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[56-1 USTC 9394]State Tax Commission v. Union General Corporation (National City Bank of N. Y.)

In the New York Supreme Court. Special Term. Part 1, No. 41507, 1953, 144 NYS2d 75, July 1, 1955

[1939 Code Sec. 3671--similar to 1954 Code Sec. 6322; 1939 Code Sec. 3672(a)--substantially unchanged in 1954 Code Sec. 6323(a)]

Lien for taxes: Priority of Federal taxes over state taxes: New York State corporate franchise taxes.--The lien of the State of New York is for corporate franchise taxes which accrued on the first day of November in the years 1942 to 1944. In October, 1952, a warrant for unpaid franchise taxes was filed in the office of the New York County Clerk and docketed as a judgment. The Federal lien is for income and excess profits taxes for the years 1941-1946. The assessment lists were received by the Collector in 1947 and 1949 and the notice of the lien was filed in March 1953. It was held that the Federal lien has priority over the State's lien on the ground that the State's lien was inchoate and not perfected at the time the assessment lists were received by the Collector, since the franchise taxes were not assessed and their amounts not determined until the warrants were issued. Furthermore, the State Tax Commission was not a "judgment creditor" under Sec. 3672 of the Internal Revenue Code of 1939.

Abraham Blume, 15 Park Row, New York , N. Y., for plaintiff. William I. Rodier, Jr., and Sherman, Sterling & Wright, 20 Exchange Place , New York , N. Y., for defendant. J. Edward Lumbardo , United States Attorney for the Southern District of New York, for the United States .

COX, Judge:

Motion by the State Tax Commission of the State of New York , under section 794 of the Civil Practice Act, for an order directing the third party, National City Bank, to pay to the State Tax Commission the $2,601.03 on deposit with them to the credit of the judgment debtor, Union General Corporation. The government opposes the motion, claiming it has priority over the money by virtue of its federal tax liens. The National City Bank, being a mere stakeholder, takes no position in this controversy.

The question presented is whether the state or the government has a prior lien over the bank deposit of the corporation.

The claims of both arise out of tax liens. The state's lien in the sum of $4,645.79 is for corporate franchise taxes which accrued on the 1st day of November in the years 1942 to 1944, inclusive. On October 3, 1952 , a warrant for the unpaid franchise taxes was filed in the office of the New York County Clerk and docketed as a judgment.

The government's lien aggregating $157,569.39 is for income and excess profits tax for various years from 1941-1946. The assessment lists with respect to the federal taxes were received by the Collector of Internal Revenue in 1947 and 1949. Notice of these liens was filed on March 26, 1953 , with the clerk of the United States District Court for the Southern District of New York, with the Register of the City of New York, New York County, and a copy was served on the National City Bank. Later that same day, a third-party subpoena was served by the state upon the bank, returnable April 9, 1953 . On April 8, 1953 , the bank was served with a levy and warrants of distraint for taxes by the Director of Internal Revenue.

In accord with sections 3670 and 3671, Title 26, U. S. C., the federal taxes became a lien on all the real and personal property of the corporation at the time the assessment lists, showing the amount of taxes, were received by the Collector of Internal Revenue, which was in 1947 and 1949.

[Corporate Franchise Taxes]

On the other hand, under Tax Law (Cons. Laws, ch. 60) section 219-c, in effect prior to 1944, the lien for corporate franchise taxes attached to the corporate property as of the date it was payable and continued until it was paid, and under Tax Law (Cons. Laws, ch. 60) section 213, in effect since 1944, the taxes became a lien on the date the report was required to be filed. Thus the franchise taxes became liens in 1942 to 1944, inclusive. However, the franchise taxes were not assessed and the amounts were not determined until at or about the time the warrants were issued in October, 1952. Both our State and Supreme Court of the United States have held that until such time as the franchise taxes were assessed and fixed, it was merely an inchoate lien upon the corporate property (Smith v. Meader Pen Corp'n, 255 App. Div. 397, aff'd 280 N. Y. 554; New York v. Maclay, 288 U. S. 290).

In determining the priority of these statutory liens by the principle of law "the first in time is the first in right," as annunciated by Chief Justice Marshall in Rankin v. Scott (U. S., 12 Wheat. 177), I hold that the government's lien has priority over the state because the latter's lien was inchoate and not perfected at the time the assessment list was filed with the collector in 1947 and 1949 (U. S. v. Gilbert Associates, 345 U. S. 361 [53-1 USTC 9291]; U. S. v. City of New Britain, 347 U. S. 81 [54-1 USTC 9191]; U. S. v. Acri, 348 U. S. 211 [55-1 USTC 9138]; U. S. v. Scovil, 348 U. S. 218 [55-1 USTC 9137]).

