monday in July at six o'clock p. m. and unless paid prior thereto, fifteen percent shall be added to the amount thereof, and unless paid prior to the first Monday in February next thereafter at six o'clock p. m. an additional five per cent shall be added to the amount thereof; and the unpaid portion, or the remaining one-half of said charges shall become delinquent on the first Monday in February next succeeding the day upon which they became due and payable, at six o'clock p. m.; and if not paid prior thereto five percent shall be added to the amount thereof.

Section 41 (quoted supra) provides a lien for the assessments and charges levied under the provisions of the act. Since, under the California law, a percentage penalty for delinquency is as much a part of the tax as the principal amount [Carpenter v. Peoples Mut. Life Ins. Co., 74 Pac. (2d) 508, 511 (1937); and see, State of California v. Hisey, 84 Fed. (2d) 802, 805 (C. C. A. 9, 1936)] the lien, which arose before the adjudication, was sufficiently broad to support the after accruing penalties as well as the taxes proper. It may be conceded that section 57(j) of the Bankruptcy Act [11 U. S. C. A. 93(j)] precludes the "allowance" of a claim for penalties, but as pointed out earlier, adjudication in bankruptcy does not affect a valid and existing lien, consequently where a lien exists to support a penalty at the time of adjudication, section 57(j) does not come into operation. Hiscock v. Varick Bank, supra; see also, State of California v. Moore, 88 Fed. (2d) 564 (C. C. A. 9, 1937). In New York v. Jersawit, 263 U. S. 493, cited by appellant, there was a simple claim for priority unsupported by a lien.

[Sufficiency of Allegations]

We next direct our attention to appellant's arguments against the granting of lien claim status to the claim of William M. Walsh, Assistant Franchise Tax Commissioner of the State of California for $25.26 for franchise taxes which accrued January 1, 1933 . It is argued that since the proof filed claimed priority under section 64(a) of the Bankruptcy Act and did not allege that it was supported by a lien, it was erroneous to give it priority as a lien claim. No contention is made that it was not in fact supported by a lien at the date of adjudication. Although the claim itself was insufficient to raise the issue that it was entitled to lien status, that issue was raised by the objection thereto filed by the trustee, which alleged that the claim "is not supported by a lien and is, therefore, subordinate to the claims of the United States of America for income taxes". The issue having been raised, it was proper for the District Court to rule thereon. Cf., Commonwealth of Massachusetts v. Meehan, 67 Fed. (2d) 638, 639 (C. C. A. 1, 1933).

[Personal Property Taxes]

Appellant next argues that the claim of Ed. W. Hopkins, Tax Assessor of Los Angeles County, for personal property taxes for the year 1933 should not have been given priority over the claim of the United States , "since it appears that it would not be due and payable until the succeeding year". Section 3717 of the California Political Code provides as follows:

Every tax due upon personal property is a lien upon the real property of the owner thereof, from and after 12 o'clock m. of the first Monday in March in each year.

The lien for the 1933 tax attached on the first Monday in March, 1933. County of San Diego v. County of Riverside , supra; City of Santa Monica v. Los Angeles County , supra.

The argument against the allowance as a "prior lien claim" of the claim of W. O. Welch, County Tax Collector of Los Angeles County, for a deficiency tax for the year 1932 "resulting from an increase in the tax rate over previous year at which the original tax bills were computed", is that it should have been denied priority for indefiniteness. We think the claim sufficiently definite. It is immaterial when the additional deficiency tax was determined and assessed--the lien for the tax attached in 1932. Cal. Pol. Code, secs. 3717 and 3718.

In his brief appellant also challenges the action of the District Court in ruling that the claim of the California Production Company is entitled to lien status. Since no assignment of error relates to this matter we do not pass thereon. 4 In re Wingert, 89 Fed (2d) 305, 307 (C. C. A. 4, 1937); Britton v. Western Iowa Co., supra, p. 491.

The order is affirmed.

1 The assignment of, errors are, if they be assumed to be sufficiently specific to comply with our Rule 11, broad enough to challenge the allowance of priority to the claims designated "expenses of admin istration". However, appellant's brief makes no reference to these claims, and consequently we do not consider the propriety of the order as it affected them.

2 II U. S. C. A. 104 provides:

"(a) The court shall order the trustee to pay all taxes legally due and owing by he bankrupt to the United States, State, county, district, or municipality, in the order of priority as set forth in paragraph (b) hereof * * *

"(b) The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment shall be * * * (6) taxes payable under paragraph (a) hereof * * *".

3 11 U. S. C. A. 110(a) provides:

"(a) The trustee of the estate of a bankrupt, upon his appointment and qualification, and his successor or successors, if he shall have one or more, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt * * *"

4 The errors assigned were:

I. The Court erred in holding that the claims for taxes filed by the State of California and its political subdivisions are entitled to payment prior to payment in full of the claims allowed for unpaid income taxes due the United States of America .

II. The Court erred in confirming the Order of the Referee in Bankruptcy, dated November 17, 1936, which subordinated payment of the claim of the United States for unpaid income taxes assessed for the taxable year 1930, to payment of the claims for taxes filed by the State of California and its political subdivisions, for the reason that under the law and the record, the claim of the said United States of America is entitled to be paid in full before payment is made upon the claim filed by the State of California. (Italics added.)

 

[75-1 USTC 9467]Craig Phelps, Receiver in Bankruptcy, Petitioner v. United States

Supreme Court of the United States, No. 74-121, 421 US 330, 95 SCt 1728, 5/19/75, Affirming CA-7, 74-1 USTC 9424, 495 F. 2d 1283

On Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit.

[Code Sec. 6331]

Levy and distraint: Effect: Prior assignment to creditors: Bankruptcy court: Jurisdiction.--A bankruptcy court lacked jurisdiction to compel assignees of a bankrupt to turn over to the bankruptcy receiver assets upon which the IRS had levied subsequent to the assignment. The levy reduced the assets to the constructive possession of the IRS and put the assignees in the position of holding the assets for the benefit of the IRS, not of the bankrupt. Jurisdiction was not conferred merely because the assignees claimed no interest in the assets.


Syllabus

After the Internal Revenue Service (IRS) had made federal tax assessments against a company and the company failed to pay the taxes after formal demand, the company transferred its assets to an assignee for the benefit of creditors, who converted the assets into cash. The IRS then filed a notice of tax lien respecting the assessments and served a levy notice on the assignee, who did not, however, comply with IRS' payment demand. The company was thereafter adjudicated bankrupt and petitioner receiver in bankruptcy made application to the bankruptcy Referee for an order requiring the assignee to turn over the cash proceeds. The IRS opposed the application on the ground that the bankruptcy court lacked jurisdiction over the subject matter of the application because the United States was entitled to possession of the cash proceeds held by the bankrupt's assignee. The Referee rejected IRS' contention, holding that the assignment passed inalienable title to the assets of the company to the assignee, and the District Court upheld the Referee. The Court of Appeals reversed. Held: The United States, by serving the bankrupt taxpayer's assignee with a valid notice of levy took constructive custody of the cash proceeds in the assignee's possession, and neither the bankrupt nor petitioner as receiver could assert a claim to those proceeds. The receiver's recourse is limited to a plenary suit under 23 of the Bankruptcy Act. Pp. 3-7.

495 F. 2d 1283, affirmed.

BRENNAN, J., delivered the opinion for a unanimous Court.

MR. JUSTICE BRENNAN delivered the opinion of the Court.

Between March and June 1971 the Internal Revenue Service (IRS) made assessments of federal taxes in the amount of $140,831.59 against Chicagoland Ideel Cleaners, Inc. Chicagoland failed to pay the taxes after formal demand. Instead, on June 28, 1971 , Chicagoland transferred its assets to an assignee for the benefit of creditors. The assignee promptly converted the assets into cash of approximately $38,000. On August 25, 1971 , IRS filed a notice of tax lien respecting the March-June assessments in the office of the Recorder of Deeds of Cook County, Illinois, and on the same day served a notice of levy on the assignee. The notice of levy stated that the proceeds in the assignee's hands "are hereby levied upon and seized for satisfaction" of the taxes, "and demand is hereby made upon you for the [proceeds]." On September 14, 1971 , an involuntary petition in bankruptcy was filed against Chicagoland. Chicagoland was adjudicated bankrupt and petitioner Phelps was appointed receiver in bankruptcy.

Petitioner receiver, on October 19, 1971 , filed an application with the referee in bankruptcy for an order requiring the assignee, who had not complied with the IRS demand for payment, to turn over to petitioner the $38,000 proceeds from the sale of Chicagoland's assets. IRS opposed the application on the ground that "this court of bankruptcy lacks jurisdiction over the subject matter of the application because the United States is entitled to the possession of the moneys now held by [the] assignee of the bankrupt. . . ." The Referee in Bankruptcy rejected the contention, holding that "the assignment . . . passed inalienable title to the assets of Chicagoland . . . to the assignee" and therefore ". . . the notice of levy of the Internal Revenue Service is a nullity. . . ." The Referee accordingly entered an order directing the assignee to "surrender and turn over to" petitioner "all sums in his possession. . . ." The District Court for the Northern District of Illinois, on Petition for Review on behalf of IRS, approved the Referee's turnover order. The Court of Appeals for the Seventh Circuit reversed. 495 F. 2d 1283 (1974). The Court of Appeals held: "Since possession of the property resided in the United States as against the [petitioner] receiver, the bankruptcy court lacked jurisdiction summarily to adjudicate the controversy without the Government's consent. . . . The United States is now entitled to have its claim adjudicated in a plenary suit. We respectfully decline to follow the contrary holding [of the Court of Appeals for the Ninth Circuit] in In re United General Wood Products Corp. [74-1 USTC 9468], 483 F. 2d 975 (CA-9 1973)." We granted certiorari to resolve the conflict between the Courts of Appeals, 419 U. S. 1068 (1974). 1 We agree with the holding of the Court of Appeals for the Seventh Circuit and affirm its judgment. 2

I The assignee claims no interest in the proceeds of $38,000. The Ninth Circuit Court of Appeals in Wood Products Corp. held that that circumstance, without more, subjected property to the bankruptcy court's summary jurisdiction to enter a turnover order. Wood Products Corp. relied on the statement in Taubel-Scott-Kitzmiller v. Fox, 264 U. S. 426, 432-433 (1924), that constructive possession of the property by the bankruptcy court "exists . . . where the property is held by some other person who makes no claim to it." 483 F. 2d, at 976. That reliance is misplaced. The statement read in the context of the facts of that case and its holding applied only to property in the hands of a nonadverse third person who was not holding it as agent for a bona fide adverse claimant. Taubel itself held that the bankruptcy court had not been given jurisdiction by summary proceedings to avoid a lien created by levy under a judgment of a state court where the sheriff possessed the property for the judgment creditor, and neither he nor the judgment creditor had consented to adjudication of the controversy by the bankruptcy court. Similarly in this case, the United States is a bona fide adverse claimant to the $38,000 proceeds held by the assignee and has not consented to adjudication of its claim by the bankruptcy court.

The levy of August 25, 1971 , created a custodial relationship between the assignee and the United States and thereby reduced the $38,000 to the United States ' constructive possession. Neither Chicagoland nor the petitioner as receiver could assert a claim to the proceeds in that circumstance. For when Chicagoland failed to pay the taxes after assessment and demand a lien in favor of the United States attached to "all property and rights to property whether real or personal, belonging to [the taxpayer]." 26 U. S. C. 6321. The assignee took Chicagoland's property subject to this lien. 3 The lien attached to the proceeds of the sale. 4 See Sheppard v. Taylor , 30 U. S. (5 Pet.) 675, 710 (1891); Loeber v. leininger, 175 Ill. 484, 51 N. E. 703 (1898). "[T]he lien re-attaches to the thing and to whatever is substituted for it. . . . The owner and the lienholder, whose claims have been wrongfully displaced, may follow the proceeds wherever they can distinctly trace them." Sheppard v. Taylor, supra, at 710. 5

The notice of levy and demand served on the assignee were an authorized means of collecting the taxes from the $38,000 held by him. 26 U. S. C. 6331(a) provides that "if any person liable to pay any tax neglects or refuse to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary . . . to collect such tax . . . by levy upon all property . . . on which there is a [tax] lien . . ."; "The term 'levy' . . . includes the power of distraint and seizure by any means." 26 U. S. C. 6331(b). Treasury regulations, 26 CFR 301.6331-1(a)(1), provide that a "levy may be made by serving a notice of levy," and that levy gave the United States the right to the proceeds. See United States v. Pittman [71-2 USTC 9650], 449 F. 2d 623, 627 (1971). 26 U. S. C. 6332(a) requires that any person holding property levied upon must surrender it to the government, or become liable for the tax, 26 U. S. C. 6332(c). With surrender however, any duty owed the taxpayer is extinguished. 26 U. S. C. 6332(d).

Thus following the levy of August 25, 1971 , actual possession of the $38,000 was held by the assignee on behalf of the United States and "where possession is assertedly held not for the bankrupt, but for others prior to bankruptcy . . . the holder is not subject to summary jurisdiction." 2 Collier, Bankruptcy, para. 23.06(3) (14th ed.). 6 Cline v. Kaplan, 323 U. S. 97 (1944); Galbraith v. Valley, 256 U. S. 46 (1921). The receiver's recourse is limited to plenary suit under 23 of the Bankruptcy Act, 11 U. S. C. 46. See Taubel-Scott-Kitzmiller Co. v. For, supra.

Petitioner argues, however, that actual possession is necessary to remove the Government's tax liens from the subordinate priority accorded them under 67c(3) of the Bankruptcy Act. 7 The argument is without merit. United States v. Eiland [55-1 USTC 9487], 223 F. 2d 118 (1955); Rosenblum v. United States [62-1 USTC 9384], 300 F. 2d 843 (1962). Section 67c(3) has no bearing on the question of summary jurisdiction; it relates only to the priority that is accorded tax liens on property that has already been determined to be within the bankruptcy court's jurisdiction as part of the bankruptcy estate. Here we are concerned not with priority of tax liens but with the effect of a tax levy. Historically, service of notice has been sufficient to seize a debt, Miller v. United States, 78 U. S. (11 Wallace) 268, 297 (1870), and notice of levy and demand are equivalent to seizure. See, e.g., Sims v. United States [59-1 USTC 9338], 359 U. S. 108 (1959). The levy therefore gave the United States full legal right to the $38,000 levied upon as against the claim of the petitioner receiver.

Petitioner's final contention is that the general restriction on bankruptcy court's summary jurisdiction was altered by the enactment in 1938 of 2(a)(21) of the Bankruptcy Act, 11 U. S. C. 11(a)(21), which grants bankruptcy courts jurisdiction to "require . . . assignees for the benefit of creditors . . . to deliver the property in their possession or under their control to the receiver. . . ." This provision, however, was designed to "clarif[y] the jurisdiction of the [bankruptcy] court," S. Rep. No. 1916, 75th Cong., 3d Sess., 12 (1938), and was "simply declaratory of prior case law," 1 Collier, supra, 2.78(3). Under that case law, an assignee for the benefit of creditors who held assets as "a mere naked bailee for the creditors . . . has no right to retain the possession as against the trustee in bankruptcy." In re McCrum, 214 F. 207, 209 (1914). Here the assignee held as custodian for the United States , a bona fide adverse claimant. Galbraith v. Vallely, supra. 8

Affirmed.

1 The grant was limited to the following questions presented in the petition:

"1. Whether the Court of Appeals incorrectly granted to the United States a priority based upon the Internal Revenue Code of 1954 for taxes in violation of and contrary to the priorities for payment of claims established by the Bankruptcy Act?

"2. Whether the Court of Appeals incorrectly held that service of a Notice of Levy upon an assignee for the benefit of creditors subsequent to the assignment reduced the bankrupt's property then held by the assignee to the constructive possession of the United States ?

"3. Whether the Court of Appeals incorrectly determined that the Bankruptcy Court lacked summary jurisdiction to adjudicate the controversy before it without the consent of the United States ?"

2 There is a significant difference in the result of a summary adjudication of the tax claim in the bankruptcy court and the result of its adjudication in a plenary suit:

"The difference between a summary and plenary proceeding in this context is not merely a matter of the relative formality of the respective procedures. The consequence of a summary turnover order is to subject the property in question to admin istration as part of the bankrupt estate. Where the government has a tax lien on the property, the consequence of the turnover is to subordinate that lien to the expenses of admin istration and priority wage claims. See Section 67c(3) of the Bankruptcy Act, 11 U. S. C. 107(c)(3). In contrast, if the property is not subject to summary turnover, it may be brought into the bankrupt estate only if the receiver is able to defeat the government's underlying tax claim in a plenary proceeding, i.e., a suit for refund. Thus, in a case where the underlying tax claim is sound, for the government the difference between a summary and a plenary proceeding is the difference between holding the property subject to prior payment of admin istrative and priority wage claims and holding it outright." Brief for the United States , at 19.

3 The unfiled tax lien was valid against all persons except purchasers, holders of security interests, mechanics lienors, and judgment lien creditors. 26 U. S. C. 6323(a). Petitioner concedes that the assignee did not fall within any of these categories.

4 Respondent does not contend that the unfiled lien followed the property into the hands of good-faith purchasers from the assignee. Brief for the United States , at 14, n. 5. As indicated in n. 3, supra, an unfiled tax lien is invalid against purchasers. 26 U. S. C. 6323(a).

5 United States v. Bess [58-2 USTC 9595], 357 U. S. 51 (1958), is not to the contrary. Bess held that a tax lien effected during an insured's life against the cash surrender value of a lien insurance policy attached after his death to insurance proceeds in the hands of the beneficiary but only in the amount of the cash surrender value. The limitation recognized that the taxpayer in his lifetime could not have realized a larger amount and thus there was no greater "property" or "rights to property" to which the lien could have attached ab initio. Id. , at 55, 56.

6 The claimant may, however, consent to summary adjudication in the bankruptcy court. Cline v. Kaplan, supra, at 99. The United States refused consent in this case.

7 Section 67c(3) of the bankruptcy Act, 11 U. S. C. 107c(3), provides in pertinent part:

"Every tax lien on personal property not accompanied by possession shall be postponed in payment to the debts specified in clauses (1) and (2) or subdivision (a) of section 104 of this title . . .."