I am also constrained to hold that though the unpaid corporate franchise taxes were entered in the judgment docket pursuant to the provisions of article 9A of the Tax Law (Cons. Laws, ch. 60) before the collector filed the required notice, the State Tax Commission was not a "judgment creditor" under section 3672, Title 26, U. S. C., which provides that the tax lien of the United States shall not be valid against any judgment creditor until the collector has filed the required notice (U. S. v. Gilbert Associates, supra).

Accordingly, the motion is denied without prejudice to the institution of a plenary action.

 

 

[56-1 USTC 9310]Art Motors, Inc. v. Scheer

In the Supreme Court of the State of New York, Special Term, Part 1, Queens County, No. 6664, 144 NYS2d 313, June 28, 1955

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

Lien for taxes: Validity against mortgagees, etc.: Priority of Federal tax liens over state tax liens.--The tax warrants of the State of New York for the State income taxes and Unincorporated Business Tax were filed in the office of the county clerk in December, 1949. The Federal tax liens for Federal income taxes were filed in November, 1950, but the assessments were received by the collector in April, 1948, and in August, 1949. The Court held that the Federal tax liens have priority over the tax liens of the State of New York on the ground that the assessments were made prior to the filing of the State's liens. The Court also rejected the State's contention that it is a judgment creditor under New York law and is therefore entitled to priority under Sec. 3672 of the 1939 Code, because the meaning of the term "judgment creditor" as used in the Internal Revenue Code is a Federal question and the State had not prefected its lien by reducing the property to its possession.

Samuel Schlau, 295 Madison Ave. , New York , New York , for plaintiff. Leonard P. Moore, United States Attorney, 521 Federal Bldg., Brooklyn , New York , for defendant. Mr. Javitts for the Attorney General's office for the State of New York . Jacob Levy, 82 Fourth Ave. , Bay Shore, Long Island , New York , was the referee.

HOGAN, Justice:

Plaintiff has moved to confirm the report of a referee as to the disposition of surplus moneys resulting from a mortgage foreclosure sale of certain realty situated in Queens County . After the payment of the claim for expenses incurred by the mortgagee in possession, as well as the expenses of the reference, the net surplus will approximate $12,000. The United States claims a lien of $17,493.36, and the State of New York claims a lien of $14,116.22 against the former owner of the property for nonpayment of federal and state income taxes and the New York State Unincorporated Business tax. They ask respectively that their liens be satisfied to the extent of this net surplus. Each claims a priority over the other, presenting for determination the dates upon which each became a lien. The tax warrants of the State of New York were filed in the office of the Queens County Clerk on December 23 and 27, 1949. It appears that since that time no further affirmative action was taken. The federal tax lien was filed on November 16, 1950 , with the Register of Queens County. The Internal Revenue Code of 1954 (sec. 6322) provides that "unless another date is specifically fixed by law, the lien imposed by Sec. 6321 shall arise at the time the assessment is made * * *." If this were controlling, the lien of the United States unquestionably would have priority, since assessments were made long before the filing of the state's lien. However, the applicable provision of the code is section 3671, which was in effect from 1939 until it was superseded by section 6322 (supra). It read: "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector * * *."

[A Judgment Creditor?]

There was introduced into evidence without objection before the referee claimant U. S. Exhibits 9 and 11, entitled "Notice of Federal Tax Liens under Internal Revenue Laws," which clearly indicate that the assessment against Elizabeth Scheer and Charles Scheer were received by the collector in April, 1948, and in August, 1949.

The contention of the State of New York that it is a "judgment-creditor" entitled to priority under I. R. C., section 3672, has been answered by the Supreme Court of the United States in the case of United States v. Gilbert Associates (345 U. S., 361) [53-1 USTC 9291]. The Town of Walpole, New Hampshire, had a lien against delinquent's property growing out of unpaid taxes. It held a tax sale, but never took possession of the property. It maintained that it was a judgment creditor entitled to priority under the aforesaid section. Under New Hampshire law, the assessment of a tax "is in the nature of a judgment enforced by a warrant instead of an execution." The same is true under New York law. Section 380 of the Tax Law of the State of New York provides that "* * * the said Sheriff shall thereupon proceed upon the same (the warrant) in all respects with like effect, and in the same manner prescribed by law in respect to executions issued against property upon judgments of a Court of Record * * *."

It would appear from this language that the State of New York would be a "judgment-creditor" as claimed.

[A Federal Question]

The Supreme Court of the United States , however, has decreed otherwise. Moreover, the relative priority of the lien of the United States for unpaid taxes is always a federal question, to be determined by federal law (Illinois v. Campbell, 329 U. S. , 362, 371). It has held that while a state is free to give its own interpretation for the purpose of its own internal admin istration, nevertheless, the meaning of a federal statute is for the United States Supreme Court to decide (United States v. Security Trust & Savings Bank, 340 U. S., 47 [50-2 USTC 9492]). It said, in justification, that "a cardinal principle of Congress in its tax scheme is uniformity as far as may be, therefore, a judgment-creditor should have the same application in all the States. In this instance, we think Congress used the words 'judgment-creditor' in Sec. 3672 in the usual conventional sense of a judgment of a Court of record since all states have such courts. We do not think Congress had in mind the action of taxing authorities who may be acting judiciary as in New Hampshire and some other states where the end result is something 'in the nature of judgment,' while in another state the taxing authorities act quasi-judicially and are considered admin istrative bodies." Mere attachment of the state's lien prior to recordation of the federal lien did not in and of itself divest the taxpayer of either possession or title to her property. There is no claim, nor is there any evidence, that the state had reduced the property to its own possession and thereby perfected its lien before the Federal Government had filed. Had this been accomplished another problem would confront us.

In the case of People of Illinois v. Campbell (329 U. S., 362) it was stated that: "The Federal priority is not destroyed by State recording acts any more than by State statutes creating or otherwise affecting liens, if the lien as recorded or otherwise executed does not have the required degree of specificity and perfection." (See also Citizens Coal Co. v. Capitol Cleaner, 233 Pacific Reporter, 2d, 377 [51-2 USTC 9387].)

The report of the referee is accordingly confirmed and the following payments are directed to be made out of the surplus moneys: Dorothy Powers (for stenographic services), $128.75; Art Motors (for disbursements by the mortgagee in possession), $1,738.70, plus interest from the date of said expenditures, $66.35; the referee's fee, $1,800.

The balance shall be paid to the United States of America . Settle order on notice.

 

 

[55-2 USTC 9663]Josephine Geitz, Plaintiff, R. Shad Bennett, Intervenor, Appellant v. Chester Gray, Defendant, United States of America, Intervenor, Respondent

In the St. Louis, Missouri, Court of Appeals, April Session, 1955, No. 29,264, 280 SW2d 859, June 14, 1955

Appeal from Circuit Court, Lincoln County.

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

Lien for taxes: Priority of lien: Assignment of attorney's fee.--U. S. lien for unpaid taxes arose when the assessment list was received by the collector. However, as to a purchaser of a portion of attorney's fee held by the court, the lien was effective only when notice thereof was filed by the collector in the office of the recorder of deeds where the property subject to the lien is situated. Such notice having been properly filed nearly two years prior to the assignment of the fee, it subjected the assignee's interest in the fee to the lien of the U. S.

R. Shad Bennett, 44 South Central Avenue, Clayton 5, Mo., pro se. Harry Richards, United States Attorney, Rob ert E. Brauer, Assistant to United States Attorney, Room 402, New Federal Building, Twelfth and Market Streets, St. Louis 1, Mo., for respondent (intervenor).

Opinion

MATTHES, Judge:

In November, 1951, Josephine Geitz, hereinafter referred to as plaintiff, and Carl E. Starkloff, an attorney at law, entered into a contract whereby Starkloff agreed to represent plaintiff in her claim for damages for wrongful death of her husband. Starkloff was to receive a fee of 35% of the amount recovered for plaintiff. Thereafter, and in the same month, R. Shad Bennett, hereinafter called appellant, who is also an attorney, was brought into the case by Starkloff to assist in the prosecution of plaintiff's claim. Under their agreement, the fee recovered, based upon the 35% contract, was to be divided equally between them. There was a suit filed in behalf of plaintiff in the Circuit Court of Lincoln County, Missouri. Following some pre-trial proceedings, such as the taking of depositions, the case was tried in said county, resulting in a verdict and judgment in favor of plaintiff for $5,650. Appellant actively participated in the preparation for, and trial of, the case.