Section 64 of the Bankruptcy Act, 11 U. S. C. 104, provides in pertinent part:

"(a) The debts to have priority, in advance of the payment of dividends to creditors and to be paid in full out of bankrupt estates, and the order of payment, shall be (1) the costs and expenses of admin istration . . .. (2) wages and commissions, not to exceed $600 to each claimant, which have been earned within three months before the date of the commencement of the proceeding, due to workmen, servants, clerks, or traveling, or city salesmen . . .."

8 Petitioner also relies on 70a(8) of the Bankruptcy Act, 11 U. S. C. 110a(8). Section 70a(8) vests the trustee of the bankrupt's estate "with the title of the bankrupt as of the date of filing the petition . . . to . . . property held by an assignee for the benefit of creditors." Even petitioner argues, however, that Chicagoland on September 1, 1971 , had no title to the property conveyed to the assignee. Brief for Petitioner, at 14. In any event, the prebankruptcy levy displaced any title of Chicagoland and 70a(8) is therefore inapplicable.

 

 

[66-1 USTC 9444] United States , Petitioner v. The Equitable Life Assurance Society of the United States

Supreme Court of the United States , No. 645, 384 US 323, 86 SCt 1561, 6/6/66 , Reversing and remanding N. J. Sup. Ct. , 65-2 USTC 9584

On Writ of Certiorari to the Supreme Court of New Jersey.

[1954 Code Secs. 6321 and 6322]

Lien for taxes: Priority over attorney's fee awarded in foreclosure suit.--A federal tax lien had priority over an attorney's fee awarded in a suit to foreclose a mortgage which had priority over the tax lien, where the lien was recorded before default by the mortgagor. The New Jersey law, which provides for allowance in a foreclosure action of an attorney's fee to be taxed as costs, had not been invoked, much less applied, to establish the amount of the lien for such costs at the time when the lien for federal taxes attached.

One dissent.

Thurgood Marshall, Solicitor General, Rob ert S. Rifkind, Assistant to the Solicitor General, Richard M. Rob erts, Acting Assistant Attorney General, Joseph Kovner, Richard J. Heiman, Department of Justice, Washington, D. C. 20530, for U. S. Donald B. Jones, 744 Broad St., Newark, N. J., for respondent.

MR. JUSTICE CLARK delivered the opinion of the Court:

This writ involves the recurring problem of priority contests between a state lien and a federal tax lien under 6321 and 6322 of the Internal Revenue Code of 1954, 26 U. S. C. 6321, 6322 (1964 ed.). Since 1950--United States v. Security Trust and Savings Bank [50-2 USTC 9492], 340 U. S. 47--we have passed upon more than a dozen cases involving some facet of the problem. In the present case the law of New Jersey provides for the allowance in a foreclosure action of an attorney's fee fixed by statute as a certain percentage of the amount adjudged to be paid the mortgagee and taxed as costs in the action. The question presented is whether a federal tax lien is entitled to priority over the mortgagee's claim for such an attorney's fee, where notice of the tax lien is recorded prior to default by the mortgagor. The state trial court held that the federal tax lien was superior, New Jersey 's highest court reversed, [65-2 USTC 9584], 45 N. J. 206, 212 A. 2d 25, and we granted certiorari, 382 U. S. 972. Only three Terms ago, MR. JUSTICE WHITE writing for the Court, disposed of an almost identical question, i. e., whether "reasonable attorneys fees" provided for in a mortgage note "in the event of default . . . and of the placing of this note in the hands of an attorney for collection, or this note is collected through any court proceedings" created a lien superior to that of a federal tax lien recorded after suit on the note was filed but prior to the actual fixing of the amount of the attorney's fees. United States v. Pioneer American Insurance Co. [63-2 USTC 9532], 374 U. S. 84 (1963). We there held the federal lien superior. We hold similarly here, and reverse.

[Statutory Attorney's Fee]

I. Albert Bagin and his wife executed to Equitable Life a first mortgage on certain real property in New Jersey . This mortgage, which secured an indebtedness of $30,000, was recorded on December 19, 1960 . The Bagins executed two other mortgages covering the property--a second mortgage which was also recorded on December 19, 1960 , and a third, recorded on May 18, 1961 . On March 21, 1962 , the United States filed a tax lien for $7,748.91 against Mr. Bagin. This lien, which was for unpaid withholding taxes, arose under 26 U. S. C. 6321, 6322, and was recorded in accordance with 26 U. S. C. 6323 (1964 ed.). 1 Shortly less than a year later, the Bagins defaulted on the first mortgage and Equitable Life brought this foreclosure action. Equitable claimed the principal and interest due under the mortgage, as well as an attorney's fee as authorized by New Jersey statute. 2 The second mortgagee admitted the superiority of the Equitable Life's priority and demanded that the second mortgage be reported upon. Both the Bagins and the third mortgagees suffered default and their interests are not before us. The United States conceded the priority of the claims of the first two mortgages exclusive, however, of the attorney's fee, which it contended was inferior to the federal lien. The trial court rendered summary judgment fixing the sums due the respective parties and, viewing the priority question controlled by United States v. Pioneer American Insurance Co., supra, subordinated the claim for attorney's fee to the federal tax lien. Without awaiting a sale of the property, respondent appealed to the Superior Court, Appellee Division, which certified the appeal to the Supreme Court of New Jersey. The Supreme Court ordered the property sold, and, after the sale, held that the statutory attorney's fee was superior to the federal lien.

[Solvency of Debtor]

II. In United States v. New Britain [54-1 USTC 9191], 347 U. S. 81 (1954), a leading case in this field, we held that where a debtor is insolvent the "Congress has protected the federal revenues by imposing an absolute priority" of the federal lien by virtue of 3466 of the Revised Statutes (1875), now 31 U. S. C. 191 (1964 ed.), and that where the debtor is solvent the "United States is free to pursue the whole of the debtor's property wherever situated" under 26 U. S. C. 6321, 6322. Id. , at 85. The record here is silent on the solvency of the debtors, but as the priority issue below centered on 6321-6323 we may safely assume they are solvent. As against a recorded federal tax lien, the relative priority of a state lien is determined by the rule "first in time is first in right," which in turn hinges upon whether, on the date the federal lien was recorded, the state lien was "specific and perfected." A state lien is specific and perfected when "there is nothing more to be done . . .--when the identity of the lienor, the property subject to the lien and the amount of the lien are established." "Thus the priority of each statutory lien . . . must depend on the time it attached to the property and became choate." United States v. New Britain , supra. These determinations are of course federal questions. United States v. Waddill Co. [45-1 USTC 9126], 323 U. S. 353, 356-357 (1945).

Pioneer American, supra, dealt with these identical problems and we therefore turn to its teachings. There, "the claim for the attorney's fee . . . became enforceable under Arkansas law as a contract of indemnity at the time of default . . . before the filing of the first federal tax liens." The suit in which the attorney's fee was earned was filed prior to the recording of the federal liens. "Nevertheless, because this fee had not been incurred and paid and could not be finally fixed in amount until . . . after all the federal liens had been filed," we held that the fees were "inchoate at least until that date and that the federal tax liens are entitled to priority." 374 U. S. , at 87. As we said there, the attorney's fee was "undetermined and indefinite" at the time the federal lien was recorded; nor had the fee been "reduced to a liquidated amount." Moreover, there was no "showing in this record that the mortgagee had become obligated to pay and had paid any sum of money for services performed prior to the filing of the federal tax lien." Thus, the mortgagee's claim was not only "uncertain in amount" but "yet to be incurred and paid." Id. , at 90-91.

Equitable's statutory lien is even more clearly inchoate. At the time the federal lien was recorded Equitable's mortgage was not even in default--no reference whatever had been made to attorneys, no suit had been filed, nor had any sums been "adjudged to be paid." New Jersey 's Rule 4:55 -7(c), supra, n. 2, which fixes the lien had not even been invoked much less applied to establish the amount of the lien. The claim was wholly contingent at the time the federal lien matured. Cast against the setting of Pioneer American, the inchoate character of the state-created lien here stands out even more starkly.

New Jersey 's Supreme Court relied on the preciseness--the fixed percentages--of Rule 4:55 -7(c), and applied the principle of Security Mortgage Co. v. Powers, 278 U. S. 149 (1928). It found Pioneer American inapposite. We cannot agree. Security did not involve a federal tax lien but raised "federal questions peculiar to the law of bankruptcy." 278 U. S. , at 154. Our opinion in Pioneer American specifically pointed out that Security had no application to federal tax lien cases because the issue there was the status of an attorney's fee clause in a bankruptcy proceeding "where the rigorous federal lien choateness test was not necessarily applicable." 374 U. S. , at 90, n. 8. We likewise find that Security has no bearing on the issue presently before us. As we noted earlier, at the time the federal lien matured here no sum of money due on the mortgage had been "adjudged." Adjudication alone triggers the mathematical machinery of Rule 4:55-7(c) whereby liability for the attorney's fee is fixed. No liability having been incurred there could of course be no lien in existence at the time the federal lien matured. In short, the fixed fee of the statute had not been brought into play.

[Legislative History]

III. Equitable Life's remaining contentions are also untenable. It argues that, since the United States concedes the priority of the mortgages here, the attorney's fee is likewise superior, for it must stand on no less equal footing as principal and interest under a Mortgage--neither of which is ascertainable until foreclosure. This identical contention was raised and implicitly rejected in Pioneer American. There is nothing in the legislative history of 6323 indicating that in protecting mortgagees from secret, government tax liens, Congress intended to include all ancillary interests which a State may afford its mortgagees. See H. R. Rep. No. 1018, 62d Cong., 2d Sess. (1912). See also H. R. Rep. No. 1337, 83d Cong., 2d Sess. (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. (1954).

Nor does the fact that New Jersey 's statutory scheme taxes the attorney's fee as costs in the foreclosure proceeding affect the standing of a competing federal lien. To repeat, the relative priority of a United States lien for unpaid taxes is a federal question. United States v. Acri [55-1 USTC 9138], 348 U. S. 211, 213 (1955). The label given the attorney's fee by the State does not bind this Court. As we said in United States v. Buffalo Savings Bank [63-1 USTC 9166], 371 U. S. 228, 229 (1963), "the state may not avoid the priority rules of the federal tax lien by the formalistic device of characterizing subsequently accruing local liens as expenses of sale." Likewise in Pioneer American, the State was not permitted to upgrade its lien by the formalistic device of "indemnity." Even where authorized by state statute 3 the distinction between costs and allowances for attorneys' fees is well recognized. In Sioux County v. National Surety Co., 276 U. S. 238 (1928), the Court specifically noted this distinction in highly cogent terms: "That the statute directs the allowance [for attorney's fees] . . . to be added to the judgment as costs are added does not make it costs in the ordinary sense of the traditional, arbitrary and small fees of court officers, attorneys' docket fees and the like . . .." At 243-244. 4 Moreover, the mortgagee by foreclosing does not produce a fund from which the United States benefits, without expenditure on its part. A foreclosure is more akin to a liquidation of assets than to the creation, enhancement or protection of a common fund from which equity permits reimbursement of costs of litigation. 5 Finally, it would be contrary to the federal policy of uniformity in the federal tax laws to permit the priority of federal tax liens to "be determined by the diverse rules of the various States." United States v. Speers [66-1 USTC 9101], 382 U. S. 266, 270 (1965). See also United States v. Gilbert Associates [53-1 USTC 9291], 345 U. S. 361, 364 (1953). While we believe that the established practice of awarding costs in the ordinary sense fairly renders those items an incident of the rights of those protected under 6323, we see no warrant either in the intent of 6323 or the practices prevailing among the States at the time of its enactment to treat attorneys' fees as a right entitled to priority over a federal tax lien.

We hold that the federal tax lien is entitled to priority over the claim for the attorney's fee under Rule 4:55-7(c). We intimate no view as to the disposition the state court may wish to make of the fund set aside for the principal, interest, and costs, exclusive of attorney's fee. That is a matter of state law. United States v. New Britain, supra, at 88.

Reversed and remanded.

MR. JUSTICE DOUGLAS dissents.

1 These provisions state:

26 U. S. C. 6321. Lien for taxes.

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

26 U. S. C. 6322. Period of lien.

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

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

"(a) Invalidity of lien without notice.

"Except as otherwise provided in subsections (c) and (d), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under State or Territorial laws.

"In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or

"(2) With clerk of district court.

"In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law designated an office within the State or Territory for the filing of such notice; . . .

. . .

"(b) Form of notice.

"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 lien."

. . .

2 Rules Governing the New Jersey Courts (1965 ed.):

"4:55-7. Counsel Fees

"No fee for legal services shall be allowed in the taxed costs or otherwise, except:

. . .

"(c) In an action for the foreclosure of a mortgage. The allowance shall be calculated as follows: on all sums adjudged to be paid the plaintiff in such an action, amounting to $5,000 or less, at the rate of 3%, provided, however, that in any action a minimum fee of $75 shall be allowed; upon the excess over $5,000 and up to $10,000 at the rate of 11/2%; and upon the excess over $10,000 at the rate of 1%."

. . .

3 Besides New Jersey , only three States provide explicitly for an allowance, as costs, for attorney's fees in foreclosure actions. 44 Iowa Code Ann. 625.22; 7 Rev. Codes of Mont. 93-8613; 46 Okla. Stat. Ann. 56. Several others provide for the enforcement of contractually created claims for attorneys' fees in such actions, as in Pioneer American. See, e.g., VIII Conn. Gen. Stat. 49-7; 4 Vt. Stat. Ann. 4527.

4 Indeed, the Supreme Court of New Jersey has itself recognized this same distinction. In United States Pipe and Foundry Co. v. United Steelworkers of America, 37 N. J. 343, 355-356, 181 A. 2d 353, 359 (1962), that court stated that costs generally "comprise principally certain statutory allowances, amounts paid the clerk in fees, and various other specified disbursements of counsel included sheriff's fees, witness fees, depositions expenses and printing costs . . .. Counsel fees, although if allowable are included in the taxed costs, are an entirely different matter." (Emphasis added.)

5 In the latter case, courts proceeding under statutory or inherent equitable powers have traditionally awarded attorneys' fees. Trustees v. Greenough, 105 U. S. 527 (1881); Sprague v. Ticonic Bank, 307 U. S. 161 (1939). See McCormick, Damages 62. In Pioneer American, we stated: "The attorney's services . . . were rendered for the benefit of the mortgagee to protect his interest in the property, and the United States , holding an adverse interest, received no such benefit from them that its interest is to be charged therefor." 374 U. S. , at 92, n. 13.

 

 

[63-2 USTC 9532] United States , Petitioner v. Pioneer American Insurance Company, et al.

Supreme Court of the United States , No. 405, 374 US 84, 83 SCt 1651, 6/10/63 , Rev'g. and rem'g. Ark. Sup. Ct. , 62-2 USTC 9573, 357 S. W. 2d 653

On Writ of Certiorari to the Supreme Court of Arkansas.

[1954 Code Sec. 6323(a)]

Liens for taxes: Priority over attorney's fees: Foreclosure of mortgage.--Liens for taxes, which concededly were subordinate to a mortgage, had priority over the mortgagee's claim for attorney's fees in foreclosure proceedings commenced prior to the filing of the federal tax liens, since the attorney's fees were not paid or fixed by the court until after the tax liens were filed, and, therefore, remained inchoate even though the note secured by the mortgage required the mortgagor to pay a reasonable attorney's fee in the even of default and proceedings for collection.

Archibald Cox, Solicitor General, John B. Jones, Jr., Acting Assistant Attorney General, Daniel M. Friedman, Assistant to the Solicitor General, Joseph Kovner, George F. Lynch, Louis F. Oberdorfer, Assistant Attorney General, Department of Justice, Washington 25, D. C., for petitioner. Marcus Ginsburg, Continental National Bank Bldg., Fort Worth, Tex., Owen C. Pearce, Edgar E. Bethell, Donald P. Callaway, Professional Life Bldg., Fort Smith, Ark., for respondent. H. Cecil Kilpatrick, Samuel E. Neel, William F. McKenna, P. James Riordan, for the Mortgage Bankers Association of America and the National Association of Mutual Savings Banks, amici curiae.

MR. JUSTICE WHITE delivered the opinion of the Court:

The United States has sought review of a decision of the Supreme Court of Arkansas subordinating the federal tax lien (26 U. S. C. 6321) to a lien for attorney's fees included in an antecedent mortgage contract 235 Ark. 267, 357 S. W. 2d 653. Because of conflict between the Arkansas decision and United States v. Bond [60-2 USTC 9532], 279 F. 2d 837 (C. A. 4th Cir.); In re New Haven Clock & Watch Co. [58-1 USTC 9458], 253 F. 2d 577 (C. A. 2d Cir.), we granted certiorari. 371 U. S. 909.

When the taxpayers in 1958 acquired their interest in the parcel of real estate involved here, they assumed liability on a note and the deed of trust (first mortgage) securing it, which were held by respondent Pioneer American Insurance Company. The note obligated taxpayers "in the event of default herein and of the placing of this note in the hands of an attorney for collection, or this note is collected through any court proceedings, to pay a reasonable attorney's fee." 1 The taxpayers at the same time executed a note and second mortgage to their vendor, respondent The Development Company, and subsequently, in April 1960, the real estate became burdened again with a mechanic's lien in favor of Alfred J. Anderson.

In October of 1960, taxpayers defaulted on the first mortgage monthly installment and failed thereafter to meet payments as they fell due. On March 24, 1961 , Pioneer American filed a suit to foreclose its mortgage and sought, in addition to the principal and interest, a reasonable attorney's fee. The United States was named a party defendant because of two outstanding federal tax liens against the taxpayers which were filed on November 29, 1960 , and January 30, 1961 . The United States admitted its liens were subordinate to the principal and interest on the first and second mortgages but claimed that the liens were superior to the claim for attorney's fee. Three additional federal tax liens subsequently were filed on April 14, July 17, and October 3, 1961 . 2

On November 15, 1961 , the Chancery Court entered its decree of foreclosure which fixed the attorney's fee at $1,250 and determined the priority of the various claimants. After satisfaction to court and foreclosure sale costs, Pioneer American was accorded first priority for principal, interest and the attorney's fee; The Development Company took next on principal and interest under the second mortgage; Alfred J. Anderson shared thereafter on his mechanic's lien and the United States took last. The property was sold and proceeds were received which satisfied all claims except $3,615.28 of the federal tax liens. 3 The United States appealed to the Supreme Court of Arkansas asserting that it was entitled to priority over the attorney's fees, 4 and that $1,250 more should have been applied to reduce the unpaid federal taxes. 5 With one judge dissenting, the Arkansas court rejected that contention and sustained the superiority of the attorney's fees.

It goes unchallenged that the claim for attorney's fees, arising out of the obligations assumed by the taxpayer in 1958, became enforceable under Arkansas law as a contract of indemnity at the time of default in October 1960 before the filing of the first federal tax liens. Furthermore, it is evident that the suit in which these attorney's fees were earned was commenced on March 24, 1961 , prior to the filing of the unpaid federal tax liens crucial to this suit, i. e., the liens of April 14, July 17, and October 3, 1961 . Nevertheless, because these fees had not been incurred and paid and could not be finally fixed in amount until November 15, 1961, after all the federal liens had been filed, we hold that the claim for attorney's fees remained inchoate at least until that date and that the federal tax liens are entitled to priority.

The priority of the federal tax lien provided by 26 U. S. C. 6321 as against liens created under state law is governed by the common-law rule--"the first in time is the first in right." United States v. New Britain [54-1 USTC 9191], 347 U. S. 81, 85-86. It is critical, therefore, to determine when competing liens, whether federal- or state-created, come into existence or become valid for the purpose of the rule.

The tax lien arises, according to 6322, when the tax is assessed, but as against the specific interests mentioned in 6323(a)--mortgagees, pledgees, purchasers and judgment creditors--it is not valid until placed of public record, and insofar as the federal lien attaches to securities, mortgagees, pledgees and purchasers must have actual notice of the lien. 6 6323(c).

As for a lien created by state law, its priority depends "on the time it attached to the property in question and became choate." United States v. New Britain, supra, at 86; United States v. Security Tr. & Sav. Bank [50-2 USTC 9492], 340 U. S. 47. Choate state-created liens take priority over later federal tax liens, United States v. New Britain, supra; Crest Finance Co. v. United States [62-1 USTC 9105], 368 U. S. 347, while inchoate liens do not. See United States v. Liverpool & London Ins. Co. , 348 U. S. 215; United States v. Scovil [55-1 USTC 9137], 348 U. S. 218; United States v. Colotta, 350 U. S. 808. And it is a matter of federal law when such a lien has acquired sufficient substance and has become so perfected as to defeat a laterarising or later-filed federal tax lien. 7 "Otherwise, a State could affect the standing of federal liens, contrary to the established doctrine, simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment, etc., is determined." United States v. New Britain, supra, at 86. The federal rule is that liens are "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." Id. , at 84.

We reject respondents' contention that the choateness rule has no place when a mortgage under 6323(a) is involved. The predecessor to 6323 was first enacted by Congress in 1912 in order to protect mortgagees, purchasers and judgment creditors against a secret lien for assessed taxes and to postpone the effectiveness of the tax lien as against these interests until the tax lien was filed. H. R. Rep. No. 1018, 62d Cong., 2d Sess. The section dealt with the federal lien only and it did not purport to affect the time at which local liens were deemed to arise or to become choate or to subordinate the tax lien to tentative, conditional or imperfect state liens. Rather, we believe Congress intended that if out of the whole spectrum of state-created liens, certain liens are to enjoy the preferred status granted by 6323, they should at least have attained the degree of perfection required of other liens and be choate for the purposes of the federal rule.

The Court has never held that mortgagees face a less demanding test of perfection than other interests when competing with the federal lien. Indeed United States v. Ball Constr. Co. [58-1 USTC 9327], 355 U. S. 587, stands for just the contrary. There the state law creditor, asserting that the assignment under which he claimed was a mortgage within the predecessor to 6323, insisted upon priority over the federal lien by virtue of the previously executed assignment. A majority of the Court, although not expressly declaring the assignment to be a mortgage, held that 6323(a) afforded the creditor no protection since his interest was "inchoate and unperfected." The four dissenters thought the assignment was a mortgage and that it was "completely perfected" and "in all respects choate." While disagreeing on the choateness of the particular assignment involved there, the Court was unanimous in applying the choateness test to those seeking the protection of 6323(a). We follow that lead here and therefore proceed to measure against the rule, the choateness of the mortgagee's lien for reasonable attorney's fees before us.

Clearly the identity of the lien holder and the property subject to the lien are definite here, but it is equally apparent that the amount of the lien for attorney's fees was undetermined and indefinite when the federal tax liens in question were filed. 8 The mortgage held by respondents secured a promissory note which obligated the mortgagor maker to pay a "reasonable attorney's fee" "in the event of default" and "of the placing of this note in the hands of an attorney for collection." By the time the federal liens subordinated by the Arkansas courts were placed of public record, default had occurred, the mortgagee had elected to declare the note due and payable, an attorney had been engaged and a suit to foreclose the mortgage had been filed. But the "reasonable attorney's fee"--reasonable in relation to the service to be performed by the attorney--had not been reduced to a liquidated amount. The final amount was to be established by court decree and the Chancery Court set the fee considerably below the sum requested. Moreover, there is no showing in this record that the mortgagee had become obligated to pay and had paid any sum of money for services performed prior to the filing of the federal tax lien.

Ball once again provides a parallel. Sums due the contractor-taxpayer under a particular construction contract were assigned to the surety as security for any future indebtedness of the contractor to the surety arising under that contract or any other. After the filing of the federal tax lien against the contractor, the surety made advances to complete another contract of the taxpayer, as the surety was obligated to do under its bond issued on that contract, and the taxpayer thereby became indebted to the surety. The majority held the surety's interest "inchoate and imperfected" at the time of the filing of the federal tax liens. 9 Ball therefore rejects as inchoate an assignee's or mortgagee's lien to secure future indebtedness of the taxpayer-debtor. The creditor holds merely "a caveat of a more perfect lien to come." New York v. Maclay [3 USTC 1044], 288 U. S. 290, 294. Likewise, when a mortgagee has a lien for an attorney's fee which is uncertain in amount and yet to be incurred and paid, such a lien is inchoate and is subordinate to the intervening federal tax lien filed before the mortgagee's lien for attorney's fee matures. 10

But, it is said, the principal and interest of the mortgage were definite in amount, the attorney's fee later became certain by court order 11 and if the tax lien were to prevail the preference of the mortgagee given by 6323 will be frustrated since payment of the attorney's fee will reduce the net amount realized from the mortgage. Aside from the fact that the mortgagee here will experience no such reduction, 12 this argument would subordinate federal tax liens to inchoate liens and in both United States v. New Britain, supra, and United States v. Buffalo Savings Bank [63-1 USTC 9166], 371 U. S. 228, the Court denied priority to local tax liens which were imperfect when the federal tax lien was filed even though the former had priority over the mortgage and would reduce the recovery of the mortgagee. 13

The court below was in error and its judgment is reversed and the cause remanded for future proceedings not inconsistent with this opinion.

Reversed and remanded.

MR. JUSTICE DOUGLAS dissents.

1 The deed of trust provided, in addition:

"That if either the party of the second part [trustee] or the party of the first part [mortgagor] shall become a party to any suit or proceeding at law or in equity in reference to its interest in the premises herein conveyed, the reasonable costs, charges and attorney's fees in such suit or proceeding shall be added to the principal sum then owing by the party of the first part and shall be secured by this instrument, and the note secured hereby shall, at the option of the holder, become due and collectible.

. . .

"The proceeds of any sale under this deed of trust shall be applied . . . as follows:

"First: No pay the costs and expenses of executing this trust, and any and all sums expended on account of costs of litigation, attorney's fees, ground rents, taxes, insurance premiums, or any advances made or expenses incurred on account of the property sold, with interest thereon.

"Second: To retain as compensation, a commission as set forth by the laws of the State of Arkansas .

"Third: To pay off the debt secured hereby, including accrued interest thereon, as well as any other sums owing . . . pursuant to this instrument."

2 The federal tax liens, as of the date of the order of distribution, November 15, 1961 , were as follows:

Lien of 
November 29, 1960
 ....         $ 659.67

Lien of 
January 30, 1961
 .....         1,661.03

Lien of 
April 14, 1961
 .......         1,344.69

Lien of 
July 17, 1961
 ........         1,653.23

Lien of 
October 3, 1961
 ......         1,164.04

 

3 The first two liens, November 29, 1960 , and January 30, 1960 , were satisfied in full. $546.68 was available for partial payment of the April 14, 1961 , lien. The balance of the April lien and the full amounts of the July 17, and October 3, 1961 , liens remained unsatisfied.

4 The United States did not challenge the priority of the mechanic's lien or of any other distribution fixed by the decree.

5 Once the attorney's fees are subordinated to the federal tax liens, the $1,250 would be borne by the other claimants in order of seniority among themselves under state law. On the basis of the present decree, the share of the mechanic's lienor Anderson would be eliminated and that of the second mortgagee, The Development Company, reduced in half.

6 "While it is true that the filing of the notice of the tax lien may constitute notice in the case of real property, it is inequitable for the statute to provide that it constitutes notice as regards securities. For example, when a broker purchases a security for his customer on the exchange, it is obviously impossible for him to check all the offices in which a notice of the tax lien may be duly filed to determine whether the security is subject to such lien. A like situation exists with respect to over-the-counter and direct transactions in securities. An attempt to enforce such liens on recorded notice would in many cases impair the negotiability of securities and seriously interfere with business transactions. The adoption of the amendment will remove an existing hardship without causing any undue loss of revenue." H. R. Rep. No. 855, 76th Cong., 1st Sess. 26 (1939).

7 "The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question. Hence, although a state court's classification of a lien as specific and perfected is entitled to weight, it is subject to reexamination by this Court." United States v. Security Tr. & Sav. Bank, [50-2 USTC 9492] 340 U. S. 47, 49-50; see also, United States v. Acri [55-1 USTC 9138], 348 U. S. 211; United States v. Vorreiter [57-2 USTC 9956], 355 U. S. 15. Thus the fact that, under Arkansas law, the claim for attorney's fees becomes enforceable upon default as a contract of indemnity does not foreclose inquiry by this Court into the degree the claim is choate at that time.

8 There is nothing in Security Mortgage Co. v. Powers, 278 U. S. 149, which compels us to hold the lien choate, since the issue there was the status of an attorney's fee clause, fixed in amount, in bankruptcy proceedings where the rigorous federal lien choateness test was not necessarily applicable.

9 Contrast Crest Finance Co. v. United States [62-1 USTC 9105], 368 U. S. 347, where the assignment and the loans were consummated prior to the accrual and filing of the federal tax liens.

10 See in accord, with respect to attorney's fees, United States v. Bond, [60-2 USTC 9532], 279 F. 2d 837 (C. A. 4th Cir.); In re New Haven Clock & Watch Co. [58-1 USTC 9458], 253 F. 2d 577 (C. A. 2d Cir.); Bank of America v. Embry, 188 Cal. App. 2d 425, 10 Cal. Rptr. 602; with respect to payments of subsequently attaching local taxes, United States v. Bond, supra; United States v. Christensen [59-2 USTC 9621], 269 F. 2d 624 (C. A. 9th Cir.); and with respect to future advance clause transactions, American Surety Co. v. Sundberg, 58 Wash. 2d 337, 363 P. 2d 99; Rev. Rul. 56-41, 1956-1 Cum. Bull. 562; cf. United States v. Peoples Bank [52-2 USTC 9407], 197 F. 2d 898 (C. A. 5th Cir.); Hoare v. United States [61-2 USTC 9681], 294 F. 2d 823 (C. A. 9th Cir.).

11 This argument would require us to revitalize the long since rejected relation-back doctrine. See United States v. Security Tr. & Sav. Bank [50-2 USTC 9492], 340 U. S. 47, 50.

12 See note 5, supra.

13 By the same token respondents' contention that the rules against "unjust enrichment" are violated by preferring the tax lien to the claim for attorney's fees is without merit. Both New Britain and Buffalo Savings Bank prefer the federal lien even though the mortgagee's interest in the proceeds will be reduced by laterarising local taxes having priority under state law over the mortgagee. The attorney's services, moreover, were rendered for the benefit of the mortgagee to protect his interest in the property, and the United States , holding an adverse interest, received no such benefit from them that its interest is to be charged therefor.

 

 

[63-1 USTC 9166] United States , Petitioner v. Buffalo Savings Bank

Supreme Court of the United States, No. 96, 371 US 228, 83 SCt 314, 1/7/63, Reversing and remanding N. Y. Ct. App, 62-1 USTC 9292

[1954 Code Sec. 6323]

Lien for taxes: Priority over state taxes: Realty taxes as expenses of sale.--A Federal tax lien was superior to subsequently accruing local real estate tax liens. City of New Britain , (Sup. Ct. ) 54-1 USTC 9191, 347 U. S. 81, followed. The priority rules under Federal law could not be avoided by characterizing such liens as expenses of sale.

Archibald Cox, Solicitor General, Louis F. Oberdorfer, Assistant Attorney General, John B. Jones, Joseph Kovner, George F. Lynch, Department of Justice, Washington 25, D. C., for petitioner. John H. Little, 545 Main St. , Buffalso, N. Y., for respondent. Laurens Williams, Ring Bldg., Washington D. C., William Poole, Delaware Trust Bldg., Wilmington, Del., for amicus curiae.

PER CURIAM:

In 1946, respondent Buffalo Savings Bank made a loan secured by a real estate mortgage. The United States filed notice of a federal tax lien against the mortgagor's property in 1953. Thereafter, in 1957 and 1958, liens for unpaid real estate taxes and other local assessments attached to the property. The bank instituted foreclosure proceedings, naming the United States as a party. The trial court's decree ordered the property sold and the payment of local real estate taxes and other assessments as part of the expenses of the sale prior to the satisfaction of the tax lien of the United States . The United States appealed and the New York Supreme Court, Appellate Division, reversed, only to be reversed in turn by the New York Court of Appeals, which reinstated the trial court's judgment on the ground that the federal tax lien attached only to the mortgagor's interest in the surplus after the foreclosure sale and therefore was subordinate to the local taxes as "expenses of sale." 11 N. Y. 2d 31, 181 N. E. 2d 413.

We must reverse the judgment of the New York Court of Appeals for failure to take proper account of United States v. New Britain [54-1 USTC 9191], 347 U. S. 81. That case rules this one, for there the Court quite clearly held that federal tax liens have priority over subsequently accruing liens for local real estate taxes, even though the burden of the local taxes in the event of a shortage would fall upon the mortgagee whose claim under state law is subordinate to local tax liens.

A similar argument based on the general character of the federal tax lien was made and specifically rejected in New Britain . Moreover, the state may not avoid the priority rules of the federal tax lien by the formalistic device of characterizing subsequently accruing local liens as expenses of sale. Cf. United States v. Gilbert Associates, Inc. [53-1 USTC 9291], 345 U. S. 361. Finally, respondent's reliance on United States v. Brosnan [60-2 USTC 9516], 363 U. S. 237, and Crest Finance Co. v. United States [62-1 USTC 9105], 368 U. S. 347, is misplaced. Brosnan was concerned with foreclosure procedures, not with priorities, and in connection with the latter subject relied upon New Britain among other cases. Crest is wholly inapposite here.

The judgment is therefore reversed and the cause remanded for further proceedings not inconsistent with this opinion.

Reversed and remanded.

MR. JUSTICE DOUGLAS dissents.

 

 

[58-2 USTC 9926] United States v. Hulley

Supreme Court of the United States , No. 300, 358 US 66, 79 SCt 104, 11/10/58 , Reversing Fla. Sup. Ct. , which affirmed Fla. Cir. Ct., 58-2 USTC 9802

Tax lien: Priority: Mechanics' liens.--A federal tax lien has priority over mechanics' liens which were filed after the tax liens were filed. The mechanics' liens did not become effective on the date of visible commencement of operations for the improvement of the subject lands, a date which preceded the date of filing of the tax lien.

J. Lee Rankin, Solicitor General, Charles K. Rice, Assistant Attorney General, Earl E. Pollock, Assistant to Solicitor General, A. F. Prescott, George F. Lynch, Dept. of Justice, for petitioner. H. Leighton Thomas, Madeira Beach , Fla. (James F. Snelling, St. Petersburg , Fla. , of counsel), for respondent.

PER CURIAM:

The petition for writ of certiorari in this case is granted and the judgment is reversed. See United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC 9492]; United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC 9291]; United States v. New Britain, 347 U. S. 81 [54-1 USTC 9191]; United States v. Acri, 348 U. S. 211 [55-1 USTC 9138]; United States v. Liverpool & London Ins. Co., 348 U. S. 215 [55-1 USTC 9136]; United States v. Scovil, 348 U. S. 218 [55-1 USTC 9137]; United States v. Colotta, 350 U. S. 808 [55-2 USTC 9680]; United States v. White Bear Brewing Co., 350 U. S. 1010 [56-1 USTC 9440]; United States v. Vorreiter, 355 U. S. 15 [57-2 USTC 9956].

 

 

[57-2 USTC 9956] United States of America , Plaintiff in Error v. W. H. Vorreiter, Defendant in Error

Supreme Court of the United States, No. 168, October Term, 355 US 15, 78 SCt 19, 10/14/57, Reversing Supreme Court of Colo., 57-1 USTC 9415, 307 P. (2d) 475

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

Tax liens: Priority over mechanics' liens.--Federal tax liens which were recorded after the time when mechanics' liens statements were filed but before the mechanics' liens were reduced to judgment were entitled to priority.

J. Lee Rankin, Solicitor General, Charles K. Rice, Assistant Attorney General, A. F. Prescott, George F. Lynch, Department of Justice, for petitioner. Conrad L. Ball, 204 First National Bank Building, Cleveland , Ohio , for respondent.

PER CURIAM:

The petition for writ of certiorari is granted. The judgment of the Supreme Court of Colorado [57-1 USTC 9415] is reversed. United States v. Security Trust and Savings bank, 340 U. S. 47 [50-2 USTC 9492.]

 

 

[56-1 USTC 9440] United States of America , Petitioner v. White Bear Brewing Co., Inc., and Chicago Title and Trust Company as Trustee, et al.

In the Supreme Court of the United States , No. 699. October Term, 1955, 350 US 1010, 76 SCt 646, April 9, 1956

Petition for a writ of certiorari to the United States Court of Appeals for the Seventh Circuit.