Prior to the trial, Starkloff and appellant agreed that Honorable Omer H. Avery, an attorney of Troy , Missouri , should be retained as local counsel to assist in the trial. Avery was actually contacted by Starkloff and participated in the trial of the case. Following the trial, and on December 10, 1952, the insurance company interested in the outcome of the case and obligated to pay the judgment rendered therein, issued its draft for the amount of the judgment, payable to plaintiff and Carl E. Starkloff, appellant, and Omer H. Avery, her attorneys. Having been served on July 7, 1952, with a levy by the United States Collector of Revenue against the interest of Starkloff in plaintiff's claim for unpaid income taxes, plaintiff refused to endorse the draft. This precipitated the filing of a motion in Lincoln County Circuit Court by the three attorneys who had represented plaintiff in the trial, styled, "Motion of * * * to correct records". In reality, the object of the motion was to obtain an order to compel plaintiff to endorse the draft; to direct the circuit clerk to reduce draft to cash, and then pay 35% of the amount thereof to appellant and balance of 65% to plaintiff.

In time there was an order entered by the court under which plaintiff was paid the amount due her. This left $1,882.50 in the registry of the Circuit Court of Lincoln County , (35% of the judgment less the amount advanced by plaintiff to defray costs). Leave having been obtained, the United States of America , hereinafter called respondent, intervened and filed a claim in said court to the full amount of the fund.

Appellant's position was, and is, that he is entitled to the whole of said fund. He claims half thereof by virtue of his contract with Starkloff, and the other half by reason of an assignment executed by Starkloff to him on January 3, 1952. Prior to the assignment appellant advanced or loaned to Starkloff money as follows: September 10, 1951, $300; October 10, 1951, $700; November 12, 1951, $150; December 12, 1951, $1,500. Subsequent thereto and on December 29, 1952, appellant paid to Omer H. Avery $200 for services rendered by him in assisting in the trial of plaintiff's case.

The claim of respondent to the fund is based upon the indebtedness of Starkloff for income taxes. In this connection it was undisputed that the assessment list was received by the Collector of Internal Revenue on October 17, 1949, and that respondent caused notice of lien for unpaid taxes under Internal Revenue Laws to be filed in the office of the Recorder of Deeds of St. Louis County Missouri, on January 12, 1950, and in the office of the Recorder of Deeds of Lincoln County, Missouri, on April 10, 1953. Appellant and respondent stipulated in the trial court that in 1950 and 1951, Starkloff was a resident of St. Louis County , Missouri .

The judgment rendered below directed the sum of $13.20 paid out of the fund held by the circuit clerk to defray court costs, and the balance of $1,869.30 distributed equally between appellant and respondent, each to receive $934.65. Following unavailing motions for new trial, both parties appealed from the judgment of the trial court. However, respondent has abandoned its appeal.

[Appellant's Argument]

Appellant has seven points in his brief, in which we find some duplication. Essentially, his contentions are: (1) Neither the filing of the assessment list with Collector of Internal Revenue nor the filing of notice of tax lien in the office of the Recorder of Deeds of St. Louis County, Missouri, constituted notice to appellant; (2) the interest of Starkloff in the lawsuit wherein he was one of the attorneys representing plaintiff, was an "intangible, inchoate, conditional, or contingent interest", and therefore not subject to the lien of respondent; (3) Omer H. Avery, employed as local counsel to assist in the trial of the case, had lien upon proceeds of judgment and right to assign his interest therein to appellant, consequently the court should have taken the amount of $200 paid by appellant to Avery into consideration in rendering judgment.

[Federal Tax Liens]

Respondent's lien for unpaid taxes due from Starkloff arose by virtue of Tile 26, U. S. C. A., Section 3670, 1 and its claim of priority is based upon Title 26, U. S. C. A., Sections 3671 and 3672. 2 Pursuant to the provisions of said Section 3672, this state enacted a statute, Section 14.010, R. S. Mo. 1949, V. A. M. S., providing for the filing of notice of liens for taxes due the United States .

The lien of respondent came into existence on the date the assessment list was received by the collector. Section 3671, supra; Citizens Bank of Barstow , Tex. v. Vidal, 114 Fed. (2d) 380 [40-2 USTC 9603]; Filipowicz v. Rothensies, 43 Fed. Supp. 619 [42-1 USTC 9300]; U. S. v. Maddas, 109 Fed. Supp. 607 [53-1 USTC 9190]. However, as to any mortgagee, pledgee, purchaser, or judgment creditor, the lien was not valid and effective until notice thereof was filed by the collector in accordance with the law of the state in which the property subject to the lien is situated. Section 3672, supra. In this state the notice must be filed in the office of the recorder of deeds where the property subject to lien is situated. Section 14.010, supra. Appellant's position is that he was a "purchaser" within the meaning of the applicable statute. While respondent does not concede that this status existed, nevertheless it has briefed the case on that theory, and contends that even though appellant did in fact purchase the interest of Starkloff in the fee which accrued under contract with plaintiff, he acquired same with the lien of respondent impressed thereon.

As stated, in 1950, when the notice of the lien for unpaid taxes was filed in the recorder's office of St. Louis County, Missouri, and in 1951, when Starkloff's right or interest in the lawsuit of plaintiff v. Chester Gray came into existence, he was a resident of that county. This being true, and inasmuch as Starkloff's right was an intangible, the situs thereof was the domicile of Starkloff, i.e., St. Louis County . 15 C. J. S., page 928, section 18(c); State of California v. St. Louis Union Trust Co., Mo. App., 260 S. W. (2d) 821. Therefore respondent complied with the provisions of the applicable statutes, and the filing of the notice of lien in St. Louis County, Missouri, constituted notice to appellant, Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC 9449]; Grand Prairie State Bank v. United States, 206 Fed. (2d) 217 [53-2 USTC 9481]; United States v. Phillips, 198 Fed. (2d) 634 [52-2 USTC 9421]; MacKenzie v. United States, 109 Fed. (2d) 540 [40-1 USTC 9229], and subjected appellant's interest in fee acquired from Starkloff to the lien of respondent. Equitable Life Assur. Soc. v. Moore, 29 Fed. Supp. 179 [39-2 USTC 9775]; United States v. Phillips, supra; MacKenzie v. United States , supra; U. S. v. Security Tr. & Sav. Bk., 340 U. S. 47 [50-2 USTC 9492].

[After Acquired Property Subject to Lien]

Title 26, U. S. C. A., Section 3670, has been construed as extending the lien of the United States for unpaid taxes to property acquired by tax delinquent after the lien became effective. Glass City Bank v. United States, supra, in which lien was applied to earnings of taxpayer for services rendered five years subsequent to date lien was recorded; United States v. Graham, 96 Fed. Supp. 318 [51-1 USTC 9218], lien effective as to rents under a lease executed by taxpayer after lien came into existence; Nelson v. United States, 139 Fed. (2d) 162 [43-2 USTC 9648], applied to grape crop grown two years after filing of lien in the office of the proper county official; Citizens Nat. Trust & S. Bank of Los Angeles v. U. S., 135 Fed. (2d) 527 [43-1 USTC 9426], lien applied to interest of taxpayer in the estate inherited by him seven years subsequent to date tax lien was filed in county recorder's office.

No useful purpose would be accomplished by reviewing the numerous cases cited by appellant in his brief. It is sufficient to say that careful consideration thereof reveals that the courts, in deciding those cases upon the particular facts presented, announced no rule contrary to that laid down by the courts in the cases hereinabove mentioned. Applying the doctrine announced therein, Starkloff's interest and right in the lawsuit which eventually terminated in judgment for plaintiff was "born with the tax lien impressed thereon", United States v. Graham, supra, 1, c. 321. Notice of the lien having been filed in the proper county on January 12, 1950, nearly two years prior to the assignment of Starkloff's interest in the fee to appellant, respondent's lien was paramount, and the trial court properly ruled that Starkloff's portion of the fee, being one half of the fund in question, should be applied toward payment of his indebtedness to the respondent.

[Local Counsel's Fee Considered]

In making the final point, that the trial court erred in failing to take into consideration the payment of the sum of $200 to Omer H. Avery for services rendered as local counsel, appellant urges that Mr. Avery "* * * would have had a lien upon the funds for his fee, and which he duly assigned to appellant by endorsing the original draft when it was paid to him". The weakness of appellant's position lies in the fact that Mr. Avery was not employed by plaintiff. The rule is tersely stated in State v. Buzard, Mo. Sup., 145 S. W. (2d) 355, l. c. 357, as follows: "(as said in the Mills case, supra) 'there can be no lien in favor of the attorney unless there be a contract due him from the client'". Mills v. Metropolitan St. Ry. Co., 282 Mo. 118, 221 S. W. 1. In Smith v. Wright, 153 Mo. App. 719, 134 S. W. 683, also cited in State v. Buzard, supra, it was announced that if the assistant attorney was employed by the principal attorney and the latter made the employment for the client and by his authority, the lien may be enforced by the assistant attorney. But in this case there was no showing made that would permit to apply the rule laid down in the Smith case.