[1939 Code Sec. 3670--corresponding to 1954 Code Sec. 6321]

Tax lien: Priority: Mechanic's lien.--The Supreme Court reverses, per curiam, the judgment of the District Court which had been affirmed by the Circuit Court, and which held that a mechanic's lien had priority over the Government's tax lien. The mechanic's lien had been acquired and recorded, and foreclosure proceedings had been commenced thereon, prior to the Collector's receipt of the first relevant assessment list.

Two dissents.

 Simon E. Sobeloff, Solicitor General, Charles K. Rice, Acting Assistant Attorney General, and Harry Baum and Stanley P. Wagman, Attorneys for the Department of Justice, all of Washington 25, D. C., for petitioner. Kenneth F. Burgess, Edward P. Saltiel, William H. Avery, Jr., George Ragland, Jr., and Henry A. Preston, 11 So. LaSalle St. , Chicago 3, Ill. , for respondents.

PER CURIAM:

The petition for writ of certiorari is granted and the judgment is reversed. Dissenting opinion by Mr. Justice Douglas in which Mr. Justice Harlan concurs.

[Dissenting Opinion]

JUSTICE DOUGLAS, with whom JUSTICE HARLAN concurs, dissenting:

I dissent. The Court holds that a federal tax lien has priority over a statutory mechanic's lien, even though the mechanic's lien was specific, prior in time, perfected in the sense that everything possible under state law had been done to make it choate, and was being enforced before the federal tax lien arose. The mechanic's lien arose out of a contract to furnish labor and materials for the improvement of the real estate. The contract had been performed, the mechanic's lien recorded for a specific amount, and suit instituted to enforce the lien--all before the federal taxes were assessed and the tax liens recorded. Moreover, by the time the United States filed the present action to foreclose its tax liens, the mechanic's lien had been reduced to judgment, and the real estate sold at public auction and transferred by the purchaser to others. In United States v. City of New Britain, 347 U. S. 81, 84 [54-1 USTC 9191], we said that liens under state law were "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." Accordingly, we held that the principle that "the first in time is the first in right" (id., at 85) should be applied. I would apply the same principle here.

None of our other cases stands in the way. United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC 9492], involved a general inchoate attachment lien which had been procured by the holder of an unsecured note. The attachment lien gave no right to proceed against the property unless the lienor obtained a judgment within three years. In United States v. Acri, 348 U. S. 211 [55-1 USTC 9138], the attachment lien was contingent upon the outcome of the suit for damages and was therefore "inchoate." Id. , at 214. The same was true of the lien of the garnisher in United States v. Liverpool & London Ins. Co., 348 U. S. 215 [55-1 USTC 9136]. In United States v. Scovil, 348 U. S. 218 [55-1 USTC 9137], the landlord's distress lien was "only a caveat of a more perfect lien to come." Id. , at 220. And in United States v. Colotta, 350 U. S. 808 [55-2 USTC 9680], the mechanic's lien which we subordinated to the federal tax lien had become definite in amount but no steps had been taken to file the statutory lis pendens notice nor to enforce the lien before the federal lien arose and was recorded.

Here the lien is not general and inchoate. It is specific and choate. The lienor had an immediate right to "enforce his lien" against the property. Ill. Rev. Stat. 1953, c. 82, 9. This is clearly more than "merely a lis pendens notice that a right to perfect a lien exists." 340 U. S. , at 50. Indeed, the mechanic's lienor had instituted suit to enforce the lien before the federal tax lien arose and had completed enforcement of the lien by the time the United States instituted the present action.

The Court apparently holds that under 26 U. S. C. 3670 a lien that is specific and choate under state law, no matter how diligently enforced, can never prevail against a subsequent federal tax lien, short of reducing the lien to final judgment. That is new doctrine, not warranted by our decisions, and supportable only if the New Britain case were overruled.

 

 

[55-2 USTC 9680] United States of America , Petitioner v. I. J. Colotta et al. (Doing Business as Partners Under the Firm Name of Long & Chambless Plumbing & Heating Company), Respondents

In the Supreme Court of the United States , No. 271. October Term, 1955, 350 US 808, 76 SCt 82, October 10, 1955

On petition for writ of certiorari to the Supreme Court of Mississippi.

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

Lien for taxes: Validity against third parties: Priority of tax liens over mechanic's liens: Mechanic's liens under Mississippi law.--The federal tax liens are superior to the mechanic's liens, even though the mechanic's liens under Mississippi law are regarded as perfected when the money for the labor and materials supplied becomes due and the assessment list covering the federal taxes is received after the completion of the building.

Simon E. Sobeloff, Solicitor General, H. Brian Holland, Assistant Attorney General, Marvin E. Frankel, Assistant to the Solicitor General, and Ellis N. Slack, A. F. Prescott, and Fred E. Youngman, Justice Department Attorneys, for petitioner. No appearance for respondent.

PER CURIAM:

The petition for writ of certiorari in this case is granted and the judgment [55-2 USTC 9584] is reversed.

Justice DOUGLAS dissents.

 

 

[49-1 USTC 9142]George T. Goggin, Trustee in Bankruptcy of the Estate of Kessco Engineering Corporation, Petitioner v. Division of Labor Law Enforcement, State of California , Statutory Assignee of Certain Prior Wage Claimants

Supreme Court of the United States , No. 35, 336 US 118, 69 SCt 469, January 31, 1949

On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit.

Lien for taxes: Property seized before institution of bankruptcy proceedings: Proceeds of sale through trustee in bankruptcy.--The Collector had seized property of the taxpayer prior to the time a petition in bankruptcy was filed. Accordingly, the provisions of the Bankruptcy Act determining priority in payment of claims had no application and, when he turned the property over to the trustee in bankruptcy for sale, the Collector was entitled to claim the proceeds as against wage claimants. Reversing the decision of the Ninth Circuit Court of Appeals, 165 Fed. (2d) 155, reported at 48-1 USTC 9106.

Martin Gendel, 607 James Oviatt Bldg., Los Angeles 14, Calif. , for the petitioner. Fred N. Howser, Attorney General of California and Frank W. Richards, Deputy Attorney General of California , for the respondent.

MR. JUSTICE BURTON delivered the opinion of the Court.

This case deals with the question whether 67c of the Bankruptcy Act, 1 in determining priorities in the payment of claims, speaks as of the time of filing the petition in bankruptcy. The precise issue presented is whether a tax claim of the United States, secured by a lien perfected before the bankruptcy of the taxpayer and accompanied at the time of the filing of the petition in bankruptcy, by the Collector of Internal Revenue's actual possession of the bankrupt's personal property, is required by 67c of the Bankruptcy Act to be postponed in payment to debts owed by the bankrupt for wages to claimants specified in clause (2) of 64a of that Act, 2 because the Collector later relinquished possession of such property to the trustee of the bankrupt's estate for sale by him. We hold that the lien was valid and entitled to priority of payment as against the wage claims at the date of bankruptcy and that the Collector's relinquishment of possession of the bankrupt's property did not change the result.

The facts are undisputed. Before March 26, 1946 , a Collector of Internal Revenue of the United States perfected a statutory lien upon the personal property of the Kessco Engineering Corporation, a California corporation, and took actual possession of such property pursuant to that lien. He attempted to sell such assets and received bids for them but did not complete the sale because the price obtainable was unsatisfactory to him. He instituted a second sale but abandoned it when he relinquished possession of the property to the trustee of the bankrupt's estate. On March 26, 1946, the corporation filed its voluntary petition in bankruptcy in the United States District Court for the Southern District of California, was adjudicated a bankrupt and George T. Goggin (who later became the trustee of the bankrupt's estate and is the petitioner herein) was appointed receiver. Having qualified as receiver on March 28, 1946 , he communicated with counsel for the Collector as to the Collector's turning over to him the bankrupt's personal property. In this connection, the referee in bankruptcy later made a finding of fact which was adopted by the District Court and is as follows:

". . . the personal property of the bankrupt in the hands of the Collector of Internal Revenue, . . . was turned over to the said George T. Goggin, who accepted the terms and conditions of a telegram from J. P. Wenchel, Chief Counsel of the Bureau of Internal Revenue, reading as follows:

`Reference to telephone conversation today with Mr. Webb [member of the Los Angeles office of Internal Revenue] relative to Kessco Engineering Corporation, Bankrupt, no objection by this office to Collector relinquishing personal property to Trustee for sale. Government's lien to attach to proceeds from sale subject to Trustee's expenses including costs of sale.

J. P. Wenchel, Chief Counsel.'"

Goggin, in his final capacity as trustee for the bankrupt, caused these assets to be sold at public auction, pursuant to order of court. Having liquidated all assets which had come into his possession, he had on hand, on December 12, 1946 , about $31,206.20, which the referee certified was insufficient to pay in full the expenses of admin istration, the lien claims, the prior labor claims and prior tax claims in the case. The gross amount of the amended claim of the Collector for taxes, penalties and interest was $78,865.03. The prior wage claims totaled $3,424.87. The Department of Employment of the State of California also filed a tax claim for $15,135, which was recorded as a lien on or about December 24, 1945 . Neither the validity nor the amount of any of these claims is in issue here. 3

The present proceeding originated in a petition filed with the referee in bankruptcy by the trustee, seeking an order to show cause why the order of priority of the payment of the tax and prior wage claims and the expenses of admin istration should not be determined by the District Court. The referee made findings of fact and reached conclusions of law upon the basis of which he ordered that, from the monies in the possession of the trustee, there first be paid the expenses of admin istration and that the balance of such funds then in the hands of the trustee be paid to the Collector of Internal Revenue in partial payment of the Government's tax claims and the interest thereon as prescribed by law. 4 The District Court adopted the findings of fact and conclusions of law of the referee and entered judgment thereon. The Court of Appeals for the Ninth Circuit reversed that judgment and held that, by virtue of the Collector's relinquishment of his possession of the personal property of the bankrupt, the taxes due to the United States must be postponed, in payment, to the debts of the bankrupt for certain wage claims, pursuant to 67c of the Bankruptcy Act. 165 Fed. (2d) 155 [48-1 USTC 9106]. Because of the importance of the issue in the admin istration of the Bankruptcy Act, we granted certiorari. 333 U. S. 860.

The bankrupt filed its petition and was adjudicated a bankrupt on March 26, 1946 . The personal property of the bankrupt was then subject to the perfected statutory lien of the United States for taxes and that lien was accompanied by the actual physical possession of the property by a Collector of Internal Revenue on behalf of the United States. Those facts completely satisfy 67c of the Bankruptcy Act. 5 Subsequent events, such as the relinquishment of his possession by the Collector in favor of the trustee of the bankrupt's estate for the purpose of facilitating a sale of the property by the trustee, are not material to the determination of the issue before us. 6 The terms under which the Collector's possession was relinquished are consistent with and support this result but the Government's right to payment ahead of the wage claims was determined at the time of bankruptcy and did not arise out of the arrangement under which possession was relinquished to the trustee.

This general point of view in interpreting the Bankruptcy Act is one of long standing. In Everett v. Judson, 228 U. S. 474, 479, this Court said:

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

See also, Myers v. Matley, 318 U. S. 622, 626; United States v. Marxen, 307 U. S. 200, 207-208; Acme Harvester Co. v. Beekman Lumber Co., 222 U. S. 300, 307. 7

While 67c was added to the Bankruptcy Act by the Chandler Act in 1938, we find nothing in it or in its legislative history to suggest an abandonment of the underlying point of view as to the time as of which it speaks and the general purpose of Congress to continue to safeguard interests under liens perfected before bankruptcy. City of Richmond v. Bird, 249 U. S. 174; In re Knox-Powell-Stockton Co., 100 Fed. (2d) 979 [39-1 USTC 9277]; In re Van Winkle, 49 Fed. Supp. 711. While 64, as amended, somewhat readjusts priorities among unsecured claims, 67 continues to recognize the validity of liens perfected before bankruptcy as against unsecured claims. Section 67b has clarified the validity of statutory liens, including those for taxes, even though arising or perfected while the debtor is insolvent and within four months of the filing of the petition in bankruptcy. It expressly recognizes that the validity of liens existing at the time of filing a petition in bankruptcy may be perfected under some circumstances after bankruptcy. Section 67c, as amended in 1938, does, however, introduce a new postponement in the payment of certain claims secured by liens to the payment of other claims specified in clauses (1) (for certain admin istrative expenses, etc.) and (2) (for certain wages) of 64a. This subordination is, however, sharply limited. For example, it does not apply to statutory liens on real property, or to those actually enforced by sale before bankruptcy, or, in general, to liens on personal property when accompanied by actual possession of such property. The background of 67c suggests a conscious purpose to give a narrowly limited priority to admin istrative expenses and to certain wage claims, at least in instances disclosing accumulations of unpaid taxes the priority of which wage earners had no good reason to suspect, and which might absorb the entire estate of the bankrupt unless postponed by these provisions. 8 The purpose of 67 in requiring a public warning of the existence of an enforceable statutory lien for taxes was served in the instant case not only by the steps taken to perfect the Government's lien but by the Collector's seizure and actual possession of the personal property of the taxpayer before the filing of the taxpayer's petition in bankruptcy.

The validity of the lien for taxes as against the wage claimants was thus established at the time of the filing of the petition in bankruptcy and the Collector's possession of the personal property of the bankrupt excluded the application of 67c which otherwise would have postponed the payment of the tax claims to the payment of the claims for admin istrative expenses and wages specified in clauses (1) and (2) of 64a. By his subsequent arrangement with the trustee for the sale of the bankrupt's property, the Collector did not lose the right to priority of payment accorded to the perfected tax liens, at the time of bankruptcy, as against the wage claims.

The arrangement between the Collector and the trustee was a natural and proper one. While the amended claim for taxes, penalties and interest, dated August 28, 1946, amounted to $78,865.03, the original claim, filed with the notices of lien prior to March 26, 1946, amounted to only $40,921.94 (even including the interest and costs later computed to August 21, 1946). Of this sum the taxes themselves amounted only to $34,848.04. To meet this, the trustee of the bankrupt's estate, on December 12, 1946 , had on hand $31,206.20, evidently derived from the sale of the property originally held by the Collector. These figures, accordingly, suggest the possibility that, in March, 1946, it reasonably may have been supposed that a surplus above the amount of the Government's tax claim might be realized from the sale of the assets then in the possession of the Collector. In that event, it would have been the obviously appropriate procedure for the trustee to sell that property free and clear of liens and encumbrances and then distribute the proceeds to the rightful claimants. Even though there was little or no prospect of realizing such a surplus, it was reasonable and appropriate for the trustee, with the consent of the lien holder, thus to sell the property and distribute its proceeds. See Van Huffel v. Harkelrode, 284 U. S. 225; 6 Remington on Bankruptcy 2577-2578 (4th ed. 1937). 9 The propriety of the present conclusion is emphasized by the fact, urged by the trustee, that the opposite conclusion would, in many other cases, operate to the detriment both of unsecured creditors and of the statutory lien holders. It would compel a lien holder to retain his actual possession of the property in order to be sure of his full priority in the payment of his tax claim. He would be compelled to do this, even though by doing so the bankrupt's property probably would yield a smaller sales price than if sold by the trustee. Furthermore, the lien holder would be brought into sharp conflict with the trustee whenever there was reason to suppose that the proceeds of the sale might equal or exceed the tax claims secured by the lien. Under such circumstances the bankruptcy court generally may order the sale of the bankrupt's property by the trustee, free and clear of liens and encumbrances. See 4 Collier on Bankruptcy 70.97, 70.99 (14th ed. 1942); 6 Remington on Bankruptcy 2583 (4th ed. 1937). Accordingly, we find no substantial support for the argument that the lien holder's voluntary relinquishment of his possession of the bankrupt's property, in favor of the bankrupt's trustee for the purpose of permitting the trustee to sell the property in this case, must carry with it, as a matter of law, a postponement of the payment of the lien holder's tax claim to that of the claims for wages here presented.

For these reasons the judgment of the Court of Appeals is

Reversed.

1 As 67b is referred to in 67c and is material to its interpretation, both subdivisions of 67 are quoted below:

"Sec. 67. Liens and Fraudulent Transfers.--. . .

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

"c. Where not enforced by sale before the filing of a petition in bankruptcy or of an original petition under chapter X, XI, XII, or XIII of this Act, though valid under subdivision b of this section, 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, and liens whether statutory or not, of distress for rent shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 of this Act, and, except as against other liens, such liens for wages or for rent shall be restricted in the amount of their payment to the same extent as provided for wages and rent respectively in subdivision a of section 64 of this Act." (Italics supplied.)

. . . . .

Bankruptcy Act of 1898, c. 541, 30 Stat. 544, 564, as amended by the Chandler Act of June 22, 1938, c. 575, 52 Stat. 840, 875-877, 11 U. S. C. 107(b) and (c).

2 Not only the portions of 64a specifying the wages here in controversy but those otherwise related to the issues of this case are quoted below:

"Sec. 64. Debts Which Have Priority.--a. The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment, shall be (1) the actual and necessary costs and expenses of preserving the estate subsequent to filing the petition; the fees for the referees' salary fund and for the referees' expense fund; the filing fees paid by creditors in involuntary cases; where property of the bankrupt, transferred or concealed by him either before or after the filing of the petition, shall have been recovered for the benefit of the estate of the bankruptcy by the efforts and at the cost and expense of one or more creditors, the reasonable costs and expenses of such recovery; the costs and expenses of admin istration, including the trustee's expenses in opposing the bankrupt's discharge, the fees and mileage payable to witnesses as now or hereafter provided by the laws of the United States, and one reasonable attorney's fee, for the professional services actually rendered, irrespective of the number of attorneys employed, to the petitioning creditors in involuntary cases and to the bankrupt in voluntary and involuntary cases, as the court may allow; (2) wages not to exceed $600 to each claimant, which have been earned within three months before the date of the commencement of the proceeding, due to workmen, servants, clerks, or traveling or city salesmen on salary or commission basis, whole or part time, whether or not selling exclusively for the bankrupt; . . . (4) taxes legally due and owing by the bankrupt to the United States or any State or any subdivision thereof: Provided, That no order shall be made for the payment of a tax assessed against any property of the bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the court: And provided further, That, in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the court; and (5) debts owing to any person, including the United States, who by the laws of the United States in [is] entitled to priority, and rent owing to a landlord who is entitled to priority by applicable State law: Provided, however, That such priority for rent to a landlord shall be restricted to the rent which is legally due and owing for the actual use and occupancy of the premises affected, and which accrued within three months before the date of bankruptcy." (Italics supplied.)

. . . . .

Bankruptcy Act of 1898, c. 541, 30 Stat. 544, 563, as amended by the Chandler Act of June 22, 1938, c. 575, 52 Stat. 840, 874, and 60 Stat. 323, 330, 11 U. S. C. 104(a).

3 There is no issue here as to the amount of penalties or interest included in the Collector's claim for taxes or as to the date to which interest on such claim shall be computed. There is no issue here as to any difference between statutory liens which were perfected more than four months before the filing of the petition in bankruptcy or those perfected within less than that time. As the lien claimed by the United States exceeds the funds available, it has filed its brief in this Court as the sole real party in interest and in opposition to the wage claims. The respondent, Division of Labor Law Enforcement of the State of California , appears on behalf of all of the labor claimants. There also is no issue here as to the amount to be paid for the expenses of admin istration or the items which such expenses may include in addition to the costs of the sale made by the trustee.

4 Provision, not material here, was made that, if additional money came into the possession of the trustee, the court, upon notice to all necessary and proper parties, should determine the respective liens or priorities, if any there be, of the Collector of Internal Revenue, the prior labor claimants, the Department of Employment of the State of California and other tax claimants entitled to be heard.

5 See note 1, supra.

6 See Davis v. City of New York , 119 Fed. (2d) 559. In that case the City perfected its lien for retail sales taxes by seizure of assets of the taxpayer, May 16, 1939 . An involuntary petition in bankruptcy was filed June 7, 1939 , against the taxpayer and it was adjudicated a bankrupt June 17, 1939 . The assets were thereafter sold in execution of the warrant issued by the city treasurer. The levy was held to be a valid statutory levy as against the trustee of the bankrupt's estate and the City was allowed to retain the proceeds of the sale, under 67b and 67c of the Bankruptcy Act, as amended in 1938. For a converse situation see City of New York v. Hall, 139 Fed. (2d) 935. In that case the City perfected its lien on personal property of the taxpayer, arising out of long delinquent business and sales taxes, by the delivery of warrants on January 14, 1943 , at 10:15 a. m., to the city's warrant agent for execution and levy on the property. The actual levy on, and inventory of, the property and the posting of notices of sale were not effected until shortly after 4:30 p. m. In the meantime, at 4:22 p. m., an involuntary petition in bankruptcy was filed against the taxpayer and upon this he was adjudicated a bankrupt. Pursuant to an order of the bankruptcy court, a receiver sold the property and the court declined to order the net proceeds to be turned over to the City. The City was the holder of a statutory lien but, at the time of the filing of the petition in bankruptcy, the lien was not accompanied by actual possession of the personal property to which it attached. It, therefore, was subordinated, under 67c of the Bankruptcy Act, to the admin istration expenses and wages covered by clauses (1) and (2) of 64a. "Notwithstanding the admonition of Section 67, sub. c, the City chose to slumber on its rights. Congress intended to penalize such somnolence." Id. at p. 936.

7 "Section 1. Meaning of Words and Phrases.--The words and phrases used in this Act and in proceedings pursuant hereto shall, unless the same be inconsistent with the context, be construed as follows:

. . . . .

"(13) 'Date of bankruptcy,' 'time of bankruptcy,' 'commencement of proceedings,' or 'bankruptcy,' with reference to time, shall mean the date when the petition was filed;" . . . 30 Stat. 544, as amended by 52 Stat. 840-841.

". . . the rights of creditors are fixed by the Bankruptcy Act as of the filing of the petition in bankruptcy. This is true both as to the bankrupt and among themselves. The assets at that time are segregated for the benefit of creditors. The transfer of the assets to someone for application to 'the debts of the insolvent, as the rights and priorities of creditors may be made to appear' [citing Bramwell v. U. S. Fidelity & Guaranty Co., 269 U. S. 483, 490], takes place as of that time." United States v. Marxen, 307 U. S. 200, 207-208.

"The general rule in bankruptcy is that the filing of the petition freezes the rights of all parties interested in the bankrupt estate. Exceptions only emphasize the rule. Whatever disagreement in opinion there may have been on the matter prior to the Act of 1938, it is now clear that statutory liens may be valid if they arise before bankruptcy although they are perfected after bankruptcy, if the perfection is within the time permitted by and in accordance with the requirements of applicable law." 4 Collier on Bankruptcy 228-229 (14th ed. 1942).

8 These provisions apparently originated in Amendments proposed by the National Bankruptcy Conference which were before Congress in a Committee Report Analysis of H. R. 12889, 74th Cong., 2d Sess. (1936). This report states that the bill was introduced by Mr. Chandler May 28, 1936 , containing Amendments proposed by the National Bankruptcy Conference, and the several Sections are accompanied by explanatory notes. Section 67c, as there proposed, resembles substantially the Section as finally enacted. The note explanatory of it is attributed to Jacob I. Weinstein, a member of the Conference, includes the following statement:

"Section 64 [of the Bankruptcy Act before amendment by the Chandler Act] is declaratory of a policy that the costs and expenses in connection with a bankruptcy proceeding and its admin istration shall be first paid in distribution. It is a sound policy and is in accordance with the general principles well established in liquidation proceedings. But Section 67 of the Act does not apply the same limitation with respect to valid liens. The Supreme Court, in the case of City of Richmond v. Bird, 43 A. B. R. 260 (1919), resolved the conflict in the lower court decisions by holding that the priority provisions of Section 64 do not apply to liens valid under Section 67. . . .

"It is significant that in recent years state legislatures have been enacting special legislation in favor of tax claims, public debts, and a variety of private claims. Statistics in the bankruptcy cases show that the effective admin istration of the bankruptcy law has seriously suffered therefrom. Such claims, particularly tax liens, often consume the entire estate, leaving nothing for the payment of the costs and expenses of admin istration incurred in reducing the assets to cash. In many such cases the tax liens represent an accumulation of delinquent items covering a long period of time, without any attempt on the part of tax collectors to enforce payment prior to the bankruptcy proceeding.

"There is therefore need for a provision to protect the admin istration costs and expenses; and similar considerations apply to wage claims. Accordingly we have selected, from among the priorities fixed by Section 64 (as revised), these particular items for protection. However, by reason of the historical development and the inherent differences existing in the incidents attaching to real and personal property, it would seem advisable to restrict the remedy thus provided to liens on personal property, where such liens have not been enforced by sale prior to bankruptcy." (Italics supplied.) Id. at p. 212 n. 1.

At that time the bill did not also except from subordination statutory tax liens on personal property "accompanied by possession of such property." The addition of that clause gives it special emphasis and suggests its appropriate effect as a warning to other claimants that the property, so possessed, will not be available in the first instance for the admin istrative expenses and wage claims specified in clauses (1) and (2) of 64a.

The report filed by Mr. Chandler for the Committee on the Judiciary, July 29, 1937 , to accompany the bill then known as H. R. 8046 merely stated: "In subdivisions b and c statutory liens are protected and permitted to be perfected if the time allowed by law for perfecting them has not expired." H. R. Rep. No. 1409, 75th Cong., 1st Sess. 34 (1937), and see references to 64 and 67c on pp. 9, 15-16.

See also, Weinstein, The Bankruptcy Law of 1938 (1938):

"This subdivision is new and is designed to correct an inequitable condition which existed under the old Act, particularly with respect to tax liens allowed, through the inaction of tax authorities, to be accumulated over a long period of time. Frequently, such liens consumed the entire estate, even to the exclusion of the costs and expenses incurred in the proceeding. While subd. a of sec. 64 provides for priority of payment of such costs and expenses, such payment is prior only to the other unsecured debts and does not affect or impair valid liens, whether statutory or otherwise. But tax claims may take the form of unsecured debts due to the sovereign, and thus payable by way of priority in the order as provided in sec. 64, or the form of liens created by local statutes. As indicated, if the tax claim takes the form of a lien, or is reduced to the form of a lien, it is not affected by the provisions of sec. 64. In view of the inequitable condition above referred to, there was need for a provision to protect the admin istration costs and expenses, and like considerations of public policy required a similar protection for wage claimants. However, the historical development, and the inherent differences in the incidents attaching to real and personal property, made it advisable to restrict the remedy provided by this paragraph to liens on personal property, but, in respect even to personal property, the provisions are applicable only where the property has not been reduced to possession or where the liens have not been enforced by sale prior to bankruptcy." (Italics supplied in the second instance.) (At pp. 144-145.)

9 The only question then arising would be as to the extent to which the trustee might deduct from those proceeds his general expenses of admin istration, as well as the costs of the sale itself. This question was touched upon in the agreement with the trustee but no issue is presented here as to it.

 

 

[48-1 USTC 9270] Commonwealth of Massachusetts , Petitioner v. The United States of America

Supreme Court of the United States , No. 157. October Term, 1947, 333 US 611, 68 SCt 747, April 19, 1948

On Writ of Certiorari to the United States Circuit Court of Appeals for the First Circuit.

Lien of federal taxes: Priority over state taxes.--The states are not entitled to collect or retain any part of an insolvent taxpayer's assets in payment of unemployment contributions owed by such taxpayer until the federal claims for taxes, including old-age benefit taxes and unemployment taxes, are paid in full. Although the statute permits taxpayers to credit amounts paid by them into state unemployment funds against their federal unemployment tax up to 90 per cent of such tax, when a taxpayer becomes insolvent the federal priority statute (Sec. 3466, Revised Statutes) intervenes and freezes the funds in the assignee's hands so that he cannot pay the state's claim for unemployment contributions until he has first paid the federal unemployment tax claim. Four dissents. Affirming the decision of the Circuit Court of Appeals, First Circuit, 47-1 USTC 9206, 160 Fed. (2d) 614, which affirmed as to capital stock taxes and taxes under Title VIII, Social Security Act, and reversed as to taxes under Title IX, Social Security Act, the decision of the District Court.

John A. Brennan for the petitioner. Clarence A. Barner, Attorney General, and Alfred E. Lopresti, Assistant Attorney General, for the United States .

MR. JUSTICE RUTLEDGE delivered the opinion of the Court.

[Nature of Proceeding]

This case is for all practical purposes a renewal of the litigation recently here in Illinois v. United States, 328 U. S. 8, and the companion case of Illinois v. Campbell, 329 U. S. 362. The former unanimously held that the United States has priority, by virtue of Rev. Stat. 3466, 31 U. S. C. 191, for payment from an insolvent debtor's estate of federal insurance contribution taxes under Title 8 and unemployment compensation taxes under Title 9 of the Social Security Act, 49 Stat. 620, as against a state's claim for unemployment compensation taxes imposed by its statute conforming to the federal act's requirements. The Campbell case, which was reargued on other issues, rested on this ruling for disposition of the common issue concerning the effect of 3466.

The facts are substantially identical with those in Illinois v. United States, 1 except in two respects. One is that the fund available here for distribution is more than sufficient to pay either the Title 8 or the Title 9 taxes, though inadequate to pay both, while in Illinois v. United States the fund was not large enough to satisfy either tax in full. Here too the debtor's assignee has paid to the commonwealth the full amount of its claim, 2 while in the Illinois cases the fund remained in the assignee's hands for distribution.

The District Court sustained the federal priority for capital stock and Title 8 taxes in full, and for 10 per cent of the Title 9 claim. It therefore deferred payment of any part of the state's claim until those claims were fully paid. But the court held the United States not entitled to priority for the remaining 90 per cent of the Title 9 claim, on the ground that Title 9, 902, 3 gives the assignee "the alternative right" to pay that amount to an approved state unemployment fund. Accordingly the judgment ordered Massachusetts to pay over to the United States , from the $803.72 received from the assignee, sufficient funds to satisfy in full the federal priorities sustained, and to retain the small balance remaining after making those payments to apply on its claim for 90 per cent of the Title 9 taxes. 65 Fed. Supp. 763. This action was taken in view that, while our previous decisions had sustained the federal priority for the capital stock and Title 8 taxes, they had not determined the question for Title 9 claims. 4

However, on appeal by both parties, the Circuit Court of Appeals held the United States entitled, under the Illinois rulings, to priority for the full amount of all its claims, including the Title 9 taxes. That court therefore affirmed the District Court's judgment except insofar as it denied the Government's Title 9 claim. As to this it reversed the District Court's ruling. 160 Fed. (2d) 614 [47-1 USTC 9206].

Because of the obvious confusion concerning the effects of our prior decisions and the asserted differences between this case and the Illinois cases, certiorari was granted. 332 U. S. 754.

[Positions Taken by Appellant and by Illinois as Amicus Curiae]

I. Massachusetts seeks to retain the entire $803.72 she has received, in priority to all the federal claims. She agrees with the district court that 902 gives the taxpayer an "optional right" of payment, but does not accept its allocation creating priorities for all federal claims except 90 per cent of the Title 9 taxes. To sustain this broad claim would require reversal of both of the Illinois decisions. In no other way, on the facts, could Massachusetts retain the whole amount she was paid. 5

Illinois as amicus curiae takes a narrower position, conceding that the Illinois cases stand as decisive adjudications of priority for Title 8 taxes but disputing that effect for Title 9 claims. 6 This position seeks an allocation paying the state's claim after the Title 8 and other federal claims, including 10 per cent of the Title 9 taxes, but before or rather in "satisfaction" of the remaining 90 per cent of them. 7

Notwithstanding their substantial differences, the two states rest their respective positions on the same basic arguments, which upon examination turn out to be identical with those vigorously presented by Illinois in the earlier cases, except for wording and detail. Much is made of the fact that here the debtor's assignee has paid to the commonwealth the full amount of its claim, which in Illinois v. United States, the fund remained in the assignee's hands. Both states urge that 902 gives the taxpayer, and here his assignee, the "optional right" of payment to the state. Moreover, with respect to the requirement of Rev. Stat. 3466 that "the debts due the United States shall be first satisfied," it is said that payment to the state with resulting credit to the United States for 90 per cent of the Title 9 claim "satisfies" the Government's debt as much as payment to it in cash.

In the Illinois cases the foundation for the state's claim to be paid in preference to any of the federal claims lay in the credit provision of 902, which is the identical provision for "optional payment." There was no question whatever that 902 gave the taxpayer the "alternate right." But the precise issue in both cases was whether that right had been cut off by Rev. Stat. 3466 when he became insolvent.

Obviously there could have been but little point or effect to our decisions if, despite them, the assignee could have turned around immediately and deprived the Government of the priorities established simply by exercising a right to make the optional payment to the state. Nor would the decisions have been much more sensible or effective, had they purported to sustain the federal priorities when the assignee has retained the fund, but to disallow them if he has paid the state before the federal claims are filed. We made no such ineffective or capricious rulings. The decision was broadly that by intervention of the insolvency and the consequent bringing of Rev. Stat. 3466 into play, the taxpayer's right to pay the state and take federal credit had been cut off. 8

Our decision went to the merits of that right and not merely to rule that the state was not a proper party to enforce its exercise. The taxes due the United States were held to be debts; and by virtue of 3466 the debtor's prior obligation attaching as of the date of his insolvency was to the Government, not to the state. It followed necessarily that the assignee could not "satisfy" it by paying the state and giving the Government "credit." This was the very question at issue and the one adjudicated. The "alternate right" contention and the one that "satisfied" in 3466 means "credit" are only verbal redressings of the basic issue decided in the Illinois cases.

[Effect of the Illinois Cases]

II. This is as true of the argument's bearing on Illinois ' narrower position as it is for Massachusetts ' broader one. But Illinois , apparently with Massachusetts ' support, brings forward to sustain the less sweeping attack the additional contention that the Illinois decisions did not adjudicate Title 9 priority, although purporting to do so. Moreover, the facts present this narrower issue of distinguishing between Title 9 and other federal claims in sharper factual focus than did the Illinois cases. For if the capital stock and Title 8 claims are first paid in full, as the District Court required, a small balance of the fund will remain, to be applied either in part payment of the federal Title 9 claim or in some form of allocation between it and Massachusetts' claim. This was not true of Illinois v. United States, or indeed of Illinois v. Campbell, in the posture in which that case was brought here.

The principal argument is that the Title 9 taxes, though litigated in the Illinois courts, were not involved on the facts in the Illinois cases as they came to and were decided by this Court. Hence it is said we did not acquire jurisdiction over the Title 9 claims. The argument is correct concerning Illinois v. Campbell . 9 But it is surprising as applied to Illinois v. United States, in view of the state supreme court's adverse decision on the Title 9 issue; Illinois' explicit application for certiorari on that issue and argument on the merits here to reverse the state courts decision; 10 the necessity on the facts for the state to bring the question up and secure reversal in order to establish its claim; 11 and finally our opinion's clear and explicit terms, indeed emphasis, in deciding the Title 9 issue, together with the Title 8 one, against Illinois. 12

The idea that the state court decided only the Title 8 issue completely misconceives its action, and serves only to confuse the judgment in that case with the one in Illinois v. Campbell . Indeed it seeks to infuse into the former the latter's denial of Title 9 priority. Not only is this wholly incompatible with Illinois ' earlier position; it ignores the fact that the state court disposed of the Title 9 issue in the two cases, but in opposite ways on entirely different facts and legal issues.

In Illinois v. Campbell, the state court did not reach the basic question of the force of Rev. Stat. 3466 to create priority for federal Title 9 claims; rather, it expressly avoided deciding that question. 391 Ill. 29, 32. This was because the insolvent's assets were in the hands of a court-appointed receiver, id. 31, and in that situation 602(b) of the Revenue Act of 1943, 58 Stat. 77, 13 expressly allowed the receiver to pay the state and take credit up to 90 per cent of the Title 9 tax. The Illinois Supreme Court expressly so held, and on this ground alone denied the federal Title 9 claim. 391 Ill. 29, 34. The effect was to rule that 602(b) created a legislative exception to 3466, limited to payments by such receivers, within the times and for the tax periods specified, up to 90 per cent of the Title 9 taxes. 14

But 602(b) did not apply in Illinois v. United States, because the insolvent's assets were held by a common-law assignee, not a court-appointed official. 15 So holding, 391 Ill. at 37, the Illinois court went on to rule that the federal claims for Title 8 and Title 9 taxes were debts within the meaning of 3466 and were therefore entitled to priority over the state's claim. It not only rejected the argument that the credit provision of Title 9, 902, made that claim "in reality a claim of the Nation . . . tantamount to a claim of the United States," 16 but also carefully guarded the wording of the opinion's dispositive paragraphs 17 and the directions given the trial court for entering the judgments on remand so as to differentiate the two cases and to avoid any direction that the fund in Illinois v. United States, apply on only one of the federal claims. 18 The judgment thus left the United States free to apply it in partial satisfaction of either claim or both.