Stewart v. Kane , Mo. App., 111 S. W. (2d) 971, relied upon by appellant, is not in point and does not support his contention. In that case the independent attorney claimed a portion of the fee of the principal attorney by virtue of an equitable assignment. No claim was made that an attorney's lien on the fund paid into court existed in favor of such independent attorney. There was ample proof that the attorney asserting the equitable assignment had entered into a contract with the principal attorney whereby 10% of the total fee was to be paid to the attorney who asserted his right as an assignee. In the instant case, for aught that appears in the record, no understanding or agreement was entered into between the attorneys when Mr. Avery was employed with respect to his compensation, the only testimony relating thereto being that, following date of rendition of the judgment in favor of plaintiff, appellant paid Mr. Avery the sum of $200 for the services rendered by him.

We have concluded that the judgment of the trial court was proper and should be affirmed. It is so ordered.

BLAIR, Special Judge, concurs.

FERRISS, Special Judge, concurs.

On Motion for Rehearing--(July 15, 1955)

Appellant has filed a motion for rehearing in which he urges that our opinion is diametrically opposed to the opinion of the Circuit Court of Appeals, Eighth Circuit, in the case of National Refining Company v. United States, 160 Fed. (2d) 951 [47-1 USTC 9221]. In that case the United States and the National Refining Company were rival claimants to a fund in the registry of the United States District Court. The Government's claim to the fund was based upon a lien for unpaid federal taxes assessed against one McDowell for the years 1935 to 1945. The lien was perfected in July, 1945, as against any mortgagee, pledgee, purchaser, or judgment creditor by recording of notice of tax lien. Appellant, National Refining Company's claim to fund was based upon an equitable assignment made to it by McDowell in October, 1940. See National Refining Company v. McDowell , Mo. Sup., 201 S. W. (2d) 342.

In finding that the claim of the National Refining Company was entitled to priority, the Circuit Court of Appeals said, 1. c. 955:

"Our conclusion is that the fund in suit represents a commission assigned to appellant by McDowell in 1940; that the commission became available to McDowell on May 17, 1945; and that appellant, as assignee, is entitled to the fund."

It is readily observable that the National Refining Company case is clearly distinguishable on the facts from the instant case. Whereas in this case the assignment was made subsequent to the perfecting of the Government's lien, in the National Refining Company case the court found that the assignment was made in 1940, and the amount became available on May 17, 1945, both dates being prior to the date that the Government perfected its lien in July of 1945.

Appellant's motion for rehearing should be overruled. It is so ordered.

1 "Section 3670. Property subject to lien.--If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

2 "Section 3671. Period of lien.--Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

"Section 3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors.--

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

"(1) Under State or Territorial laws. In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice;"

 

 

[54-2 USTC 9641]Claremont Securities Corporation, a California Corporation, Plaintiff v. J. R. Hamilton, United States of America, et al., Defendants United States of America, Plaintiff in Intervention v. Claremont Securities Corporation, a California Corporation, et al., Defendants in Intervention

In the Superior Court of the State of California in and for the County of San Bernardino, No. 69579, September 30, 1954

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

Mechanics' liens v. tax liens: Priority.--In an interpleader action, the Court held that United States tax liens arising from Sec. 3670 had priority over mechanics liens regardless of the time the liens were recorded pursuant to a strict interpretation of Sec. 3672.

William G. Bergman, Jr., for plaintiff. Pauline Nightingale, for defendant Division of law enforcement; Waldo Willhoft, for defendants John S. Suverkrup Lumber Co. et al.; Dennet Withington, for defendant Fred Elliot; H. R. Griffin, for defendants Norman Aide et al.; Oliver M. Charleville, for defendants Gibson Lumber Co. et al.; Edmund G. Brown, for defendant Department of Employment of the State of California; J. Clifford Argue, for defendant E. A. Diedrich; Laughlin E. Waters, United States Attorney, for the United States.

HILLIARD, Superior Court Judge:

This is an action initiated by a complaint in interpleader wherein the plaintiff, as trustee under a first deed of trust upon certain real property, alleges the foreclosure thereof, sale of property, and realization of an amount in excess of the trust deed obligation--which excess is in the sum of $2,827.66.

[Creditors]

Plaintiff has deposited said sum in Court and names as defendants in interpleader certain parties who may be classified as follows:

(a) Holders of merchanic's liens whose claims have been reduced to judgment and abstract filed thereof; or whose action for foreclosure of the lien is now pending.

(b) Division of Labor Law Enforcement, State of California , on behalf of Frank Francisco, its statutory assignor, claiming a lien for wages incurred and owed in connection with construction of the building.

(c) Department of Employment, State of California , claiming three separate liens on the property to secure payment of contributions owing under the Unemployment Insurance Act of California.

(d) The United States of America , as plaintiff in intervention, asserting its tax lien for amounts withheld for income taxes by the owner-contractor, John R. Hamilton.