This was also the effect of our own decision and judgment. It generally and without distinction between the Title 8 and Title 9 claims adjudicated priority for both. As in the Illinois court's decision, no restriction was placed upon allocation of the fund, nor is any hint to be found in the opinion that such an allocation was intended. Indeed we were not asked to make one and to have done so would have disregarded the basic position of both parties, each of which sought a full and favorable disposition of the controversy including decision upon all the issues presented. 19

It is true that, as in the Illinois Supreme Court, the decision and judgment could have been made on the narrower basis that the Title 8 claim was more than sufficient to exhaust the fund, and therefore to sustain the priority for that claim alone would dispose of the case. But this would have been equally true of the Title 9 claim. Neither claim was either more or less essential to decision than the other, indeed decision upon both was necessary to a judgment favorable to Illinois . To have eliminated either would have required some indication of that purpose. Since none was given, it cannot be said that the judgment rested on the one ground or claim more than the other.

While therefore the case is one which might have been decided on either of two independent grounds favorably to the Government, it is neither one in which that course was followed nor one which could have been determined the opposite way in that manner. Instead, as we were asked to do and rightly could do on the record and the issues, we decided both issues, and the judgment rested as much upon the one determination as the other. In such a case the adjudication is effective for both. United States v. Title Ins. Co., 265, U. S. 472; Union Pacific Co. v. Mason City Co., 199 U. S. 160; see Richmond Co. v. United States, 275 U. S. 331, 340.

[Effect of Rev. Stat., Section 3466]

III. Finally, it is urged that in Illinois v. United States we had no occasion to consider and hence our opinion did not discuss whether in a case like this, where the fund is more than sufficient to pay all federal claims except 100 per cent of the Title 9 claim, the balance remaining after paying those other claims must go first to pay the federal Title 9 claim in full, or may be allocated between that claim and the state claim to pay 10 per cent of the federal claim first and then to apply what remains on the state claim. 20

Closely related to this, though not involved on the facts in Illinois v. United States or here, 21 is the Government's apparent concession that if all the federal claims are paid in full, including 100 per cent of the Title 9 claim, and any balance then remains in the fund, the insolvent taxpayer is nevertheless given the right by 902 to pay that balance to the state and receive credit on his federal Title 9 tax. In such a case, it is said, the Government would be overpaid on Title 9 taxes and obligated to refund the excess. Then the taxpayer could apply the amount received in further payment of the state claim, with corresponding federal credit, overpayment and refund, only to start the cycle again and repeat it until he had paid the state its claim in full and received the entire 90 per cent credit. 22 Hence in this situation, it is said, short-cut distribution might well be made to the state in the first place, to eliminate the cycle.

The effect of the concession, if it is valid, goes far toward cutting the ground from beneath the Government's basic position. 23 That effect is heightened by the further surprising statement in its brief that in a case like this, not covered by the concession, compliance with the credit conditions of 902 becomes impossible "not because Section 3466 operate to exclude Section 902 or to nullify it, but because the terms of Section 902 itself deny it [credit] where no payment can be made." The statement would be understandable, if it had been that 3466 and 902 both work to deny the credit in this situation. But to say that 3466 has no effect to cut off the right to credit either in the present situation or in the different hypothetical one stated is to take away the basic grounding of all federal priority as against the state's claim.

The concessions cannot be accepted. In the first place, the effect of 3466 depends on the fact of insolvency, not on the degree of it as the first concession seems to contemplate. And it is only by force of 3466 that the Government has any priority at all. Section 902 may work to deny credit, if its conditions for credit are not fulfilled. But it does not give federal priority over valid state claims. Moreover, both concessions are altogether inconsistent with the basic decisions in the Illinois cases and the grounds on which they rested. The matter requires brief restatement. It is one which goes fundamentally to the effect of Rev. Stat. 3466, as distinguished from, though not unrelated to, 902 of the Social Security Act. These of course are entirely distinct statutes, with different functions.

Rev. Stat. 3466 gives priority explicitly for "debts due the United States " and the priority given is in terms absolute, not conditional. Once attaching, it is final and conclusive. A long line of decisions has held that taxes due the Government are "debts" within the meaning of the section. 24 In the Illinois cases we applied this ruling to Title 8 and Title 9 taxes as against the state's claim for "contributions." Prior decisions also have held that the priority attaches as of the time of the insolvency, 25 a ruling also applied in the Illinois cases.

But if credit can be taken after 3466 attaches, i. e., after insolvency, effective to set aside the federal priority up to 90 per cent of the Title 9 claim, the priority to that extent becomes conditional, not absolute. Its effectiveness then becomes contingent upon the happening of subsequent events, namely, the concurrence of the conditions of 902 for paying the state and taking the credit together with the taxpayer's election to do this. In short, 3466 never conclusively attached and 902 works retroactively on occurrence of those contingencies to upset the priority.

A further effect might be to make the statute applicable beyond the scope of the term "debts due to the United States ." For if the taxpayer's subsequent election can destroy the priority retroactively, not only the priority but the "debt" itself becomes contingent. And it is at least doubtful on the statute's wording that obligations wholly contingent for ultimate maturity and obligation upon the happening of events after insolvency can be said to fall within the reach of "debts due" as of the time of insolvency. 26

However this may be, we know of no previous application of 3466 creating such a conditional priority. 27 Nor do we see how one could be made consistently with the section's terms or purposes. The only such consistent application would seem to be one giving the Government the prior and indefeasible right to take the fund available, up to the amount necessary to pay its claim as of the date the priority attaches, not as it may be affected by later contingencies other than payment. 28 In enacting 3466 Congress gave no indication whatever of intent to create defeasible priorities.

The defeasance conceded possible by the Government, therefore, together with the further conceded ineffectiveness of 3466 [though not of 902] in circumstances like these to deny the right to credit, destroys the fundamental character of the priority created by 3466 and thereby removes the foundation from the Government's basic position, which is that 3466 applies as of the time of insolvency to create the priority it contemplates. Through these concessions the section is made, by virtue of the effect of 902, to create only a defeasible federal priority as against claims for credit. This actually is but another way of making 902 effective as an exception to Rev. Stat. 3466, like 602(a) and (b) of the Revenue Act of 1943, noted above in Part II.

This of course was Illinois ' earlier position, rejected by this Court. If that position is now to be accepted, we do not see how 3466 can be regarded as applying to Title 9 taxes or, indeed, how the effect of treating 902 as an exception can be limited to Title 9 taxes. For if 902 works as an exception to 3466, then Illinois was right in the first place, and the exception would seem to apply to all federal taxes, not just the one. 29

Accordingly, the Government's concessions cannot be accepted as consistent either with our prior decisions or with its own basic position in the Illinois cases and this one. That position, apart from the concessions, rests ultimately on 3466 and its applicability to these claims. This necessarily denies that 902 creates an exception to 3466 or a qualification inconsistent with its terms. The qualifications now conceded are not consistent with those terms, for they do not contemplate the tenuous, destructible sort of "priority" the concessions involve.

Moreover, the fact that in Illinois v. United States we did not discuss expressly the 10-90 per cent distribution of Title 9 taxes now suggested does not mean that our decision did not encompass that possibility. It extended generally to all cases where credit is sought after insolvency. It was federal priority attaching as of the time of insolvency that we adjudicated, not something less. As we have indicated, in making the adjudication we neither were nor could have been ignorant of 902's allowance of the taxpayer's election. Our decision held that right cut off by the incidence of 3466 at the time of insolvency. Any other would have been wholly inconsistent with the ruling that 3466 applies as against the state's claim for "contributions" or the taxpayer's right to make them after the incidence of his insolvency.

[Final Conclusions]

IV. We have taken pains to state the effect of our previous decisions, because of the confusion concerning them and the fact that two states have earnestly presented the questions. Ordinarily this would end the matter. But, again for those reasons, we turn briefly to the merits and to the question whether the Illinois decisions should now be reversed.

Apart from the arguments already discussed, two stand out as reasons for the change sought. Both reiterate contentions rejected in the Illinois cases. The primary one is that the objects of the legislation will be defeated unless the change is made, namely, the encouragement of the state systems and correspondingly of taxpayers to make "contributions" to state funds, thereby insuring that the moneys so paid in will go out for unemployment benefits rather than into the Treasury as revenue. The second is a heightened emphasis on the subsequent amendments to 902 as showing Congress' intent to waive, in progressively broadening scope though still only in specified situations, the original limitations of 902 upon securing credit. 30

From the second contention is drawn the conclusion that Congress, by its carefully, even meticulously drawn relaxations, meant credit to be given not only in the circumstances so carefully prescribed but also in other situations not within those prescriptions. This conclusion when added to the first argument amounts in sum to reiterating that the state exaction is "tantamount to a claim of the United States," and that not to disregard the tax and credit structure in which Congress molded the Act would be to "observe the form and ignore the substance of the legislation."

We shall not repeat the answers made in Illinois v. United States, except to say that "while the state and federal governments were to cooperate, the underlying philosophy of the Federal Act was to keep the state and federal systems separately admin istered." 328 U. S. 8, 11. To the considerations there stated, however, we now add the following ones, not expressly mentioned in the earlier opinion, prefaced however, with the observation that the grounding of each plea for reversal affords basis for conclusion against that action as well as in its favor.

Thus the many relaxations which Congress has made respecting the conditions permitted for taking credit, by force of their very number and careful limitation, show that Congress was not offering a broadside exemption to be applied in situations, such as this case, other than those specifically defined. 31 Rather the intention disclosed is to limit the credit to the precise situations specified for allowing it. That view accords with Congress' deliberate choice of the tax and conditional credit devices for framing the Act's structure. These are well-known techniques, adopted apparently in this instance for constitutional as well as admin istrative reasons. 32 But those very motivations warn us to be wary of disregarding the form which Congress has chosen advisedly, in order to substitute a substance we can only be doubtful it may have intended. 33

But it is said that if payment to the state is not allowed and the right to receive credit is cut off, the money will not be paid out in unemployment benefits but will go into the Treasury as general revenue; the states will be compelled to make payments to the insolvent's employees; and thus the primary purposes of the Act will be defeated. There are several answers.

One is that Congress has guaranteed the solvency of the state funds and, if need be, the revenues thus paid into the Treasury will be available for that purpose. 34 Moreover, but especially in view of this guaranty, it may be more likely that the funds, if paid into the Treasury rather than to the state, will be saved for application to the Act's purposes. For there is no assurance, if the state's prior right to them is once established, that they will go for the payment of unemployment benefits.

It must be remembered that we are dealing with an insolvent's assets. And the states have statutes by which such assets are distributed according to local priorities whenever 3466 is not operative. Only a few of them place unemployment benefits at the top. 35 Depending therefore upon the number and the amounts of claims standing ahead of the unemployment benefit claims in the particular state would be the certainty or probability of payment of the latter. In short, reversing our decisions and conceding the validity of the state's position, either as to Title 9 taxes alone or as to all federal taxes, would give no definite and certain assurance that the funds thus acquired by the states would go to satisfy the Act's purposes. 36 In many cases payment to the state would be the means of diverting them to wholly extraneous objects. Especially would this be true when smaller employers within the Act's terms are involved, as they seem to be much more often than others. 37 In the absence of any explicit or clearly implied direction we do not believe that Congress intended to require that the state's claim for unemployment contributions take precedence over all other debts of the insolvent or to authorize us to make this a condition of allowing payment to the state to be made from his estate. There was no evident purpose thus broadly to upset state schemes of priority.

These examples are enough to show that the premises of the states' contentions are capable of supporting other conclusions than they draw from them. Other examples might be stated. But in each instance the inferences drawn by the states are counterbalanced with opposing ones quite or nearly as tenable. In some they are of greater weight.

It follows that Massachusetts and Illinois have not shown the clear inconsistency between the Act's explicit terms and our previous decisions, on the one hand, and achieving the Act's purposes, on the other, which is necessary to make out a case for reversal and thus for negating the force of Rev. Stat. 3466 as creating federal priorities for Title 9 or other federal tax claims. The Illinois decisions were advisedly made, after full deliberation. There was no dissent on the basic question of priority, even though the issue seemed close. No substantially new argument or consideration of policy has been put forward. The case for reversal is no more clear or convincing than Illinois ' position on the merits in the earlier litigation.

Nor are we persuaded that our former decisions were erroneous. For the strict policy of 3466 had permitted few exceptions 38 and, as we repeated in Illinois v. United States, quoting United States v. Emory, 314 U. S. 423, 433, "only the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of 3466." 328 U. S. 8, 12. See also United States v. Remund, 330 U. S. 539, 544-545. There is no such inconsistency here.

Until the federal claims for taxes, whether under Title 8, Title 9 or other taxing provision are paid in full, the states are not entitled either to collect or to retain any part of the insolvent debtor's assets. We do not anticipate that any of the state unemployment insurance programs will fail or be seriously impaired by reason of this decision, or their consequent failure to secure the small sums characteristically at stake in this extended litigation and, apparently, in other cases most likely to produce similar controversy. Nor would the Federal Treasury have been rendered bankrupt by a contrary result.

The judgment of the Circuit Court of Appeals is

Affirmed.

1 Here, as in that case, the debtor made a common-law assignment for the benefit of creditors. The assignee here realized $1,135.11 from sale of the assets. The claim of the United States for Title 9 taxes amounted to $963.08; for Title 8 taxes, $690.05; and for capital stock taxes, $21. The commonwealth's claim was for $803.72 in unemployment taxes. Within the time allowed, but for intervention of the insolvency, the assignee paid the state's claim in full and then paid the remaining assets of $331.39 to the collector. He applied this sum on account of the Title 8 taxes, thus leaving unpaid the federal claims for capital stock and Title 9 taxes as well as $358.66 plus interest on the Title 8 claim.

2 The commonwealth in effect has undertaken to indemnify the assignee, by paying over to the United States the $803.72, if the payment to the state should turn out to have been erroneously made. The United States has agreed that if it prevails the judgment shall be limited to $803.72.

3 The original 902, 49 Stat. 639, provided that the taxpayer might credit against Title 9 taxes 90 per cent of his contributions under an approved state program. Subsequent amendments did not alter the conception of a basic 90 per cent credit. See, e.g., notes 13, 15. The present "credit against tax" section is incorporated in the Internal Revenue Code, 26 U. S. C. 1601.

4 The District Court thought that in Illinois v. United States, the Title 9 issue had become moot either before or as of the time the case reached this Court, and that therefore we "had no occasion to consider the problem whether as to 90 per cent of the amount due for Title IX taxes the United States [by 902] had not given the taxpayer the option to make payment to Illinois instead of to the United States." 65 Fed. Supp. 763, 765. The court thus regarded the Title 9 question as left open and "nicely analyzed . . . to be one not of priority but of alternative obligation." Id. at 764.

5 Since the insolvent's assets are not large enough to pay either the Title 8 or the Title 9 claim and leave enough to pay the state claim in full. See note 1.

In the brief Massachusetts states the federal question as being whether the assignee may "make payment of the State unemployment tax to the exclusion of the Federal Government claim for Title IX taxes or any other taxes due the Federal Government from the taxpayer?" (Italics added.)

6 Illinois has appeared with leave, both by brief and in the oral argument. It neither expressly disclaims nor expressly supports Massachusetts ' broad position for reversal.

7 On the facts, see note 1, after paying the capital stock claim, the Title 8 claim and 10 per cent of the Title 9 claim, this would leave $327.75 to apply on the state's claim; and hence require Massachusetts to pay over to the United States $475.97 plus interest from the $803.72 she has received, in order to complete the payment in full of the Title 8 claim.

Actually this represents the District Court's specific allocation, not exactly that of either Massachusetts or Illinois . Each would apply a somewhat different method of allocation. See note 20.

8 See Part III. The federal priority under 3466 attaches from the time the insolvent debtor transfers or loses control over his property. Illinois v. Campbell, 329 U. S. 362, 370; United States v. Waddill Co., 323 U. S. 353, 355-358 [45-1 USTC 9126]; United States v. Oklahoma, 261 U. S. 253, 260.

9 The state supreme court's judgment had sustained the federal priority for Title 8 taxes, ordering them paid first and the small remaining balance of about $150 to be paid to the state. This left the Title 9 taxes unpaid. The court denied priority for that claim because it fell within the explicit exception of 602(b) of the Revenue Act of 1943. See text infra at notes 13, 14. The Government's failure to apply for certiorari as to the $150 eliminated the Title 9 issue from the case in this Court.

10 Illinois almost uniformly put the issues as involving Title 8 and Title 9 taxes indiscriminately. Thus, in stating "The Questions Presented," the petition for certiorari spoke of priority for "Social Security excise taxes and Capital Stock taxes," necessarily encompassing Title 8 and Title 9 levies. This was repeatedly true of the state's brief. Further, the petition at one point said: "In holding that the claim of the petitioner was subordinate to the claims of the United States for capital stock tax and for taxes arising under Titles VIII and IX of the Social Security Act, the Supreme Court of Illinois looked to form, not substance, and disregarded the character and significance of petitioner's claim." The Government's briefs were equally positive in seeking disposition of the Title 9 claim.

11 The federal claims asserted were as follows: Capital stock taxes, $58.73; Title 8 taxes, $1,065.52; Title 9 taxes, $1,284.36; all plus interest from the date due. The Illinois claim for state unemployment compensation contributions was $721.29. And the fund available to satisfy all these claims was $1,010.81.

Since the assets were insufficient to pay in full either the Title 8 or the Title 9 claim, Illinois had to override both to establish her claim. Illinois recognized this both by her application for review and by the broad argument that the state claim was tantamount to a federal tax and the credit provisions of 902 exempted it completely from the priority of Rev. Stat. 3466 for all federal taxes, not simply one.