(e) Mechanic's lien claimants, whose liens have been filed but not reduced to judgment nor supported by action for foreclosure within the statutory period.

(f) Defendants in intervention, Norman Aide and Mabel Irene Aide, claiming an encumbrance upon the property by virtue of second deed of trust securing promissory note in the sum of $1700.00. The property was foreclosed and sold on October 7, 1949 by the trustee, and purchased by Mr. and Mrs. Aide. By this process the lien of the second deed of trust was merged in the legal title and lost to the defendants in intervention Aide.

(g) Judgment creditors whose liens are supported by abstracts of judgment. These consist of Smith-Grubbs Company, with abstract filed September 10, 1949 ; Elliott Precision Block Company, with abstract recorded May 24, 1950 .

[Order of Priority]

It has been stipulated by counsel for all parties as follows:

1. That counsel for plaintiff in interpleader may be allowed counsel fees to be fixed in the discretion of the Court. No evidence was submitted in reference to costs incurred by said counsel and it is therefore assumed that--with the exception of legal costs incident to these proceedings--further expenses must necessarily be included in counsel fees.

2. That the attachment and garnishment heretofore levied upon Claremont Securities Corporation on behalf of Gibson Lumber Company was invalid and of no effect. Gibson Lumber Company will stand in the same position as other mechanic's lien claimants.

3. That the following are mechanic's lien claimants who are entitled to share pro rata with equal priority in the proceeds of the deposit in Court:

(1) Gibson Lumber Company

(2) Smith-Grubbs Company

(3) Prominski

(4) Odom

(5) Division of Labor Law Enforcement as statutory assignee of Frank Francisco.

(6) Suverkrup Lumber Company

Following in order of priority (excepting as may be determined to be entitled to full preference, i. e., claim of United States of America ).

(7) California Department of Employment

(8) Smith-Grubb Company (as Judgment Creditor)

(6) Elliott Precision Block Company

[Government's Contention]

The remaining issue to be determined is dependent upon a finding as to the status of the claim of tax liens of the United States of America . It is the contention of the United States Attorney that:

(a) The second trust deed on the property having been lost by merger with legal title;

(b) Provisions of Section 3672a of the Internal Revenue Code providing for supremacy of the tax lien as to all persons excepting mortgages, pledges, purchasers or judgment creditors prior to notice;

(c) The fact that no mechanic's liens were perfected by judgment prior to notice by the United States of America--and that there are no claimants falling within any other of the designated classes;

entitles the tax lien to full preference and priority.

It has been stipulated that the Commissioner authorized the filing of United States tax liens and that two of them actually were filed July 18, 1949; that no judgment resulting from the foreclosure of any mechanic's liens was recorded prior to that date; that the work of construction commenced January 31, 1949; that all mechanic's liens relate back to that date.

In an excellent discussion of Federal Tax Liens, arising under Section 3670, appearing in the California Law Review, Volume 41, p. 241, the following excepts are applicable:

"What of statutory liens given the force and effect of a 'judgment lien' under state laws, but not creatures of judicial process? State laws have been framed to give certain types of lien such priority, as, for instance, liens for state taxes or for wage claims. Are these liens entitled to protection from the effect of an assessment lien under Section 3672? Until recently, this question has resulted in much litigation, with conflicting decisions. However, in United States v. Gilbert Associates, Inc. the Supreme Court has settled the matter by adopting the arguments of the Federal Government. Briefly, the facts are as follows: First, the United States secured a series of assessment liens against the taxpayer. Second, the Town of Walpole, New Hampshire, assessed an ad valorem tax against machinery of the taxpayer under State law characterizing a tax assessment as 'in the nature of a judgment.' Next followed the filing of a notice of lien by the Director, which was ignored by the Town when it sold to itself the taxpayer's machinery at a tax sale. Despite these actions of the Town, the federal lien was held to be a prior encumbrance upon the moneys realized by a sale of the machinery. The Supreme Court reasoned that a state's characterization of a lien cannot control priorities between it and the Federal Government; to permit such control would be to destroy the uniform application of the federal tax structure throughout the several states. The Court therefore adopted as its own the principle, foreshadowed by Justice Jackson's concurring opinion in the Security Trust and Savings Bank case, that 'the words "judgment creditor" in Section 3672 (are used) in the usual, conventional sense of a judgment of a court of record, since all states have such courts.'