12 The opinion in Illinois v. United States explicitly stated: "The claim of the United States is for federal unemployment compensation taxes under Title 9 and federal insurance contributions taxes under Title 8 of the Social Security Act, 49 Stat. 620." 328 U. S. 8, 9. The opinion throughout treated Title 9 taxes on a parity with those under Title 8. We accepted fully the state's view that the credit or "optional payment" provision of 902 was designed to stimulate the creation of sound state systems. 328 U. S. 8, 10. See Illinois v. Campbell, 329 U. S. 362, 367, n. 5. But we rejected the argument that the state claim was tantamount to a federal one and said: "But we cannot agree that Congress thereby intended in effect to amend 3466, by making its priority provisions inapplicable to state unemployment tax claims." 328 U. S. 8, 11. The ruling applied to both types of tax without distinction.

13 This section was one of the relaxing amendments, see Part IV, to Title 9, 902, of the Social Security Act. For Title 9 taxes due for the years 1939, 1940, 1941 and 1942 it allowed credit up to 90 per cent, without regard to previous failure to pay as required, if the assets of the debtor had been, during the period specified, "in the custody or control of a receiver, trustee, or other fiduciary appointed by, or under the control of, a court of competent jurisdiction."

Section 602(a) of the 1943 Act, 58 Stat. 77, also created a similar relaxation of 902, for Title 9 taxes due for the years 1936, 1937 and 1938, with credit limited however to 81 per cent, when the state payments for those years were made after December 6, 1940. This section formed the basis for a claim to credit in Illinois v. United States rejected by the Illinois court. See note 15.

14 See also Part IV. The court, however, in giving directions for the decree to be entered by the trial court ordered the federal Title 8 claim paid first in full "and any balance remaining" to the state. 391 Ill. at 46; see also id. 42. Thus apparently it inadvertently lost sight of the fact, earlier expressly noted, id. 34, 39, that 602(b) allowed the receiver to take credit only up to 90 per cent of the Title 9 taxes.

This oversight seemingly was responsible for the court's failure to award priority to the United States for 10 per cent of its Title 9 claim, from the small balance remaining after paying the Title 8 taxes. Cf. note 9. Had this amount, some $128, also been awarded to the United States , roughly only $22 would have been left for the state. The opinion gave no consideration to this question, and by the Government's failure to apply for certiorari regarding it we were prevented from considering it.

15 An additional reason was that the taxes against which credit was claimed were not taxes for the years to which 602(b) expressly limited the credit it allowed. Instead 602(a) of the 1943 Act, see note 13, allowed conditional credit for the tax years involved in Illinois v. United States and the state sought to secure it. But the Illinois court held 602(a) also inapplicable on the facts and denied the 81 per cent credit because the assets were in the hands of a common-law assignee, not in the custody or control of a court-appointed receiver or other official as the section required for the credit to be available. 391 Ill. at 37.

16 391 Ill. at 39, 40; cf. 328 U. S. at 11. The Illinois court held "the full amount" of the payroll (Title 9) taxes to be "taxes due the Federal government." In the first instance, it said, this was true of "100 per cent of the taxes levied," which "continues to be taxes due the Federal government either until it is all paid to the Federal government, or 90 per cent is paid to the State and the balance to the Federal government." The provisions for credit, the opinion continued, "do not change the character of the taxes imposed. They are still taxes due the Federal government and constitute a debt due to the United States within the purview of section 3466 of the Revised Statutes." Id. 40, 41.

17 391 Ill. 42, 46.

18 Ibid. The order for judgment in Illinois v. United States merely reversed the trial court's judgment and remanded the cause "with directions to enter a decree finding that the United States is entitled to priority of payment to the extent of the funds on deposit, and ordering distribution accordingly." 391 Ill. at 46. See note 14 for the directions in the Campbell case.

19 See notes 10, 11. The cases were obviously test cases designed to settle the question of priority generally, i. e., not merely for one but for all federal taxes and thus provide a certain basis for admin istration of the Social Security Act in both its insurance and its unemployment compensation features.

20 Cf. the District Court's view, note 4 supra; and note 7. Illinois and Massachusetts in fact urge different methods of allocation, each differing from the one applied by the District Court. From the funds available for Title 9 distribution, Massachusetts would pay the state claim first and correspondingly reduce the federal claim. Illinois would make a pro rata distribution of 10 per cent of the available funds to the Federal Government and 90 per cent to the state, while the District Court would pay the federal 10 per cent first and apply the balance remaining on the state claim.

21 Since the fund was not large enough in either case to pay all the federal claims in full.

22 Hypothetical examples are stated in the District Court's opinion, 65 Fed. Supp. 763, and in the briefs filed here.

23 Possibly the concession was intended as an argumentative alternative to other and broader positions. In any event, we are not bound to accept it as either sound or conclusive of the litigation. It is not, even in terms, a confession of error.

These observations apply equally to the Government's further damaging statement set forth in the sentence following the one to which this footnote is appended.

24 The federal priority has been uniformly sustained for tax claims. United States v. Waddill Co., 323 U. S. 353 [45-1 USTC 9126] (unemployment compensation taxes and a debt arising out of a Federal Housing Administration transaction); United States v. Texas, 314 U. S. 480 (gasoline taxes); New York v. Maclay, 288 U. S. 290 [3 USTC 1044] (income taxes and a claim for expenses incurred in the replacement of a buoy damaged by the insolvent); Spokane County v. United States, 279 U. S. 80 [1 USTC 387] (income taxes and penalties); Price v. United States, 269 U. S. 492 [1 USTC 158] (income taxes and customs duties); Stripe v. United States, 269 U. S. 503 [1926 CCH 7046] (income, excess profits, and capital stock taxes).

Judgments recovered by the United States also are debts entitled to priority. United States v. Knott, 298 U. S. 544 (against surety on estreated bail bonds); Hunter v. United States, 5 Pet. 173 (against surety).

Other debts for which the Government has been held to have priority under 3466 are: United States v. Remund, 330 U. S. 539 (emergency loans made by Farm Credit Administration); United States v. Emory, 314 U. S. 423 (sum due on note held under the National Housing Act); Bramwell v. U. S. Fidelity Co., 269 U. S. 483 (Indian funds deposited in bank); United States v. National Surety Co., 254 U. S. 73 (losses where contractor defaulted); Bayne v. United States, 93 U. S. 642 (misappropriated Army paymaster funds); Lewis v. United States, 92 U. S. 618 (funds held by Navy disbursing agents); United States v. State Bank of North Carolina, 6 Pet. 29 (bonds for customs duties); United States v. Fisher, 2 Cranch 358 (claim against indorser of protested bill of exchange).

25 See note 8 supra.

26 It has been held that the term "debts due to the United States " should be construed with some liberality. See, e.g., Price v. United States , 269 U. S. 492, 500 [1 USTC 158]; United States v. Emory, 314 U. S. 423, 426. And there is apparently no decision expressly ruling the matters of contingency of the obligation or of the priority upon subsequent events not certain. Cf. United States v. Marxen, 307 U. S. 200. But the fact that the problem has not squarely arisen in the long history of 3466 and that all of the decisions sustaining the priority were for debts clearly due and owing, adds force to the clear inferences implicit in the statute's wording, viz., that Congress not only created a conclusive priority attaching as of the time of insolvency but in doing so drew the line for its operation close to, if not at, the commonly accepted meaning of "debt" as distinguished from other forms of obligation.

27 See notes 24, 26.

28 Again the distinction between "payment" and "satisfaction" becomes pertinent. To construe the term "satisfied" in 3466 as being fulfilled by taking subsequent credit, as the states urge, would be to qualify the word "debts" so as to make it include conditional obligations.

29 Congress, of course, could provide for federal priority as to all taxes except Title 9 claims. But, apart from the explicit exceptions created by 602(a) and (b) of the Revenue Act of 1943 with reference to funds of insolvents in the hands of court-appointed officials. See Part II, notes 13, 15, Congress has not done so either by any wording or intent of Rev. Stat. 3466, nor in our view by 902 of the Social Security Act. We do not think that it intended to make the state's claim subject to all other federal taxes, but prior to all but 10 per cent of the Title 9 taxes. See text infra Part IV. No instance has been found where 3466 has been applied to create such a selective priority as among federal claims qualifying as "debts" within the meaning of 3466.

30 Of the several amendments, none is applicable to this case. The only ones relating expressly to insolvents' estates are those noted in Part II, see notes 13, 15 and text, 31, applying to payments by court-appointed receivers, etc.

31 Thus, as has been noted, the provision for payment and credit given by the Revenue Act of 1943, 602(a)(3) and (b), 58. Stat. 77, is limited to situations where an insolvent's assets are under the control of a court or its appointed official. Congress quite obviously had the insolvent taxpayer in mind. But even so it excluded nonjudicial custodians of his assets by its failure to extend the relaxation to them. The omission cannot be taken to have been unintentional. The necessary effect in the one case was to create a legislative exception to 3466, in the other to deny it by the withholding of the like privilege. So also with the other easing amendments.

32 Cf. Steward Machine Co. v. Davis, 301 U. S. 548.

33 It is precisely in matters where Congress has used the tax and credit technique that disregarding the form chosen offers the gravest dangers of perverting a statute's purposes. We think that possibility is equally as great here from ignoring Congress' expressed intent, both in limiting the right of credit to defined situations and in its failure expressly to qualify the broad policy of 3466, as would be the other one of reaching its purpose by giving effect to its explicit limitations.

34 Sections 904 and 1201 of the Social Security Act 58 Stat. 789, 50 U. S. C. App. (Supp. V, 1946) 1666-1667, as amended, 61 Stat. 793, 794, 4-5. Section 904 established a federal employment account in the United States Treasury, and appropriated the excess of Title 9 taxes over unemployment admin istrative expenses to such account. Section 1201 authorized loans from such account to the states for unemployment insurance payments when a state's unemployment insurance fund becomes dangerously low, repayment of such advances not being required unless the state fund regains stable condition. See S. Rep. No. 477, 80th Cong., 1st Sess. 9-10.

35 See, e.g., Mass. Ann. Laws, c. 151A, 17 (1942); Cal. Gen. Laws, Act 8780d, 46 (1944); Iowa Code, 96.14(3) (1946); Okla. Stat., tit. 40, 224(c) (1941).

36 Unless in this case we should undertake to say, as we have not been asked or authorized to do, that by implied force of 902, state priorities are relegated to a position inferior to the taxpayer's right to pay the state and take federal credit. Nothing in the statute suggests that Congress intended to give the taxpayer or this Court the power thus to disorder the states' schemes of priorities.

37 If the litigated cases, of which the ones that have come here seem to be typical, and common observation may be taken as fairly accurate bases for judgment.

It is true that in some cases of insolvency the business continues without being wound up. But this perhaps is much more often the case when operation is continued under judicial control than otherwise. And when that is the situation, insofar as the 1943 amendment applies the payment may be made and credit obtained. Insofar as it does not apply the amendment is a clear mandate against allowing that to be done.

38 The original departures indeed did not contemplate that exceptions were being made. They conceived that the funds or property affected, being covered by mortgage, belonged in fact to third persons, not to the insolvent debtor. Thelusson v. Smith, 2 Wheat. 396, 426; Conard v. Atlantic Ins. Co., 1 Pet. 386; Brent v. Bank of Washington, 10 Pet. 596, 611; see Savings Society v. Multnomah County, 169 U. S. 421, 428; cf. United States v. Fisher, 2 Cranch 358; United States v. Hooe, 3 Cranch 73. The Court has been loath to expand these exceptions, cf. Illinois v. Campbell, 329 U. S. 362, 370, to include other types of lien. The claims of Massachusetts and Illinois do not fall within the scope of those exceptions or of others as to which the Court has felt that subsequent legislation authorized them. Cf. Cook County National Bank v. United States, 107 U. S. 445; United States v. Guaranty Trust Co., 280 U. S. 478.

[Dissenting Opinion]

MR. JUSTICE JACKSON, with whom MR. JUSTICE FRANKFURTER, MR. JUSTICE DOUGLAS and MR. JUSTICE BURTON join, dissenting.

This decision announces an unnecessarily ruthless interpretation of a statute that at its best is an arbitrary one. The statute by which the Federal Government gives its own claims against an insolvent priority over claims in favor of a state government must be applied by courts, not because federal claims are more meritorious or equitable, but only because that Government has more power. But the priority statute is an assertion of federal supremacy as against any contrary state policy. It is not a limitation on the Federal Government itself, not an assertion that the priority policy shall prevail over all other federal policies. Its generalities should not lightly be construed to frustrate a specific policy embodied in a later federal statute.

The Federal Government has sued to enforce a personal liability against one who, as assignee, paid to the State of Massachusetts funds which the Federal Government claims by virtue of its statutory priority. Defendant was the assignee of a small concern under a common-law assignment for benefit of creditors. The assets did not realize enough to pay both federal and state tax claims. The United States filed a claim, among other things, for 100% of the taxes laid by Title 9 of the Social Security Act, which, however, provides for a 90% credit against the federal tax if that amount has been paid into an approved state unemployment compensation fund. Believing that he was entitled thereby to pay the State and to claim the credit against the federal tax, this assignee paid $803.72 on the claim of Massachusetts for taxes under the Massachusetts Unemployment Compensation Act. This is the sum now demanded by the Federal Government.

The reasoning on which the assignee is held liable and the State is required to turn this amount over to the Federal Government is this: True 902 gives a 90% credit. But, literally, it is only for actual payment to the State. On insolvency, the federal priority statute, so it is held, intervenes and freezes the funds in the assignee's hands so that he cannot pay the State until he has first paid the Federal Government. Hence, unless he has enough money to pay both claims in full, the priority statute prevents him from taking the credit which the Social Security Act grants him, the Federal Government collects a windfall ten times what would normally be its due, and the State government gets nothing on its tax claim. This Court now so construes the priority statute as not merely to prefer net claims of the Federal Government, but also as a prohibition against courts marshaling the assets of an insolvent in an equitable manner.

The District Judge declined to support this harsh reasoning. He is one whose views of the meaning of the Social Security Act are entitled to great weight, because of his experience with it. See Steward Machine Co. v. Davis, 301 U. S. 548, at 553. He considered that as to 90% of the federal tax, the taxpayer in effect was given an option to pay it to the approved state fund or to the Federal Government. He said:

"The force of that analysis seemed to me the more persuasive when the true nature of Title IX of the Social Security Act as portrayed in Charles C. Steward Machine Co. v. Davis, 301 U. S. 548, was stressed. As to 90 per cent of the taxes under that title the objective of Congress was not to collect federal revenues but to stimulate the creation of and payment to state unemployment compensation funds. It would defeat obvious Congressional intent to lay down a rule which required that this 90 per cent should go to satisfy a Title IX tax claim instead of going to the direct benefit of claimants under state unemployment compensation plans."

The consequences of this Court's refusal to follow his reasoning are so inconsistent with the purposes of the Social Security Act that they could not have been intended by a reasonable Congress. What the Court is doing practically is this:

1. The Court is giving the Federal Treasury a payment from an insolvent taxpayer ten times as large as Congress exacted from a solvent taxpayer under like circumstances. The 90% was never contemplated as federal revenue, but credit for that amount was intended to be availed of, to induce states to create unemployment compensation funds and to maintain them in solvent condition.

2. The Court is depriving the State of a revenue Congress not only tried to assure it, but one which it used the tax and credit device to impel the state to collect. See Steward Machine Co. v. Davis, 301 U. S. 548.

3. This unjust enrichment of the Federal Government and the depletion of state unemployment funds is accomplished by holding that the priority statute prohibits simultaneous distribution to each, State and Federal Government, of the net amount actually due, taking into account such simultaneous payments, and by requiring instead that the total federal tax be paid in full and first in point of time, which in this case depletes the estate so that the assignee cannot thereafter make the state payment to obtain the federal credit. It seems to me that the federal priority statute cannot have been intended to do more than secure to the Federal Government what becomes fairly due it on a marshaling of assets as courts of equity usually do.

4. This interpretation prejudices general creditors by placing ahead of them $190 of tax claims for every $100 actually owing. For example, the maximum tax for both the State and Federal Governments is that laid by the Federal Act--let us say it amounts to $1,000. It can be discharged by payment of $1,000, $900 paid to the approved state fund and $100 to the Federal Government. But under this ruling the insolvent must pay the $1,000 in full to the Federal Government. That, of course, leaves the state tax undischarged, which calls for payment of another $900 before anything can be left for the general creditors. Thus, where an equitable marshaling of assets to pay just claims would put $1,000 of taxes ahead of general creditors, the Court's ruling puts $1,900 ahead of general creditors. The Court even goes so far as to reject concessions by the Government designed to mitigate, in this respect at least, the harshness of this rule.

The interpretation of the Priority Act to thus gouge the states and private creditors is contrary to the purpose and spirit of the Act itself. Over a century ago Mr. Justice Story defined the "motives of public policy" which underlie the priority statutes of the Federal Government to be "in order to secure an adequate revenue to sustain the public burthens and discharge the public debts. . . ." United States v. State Bank of North Carolina (1832), 6 Pet. 29, 35. It is obvious that as to the 90% of the Social Security tax here involved, it was not contemplated as federal revenue to meet federal burdens but was laid to induce and to enable the State to assume specific obligations to the unemployed. The priority statute is not invoked to deny, in this class of cases, the aid promised in meeting these obligations.

When a later statute has enacted a comprehensive federal policy in another field and created a federal interest in the adverse claimant's solvency or function, this Court has rarely, and never until recently, hesitated to interpret the old and general priority statute as yielding to the newer and specific statutory scheme. Cook County National Bank v. United States , 107 U. S. 445; United States v. Guaranty Trust Co., 280 U. S. 478; cf. Callahan v. United States , 285 U. S. 515. See also dissent in United States v. Emory, 314 U. S. 423 at 433. The problem here is not whether a mere state claim can defeat one of the Federal Government, but whether one federal statute will be so construed as to defeat the manifest policy of another.

The Court's opinion, however, goes to some lengths to show that the Court as a whole and without dissent on this point has become committed to the imterpretation it adopts, and by unusual deference to the doctrine of stare decisis declares itself bound hand and foot to full federal priority. I am unable to detect the commitment which the Court so clearly sees. But if I have agreed to any prior decision which forecloses what now seems to be a sensible construction of this Act, I must frankly admit that I was unaware of it. However, no rights have vested and no prejudicial action has been taken in reliance upon such a ruling. It does not appear to have been called to the attention of Congress and in effect approved by failure to act. Under these circumstances, except for any personal humiliation involved in admitting that I do not always understand the opinions of this Court, I see no reasons why I should be consciously wrong today because I was unconsciously wrong yesterday.

I would reverse the judgment and allow federal priority only subject to the 90% credit for sums disbursed to the State on account of its unemployment compensation tax.

 

 

[45-1 USTC 9126]The United States of America , Petitioner, v. Waddill, Holland & Flinn, Inc., et al.

Supreme Court of the United States , No. 65. October Term, 1944, 323 US 353, 65 SCt 304, January 2, 1945

On writ of certiorari to the Supreme Court of Appeals of Virginia .

Tax liens: Landlord's lien: Local taxes: Superior claim of U. S. for payment of taxes.--Where a tenant made a voluntary assignment for the benefit of creditors, whereupon the landlord levied a distress warrant on personal property upon the leased premises to satisfy a claim for rent and, later with other creditors, claimed the proceeds of sale of such property made by the trustee by virtue of their several liens, it was held by the Supreme Court that the provisions of Sec. 3466 R. S. clearly subordinated the liens of both the landlord and the municipality, on the ground that the latter's lien claim for the payment of local taxes and the landlord's lien claim for the payment of rent, as created by the Statutes of Virginia, were not sufficiently specific and perfected on the date of the voluntary assignment to make them operate within the claimed exception to the priority of the United States. One dissent. Reversing the decision of the Virginia Supreme Court of Appeals, 28 S. E. (2d) 741, reported at 44-1 USTC 9297.

Charles Fahy, Solicitor General, Francis M. Shea, Assistant Attorney General, D. L. Kreeger, Special Assistant to Attorney General, Paul A. Sweeney and Walter J. Cummings, Jr., Attorneys, for petitioner. Rutledge C. Clement, Danville, Va. and Henry R. Miller, Jr., 402 City Hall, Richmond, Va., for respondent. E. Walter Brown, City Attorney for City of Danville , Va. , in opposition to petition for writ of certiorari.

Mr. Justice MURPHY delivered the opinion of the Court.

The issue here is whether, in a state proceeding under a general assignment for benefit of creditors, Section 3466 of the Revised Statutes, 31 U. S. C. 191, gives priority to a claim of the United States over a landlord's lien and a municipal tax lien.

[The Facts]

Mrs. Oeland Roman, the assignor, operated a restaurant in Danville , Virginia , on premises leased from respondent Waddill, Holland & Flinn, Inc. On June 19, 1941 , she executed a general deed of assignment to a trustee for the benefit of creditors, specifically conveying all personal property, fixtures and equipment used by her in the conduct of the restaurant and located on the premises. This property remained on the premises until sold by the trustee on July 12, 1941 . After deduction of appropriate admin istrative expenses, a sum of $1,407.29 remained. Four creditors claimed priority of payment from this amount.

(1) The United States claimed the sum of $1,559.63, plus interest, representing certain unpaid federal unemployment compensation taxes and a debt arising out of a Federal Housing Administration transaction.

(2) The Virginia Unemployment Compensation Commission made a tax claim of $66.38, plus interest. The Commission's claim, however, was conceded to be subordinate to that of the United States and need not be further considered here.

(3) The City of Danville claimed $300.55 as personal property taxes still unpaid. On July 2, 1941 , the City Collector distrained on all of the property on the leased premises.

(4) The landlord, Waddill, Holland & Flinn, Inc., claimed $1,500.00 for six months' rent due and to become due. The assignor's lease from this firm ran for five years beginning January 1, 1937, at a monthly rental of $250.00. On July 1, 1941, twelve days after the deed of assignment was executed, the firm obtained the issuance of a distress warrant for 32/5 months' past due rent and an attachment for 23/5 months' future installments of rent. On the same day, the firm levied the warrant and attachment on the assignor's property located on the leased premises.

The trustee under the general assignment filed a petition in the Corporation Court of Danville, reciting the various claims and requesting advice as to the proper distribution. That court held that the landlord was entitled to priority in payment over the claims of the United States and the Virginia Unemployment Compensation Commission but that its claim was subordinate to that of the City of Danville for taxes in the sum of $222.31. On appeal by the United States, the Supreme Court of Appeals of Virginia affirmed this order of distribution. 182 Va. 351, 28 S. E. 2d 741. We granted certiorari because of the importance of the problems raised and because of asserted conflict with his Court's decisions in New York v. Maclay, 288 U. S. 290, and United States v. Texas, 314 U. S. 480 [42-1 USTC 9162].

Section 3466 of the Revised Statutes provides in pertinent part that "the debts due to the United State shall be first satisfied" whenever any person indebted to the United States is insolvent or, "not having sufficient property to pay all his debts, makes a voluntary assignment thereof." We hold that this statute clearly subordinates the claims of both the landlord and the municipality to that of the United States. The judgment of the court below must accordingly be reversed.

[Exceptions to U. S. Priority]

The words of Section 3466 are broad and sweeping and, on their face, admit of no exception to the priority of claims of the United States . Thelusson v. Smith, 2 Wheat. 396, 425; United States v. Texas , supra, 484. But this Court in the past has recognized that certain exceptions could be read into this statute. The question has not been expressly decided, however, as to whether the priority of the United States might be defeated by a specific and perfected lien upon the property at the time of the insolvency or voluntary assignment. Conard v. Atlantic Insurance Co., 1 Pet. 386, 441, 444; Brent v. Bank of Washington, 10 Pet. 596, 611, 612; Spokane County v. United States, 279 U. S. 80, 95 [1 USTC 387]; United States v. Knott, 298 U. S. 544, 551; New York v. Maclay, supra, 293, 294; United States v. Texas, supra, 485, 486. It is within this suggested exception that the landlord and the municipality seek to bring themselves. Once again, however, we do not reach a decision as to whether such an exception is permissible for we do not believe that the asserted liens of the landlord and the municipality were sufficiently specific and perfected on the date of the voluntary assignment to cast any serious doubt on the priority of the claim of the United States.

The landlord rests its claim upon certain provisions of the Virginia Code of 1936. Sections 5519 and 5523 authorize a landlord to levy distress for six months' rent upon "any goods of the lessee * * * found on the premises, or which may have been removed therefrom not more than thirty days. * * * for not more than six months' rent if the premises are in a city or town." Section 5524 provides that the goods of the tenant on leased premises in a city or town may not be removed by a lienor or purchaser, nor taken under legal process, save "on the terms of paying to the person entitled to the rent so much as is in arrear, and securing to him so much as is to become due," not to exceed six months' rent. Other sections provide for officers making the distress under warrant from a justice, founded upon an affidavit of the person claiming the rent, and for such officers to make returns of their actions and proceedings upon such warrants. Provisions are also made for legal proceedings looking toward the possession and sale of the property to satisfy the debt.

[Federal Court Must Decide]

The Supreme Court of Appeals of Virginia has here held that these sections "give the landlord a lien which is fixed and specific, and not one which is merely inchoate, and that such a lien exists independent of the right of distress or attachment, which are merely remedies for enforcing it." 182 Va. at 363, 28 S. E. 2d at 746. It has also held that such a lien "relates back to the beginning of the tenancy," 182 Va. at 364, 28 S. E. 2d at 746, thus giving it force and effect on date of the voluntary assignment. These interpretations of the Virginia statutes, as propositions of state law, are binding. But it is a matter of federal law as to whether a lien created by state statute is sufficiently specific and perfected to raise questions as to the applicability of the priority given the claims of the United States by an act of Congress. If the priority of the United States is ever to be displaced by a local statutory lien, federal courts must be free to examine the lien's actual legal effect upon the parties. A state court's characterization of a lien as specific and perfected, however conclusive as a matter of state law, cannot operate by itself to impair or supersede a long-standing Congressional declaration of priority. Field v. United States , 9 Pet. 182, 201; United States v. Oklahoma, 261 U. S. 253, 260; Spokane County v. United States , supra, 90.

Tested by its legal effect under Virginia law, the landlord's lien in this instance appeared to serve "merely as a caveat of a more perfect lien to come." New York v. Maclay, supra, 294. As of the date of the voluntary assignment, it was neither specific nor perfected. It gave the landlord only a general power over unspecified property rather than an actual interest in a definitive portion or portions thereof.

[Landlord's Lien Not Specific]

Specificity was clearly lacking as to the lien on June 19, 1941 , the date of the assignment. On that day it was still uncertain whether the landlord would ever assert and insist upon its statutory lien. Until that was done it was impossible to determine the particular six months' rent, or a proportion thereof, upon which the lien was based. The lien did not relate to any particular six months' rent but could attach only for the rent which might be due at or after the time when the lien was asserted. Wades v. Figgatt, 75 Va. 575, 582. And if it were asserted at a time when the tenancy had terminated or would terminate within six months of the date to which rent had been fully paid, the lien could only cover less than six months' rent. Conceivably the amount of rent due or to become due was uncertain on the day of the assignment. The landlord may have been mistaken as to the rental rate or as to payments previously made and the tenant may have been entitled to a set-off. See Allen v. Hart, 18 Gratt. (59 Va. ) 722, 737; Hancock v. Whitehall , &c. Co. , 100 Va. 443, 447. Moreover, while the lien legally attached to all such property as might be on the premises when the lien was asserted or within thirty days prior to distraint, the landlord could distrain goods only to the extent necessary to satisfy the rent justly believed to be due, the tenant possessing an action for damages for excessive distraint. Va. Code 5783; Fishburne v. Engeldove, 91 Va. 548; Gurfein v. Howell, 142 Va. 197. Thus until the extent of the lien was made known by the landlord and until some steps had been taken to distrain or attach sufficient property to satisfy the lien, it was impossible to specify the goods actually and properly subject to the lien. Some of the goods on the premises may have been subject to mortgages or liens which attached before the goods were brought on the premises, in which case the landlord's lien would be inferior. Va. Code 5523. And if other goods were removed after the date of the voluntary assignment but more than thirty days before the distraint, or attachment, the right of distraint and attachment as to those goods would disappear. Va. Code 5523; Dime Deposit Bank v. Wescott, 113 Va. 567. These factors compel the conclusion that neither the rent secured by the lien nor the property subject to the lien was sufficiently specific and ascertainable on the day of the voluntary assignment to fall within the terms of the suggested exception.

[Lien Not Perfected]

Nor was the statutory lien perfected as a matter of actual fact, regardless of how complete it may have been as a matter of state law. The tenant was divested of neither title nor possession by the silent existence of the landlord's statutory lien on the date of the assignment. Only after the lien was actually asserted and an attachment or a distraint levied, enabling the landlord to satisfy his claim out of the seized goods, could it be argued that such goods severed themselves from the general and free assets of the tenant from which the claims of the United States were entitled to priority of payment. Prior to that time, the lien operated to do no more than prevent the removal of goods from the premises by certain classes of persons, Va. Code 5524, and give the landlord priority in distribution under state law provided that the goods remained on the premises. Such a potential, inchoate lien could not disturb the clear command of Section 3466 of the Revised Statutes. Something more than a "caveat of a more perfect lien to come" was necessary.

The lien of the City of Danville stands in no better position insofar as the claim of the United States is concerned. The municipality contends that it assessed taxes on specific items of furniture and equipment pursuant to annual levies made by the city council and that a lien attached to such property on January 1, 1941, by operation of state law. It claims that this lien attached before the claim of the United States was acquired and hence had priority.

[Municipal Lien Inferior]

Under Virginia law, however, a municipal tax confers a lien on personal property which enables the city to follow it wherever it may be taken only if the assessment is specifically made on such property. Drewry v. Baugh and Sons, 150 Va. 394, 400, 401; Chambers v. Higgins, 169 Va. 345, 351, 352. The Corporation Court of Danville recognized that the city had not made such an assessment in this case since it held that assessment of the furniture and equipment as a unit was sufficient to satisfy this rule "so long as they remained on the premises where the owner's business was conducted." It realized that if this property unit were separated or removed from the premises different results would follow. Unless and until distraint was levied, which in this case occurred thirteen days after the voluntary assignment, it was uncertain whether the furniture and equipment would remain intact as a unit on the premises and hence be subject to the tax lien. If such property had been removed, distraint could then have been levied on other undetermined property of the tenant. At least until actual distraint, therefore, there was no certainty as to the property subject to the lien and no transfer of title or possession relative to any property. Such a lien cannot be said to be so explicit and perfected on the date of the voluntary assignment as to fall within the claimed exception to the priority of the United States .

Reversed.

Mr. Justice JACKSON is of opinion that the judgment should be affirmed for the reasons stated by the Supreme Court of Appeals of Virginia .

 

 

[1 USTC 128]Oliver, as Trustee in Bankruptcy of the Estate of West Coast Rubber Corporation, et al. v. United States of America et al.

Supreme Court of the United States, No. 180, 268 US 1, 45 SCt 386, Decided April 13, 1925

On writ of certiorari to the United States Circuit Court of Appeals for the Ninth Circuit.Claims for wages against the estate of a bankrupt are subordinate to claims for taxes. Affirming and remanding Circuit Court decision, 290 F. 160, which reversed District Court decision, 283 F. 351.

Mr. Justice McREYNOLDS delivered the opinion of the Court:

The bankrupt's estate consisted of personal property only, and there is no suggestion of a lien thereon to secure any of the claims now under consideration. The fund derived from conversion of all the property is insufficient fully to satisfy taxes due the United States and the City and County of San Francisco , and the allowed claims for preferred wages. Which of these must be paid first is the question for decision. The referee ruled in favor of the wages, and the District Court approved; but the Circuit Court of Appeals held to the contrary and directed that priority should be given the taxes.

The Bankruptcy Act of 1898, c. 541, 30 Stat. 544, 563, provides--

Sec. 64. Debts which have priority. (a) The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, State, county, district, or municipality in advance of the payment of dividends to creditors, and upon filing the receipts of the proper public officers for such payment he shall be credited with the amount thereof, and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court.

(b) The debts to have priority, except as herein provided, and to be paid in full out of bankrupt estates, and the order of payment shall be (1) the actual and necessary cost of preserving the estate subsequent to filing the petition; (2) the filing fees paid by creditors in involuntary cases; (3) the cost of admin istration, including the fees and mileage payable to witnesses as now or hereafter provided by the laws of the United States, and one reasonable attorney's fee, for the professional services actually rendered, irrespective of the number of attorneys employed, to the petitioning creditors in involuntary cases, to the bankrupt in involuntary cases while performing the duties herein prescribed, and to the bankrupt in voluntary cases, as the court may allow; (4) wages due to workmen, clerks, or servants which have been earned within three months before the date of the commencement of proceedings, not to exceed three hundred dollars to each claimant; and (5) debts owing to any person who by the laws of the States or the United States is entitled to priority.

Guarantee Co. v. Title Guaranty Co., 224 U. S. 152, 159, 160, held that under Section 64 wages were entitled to priority over the claim of the United States for damages occasioned by the bankrupt's failure to comply with a construction contract. It was there said--

By the statute of 1797 (now Sec. 3466) and Sec. 5101 of the Revised Statutes all debts due to the United States were expressly given priority to the wages due any operative, clerk, or house servant. A different order is prescribed by the Act of 1898, and something more. Labor claims are given priority, and it is provided that debts having priority shall be paid in full. The only exception is "taxes legally due and owing by the bankrupt to the United States, State, county, district or municipality." These were civil obligations, not personal conventions, and preference was given to them, but as to debts we must assume a change of purpose in the change of order. And we cannot say that it was inadvertent. The Act takes into consideration, we think, the whole range of indebtedness of the bankrupt--national, State and individual--and assigns the order of payment. The policy which it dictated was beneficient and well might induce a postponement of the claims, even of the sovereign, in favor of those who necessarily depended upon their daily labor. And to give such claims priority could in no case seriously affect the sovereign. To deny them priority would in all cases seriously affect the claimants.

In City of Richmond v. Bird, 249 U. S. 174, 177, past due taxes were denied priority of payment over a debt secured by a lien which the State law recognized as superior to the City's claim for such taxes. We said--

Respondents therefore must prevail unless priority over their lien is given by Sec. 64a to claim for taxes which, under State law, occupied no better position than one held by a general creditor. Section 67d, Bankruptcy Act, quoted supra, declares that liens given or accepted in good faith and not in contemplation of or in fraud upon this Act, shall not be affected by it. Other provisions must, of course, be construed in view of this positive one. Section 64a directs that taxes be paid in advance of dividends to creditors; and "dividend," as commonly used throughout the Act, means partial payment to general creditors. In Sec. 65b, for example, the word occurs in contrast to payment of debts which have priority. And as the local laws gave no superior right to the City's unsecured claim for taxes we are unable to conclude that Congress intended by Sec. 64a to place it ahead of valid lien holders.

Of course, this opinion must be read in the light of the question under consideration--Does Section 64 require that taxes shall be paid in advance of debts secured by liens which under the local law are superior to claims for such taxes? We pointed out that Section 67d preserves valid liens and is not qualified by the direction of Section 64a to discharge taxes "in advance of the payment of dividends to creditors," since `dividend', as commonly used throughout the Act, means partial payment to general creditors." We did not undertake to decide in what order, as among themselves, taxes and the debts specified by Section 64 should be satisfied; that point was not presented.

The language of Section 64 has caused much uncertainty; and widely different views of its true meaning may be found in the opinions of District Courts and Circuit Courts of Appeals.

Paragraph "a" directs that "the court shall order the trustee to pay all taxes legally due and owing * * * in advance of [not next preceding] the payment of dividends to creditors"--that is, partial payments to general creditors. City of Richmond v. Bird, supra. It does not undertake otherwise to fix the precise position which shall be accorded to them. This, we think, must be determined upon consideration of the circumstances of each case and the provisions of relevant Federal and local laws--e.g., those which prescribe liens to secure or special priority for tax claims. It also appears, plainly enough, that all debts mentioned in Paragraph "b" must be satisfied before any payment to general creditors.

Guarantee Co. v. Title Guaranty Co., supra, declares that the taxes of Paragraph "a" are "civil obligations, not personal conventions, and preference was given to them" over the wages specified by Clause (4), Paragraph "b." We adhere to this as a correct statement of the general rule to be followed whenever it does not clearly appear that the particular tax has been subordinated to claims for wages by some relevant law.

We find no error in the action of the court below. The cause will be remanded to the District Court for further proceedings consistent with this opinion.

Affirmed.                

 

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