`Relation back' is a fourth exception to the normal rules of tax lien priority. This fiction has been used in a variety of situations to defeat the earlier arising federal lien, as pointed out in their discussion concerning an attaching creditor. In view of the recent Supreme Court pronouncement on the doctrine, tax lien cases which rest upon 'relation back' must necessarily be considered with a jaundiced eye. However, in areas of special hardship to the competing claimant, courts are prone to use the fiction to give priority to him although his rights are otherwise junior to the tax lien. Illustrative of these cases are those dealing with labor and materialmen liens. Since the laborer has contributed his effort toward improving the property subject to the lien, the courts often protect him against the federal lien by holding that his lien is effective from the date he commenced work on the property, whether or not he has an enforceable lien under the state law from the date work commenced. However, decisions to the contrary are also on the books: equitable considerations cannot govern the incidence of the tax lien, since the hardship here produced is but one of the manifestations of hardship imposed by the power to tax." (Italics added)

In the case of United States v. Eisinger Mill and Lumber Company, Inc., 98 Atlantic Reporter (2d) 81, a similar factual situation was presented to the Court. In that case there had been a foreclosure sale of real property resulting in an excess. The action was brought for the purpose of obtaining a declaration of priorities and rights in the excess sum. The lower Court held that mechanic's liens, filed subsequent to tax liens of the United States , were entitled to priority. This decision was based upon a similar statutory provision in Maryland to that existing under the laws of California , which provided that the liens were effective from the date of furnishing material or labor. The lower Court held that although these liens had not been "perfected" that the unrecorded mechanic's liens were more than a potential right of contingent liens, and were absolute liens on the specific property, which would be lost only by failure to file within the time limited.

The tax liens of the United States existed by virtue of Section 3670, Title 26, Internal Revenue Code.

In rejecting the reasoning of the Chancellor (or lower Court) the Court of Appeals adopts the statement of the Supreme Court in United States v. Security Trust & Savings Bank, as follows:

"Nor can the doctrine of relation back--which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment--operate to destroy the realities of the situation."

In its decision the Maryland Court discusses the case of United States v. Security Trust and Savings Bank, (referred to by counsel in their briefs) and the case of United States v. Gilbert Associates, Inc., 345 U. S. 361, 73 Supreme Court 703 [53-1 USTC 9291].

In the recent case of United States v. New Britain, Conn., (1953 Term, Advance Reports of the S. Ct. of the U. S., 98 Lawyer's Edition, p. 289) [54-1 USTC 9191] the Court, in discussing the priority of Federal Tax Liens, adopts the following definition of "choate" liens:

"The liens may also be perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established."

A careful study of the legislative history upon which Sections 3670 et seq. of the Internal Revenue Code are based discloses that the priority exceptions contained therein were intended to relieve particular hardship situations. To extent the definitions into other creditor classes by judicial decree would be an infringement upon legislative powers. The exceptions created by Section 3672 are specific and do not afford protection to any person who does not unequivocally fall within such definitions.

United States v. Security Trust and Savings Bank, 340 U. S. 47-53 [50-2 USTC 9492]; Investment and Securities Co. v. U. S., 140 Fed. (2d) 894 [44-1 USTC 9210]; MacKenzie v. U. S., 109 Fed. (2d) 540 [40-1 USTC 9229]; Miller v. Bank of America, 166 Fed. (2d) 415 [48-1 USTC 9185].

The cases cited by counsel in their briefs indicate an effort on the part of many Courts to liberalize the interpretation of Section 3672. Those Courts whose opinions were influenced by a desire to make equitable rights paramount to the strict legal construction of the statute appear to have represented the majority views. (See summary of cases in annotation to Security Trust and Savings Bank, 95 L. Ed. (U. S. Supreme Court Reports) 67). This situation prevailed until the case of United States v. Gilbert Associate, Inc., infra. It is now clear that the statute must be construed without deviation from the enumerated categories. Respective priorities under the Section, and the effect of tax liens created thereby, are to be determined, under familiar principles of law, as federal questions.

It is the opinion of the Court that claims of the United States for tax liens arising pursuant to Section 3670 must be given priority over mechanic's liens, and without respect to the time of recordation of such liens.

Judgment will be entered finding that the find on deposit with the County Clerk should be distributed in accordance with the rights of priority as herein set forth. Attorneys' fees shall be allowed from the fund to counsel for plaintiff in interpleader in the sum of $200.00. Findings and Conclusions to be prepared and submitted by counsel for plaintiff in interpleader.

 

 

[53-2 USTC 9556]Division of Labor Law Enforcement, Department of Industrial Relations, State of California, Plaintiff v. Louis Plotnek et al., Defendants

In the Superior Court of the State of California in and for the County of Los Angeles, No. 601-781, July 29, 1953

Liability of assignee for benefit of creditors: Priority of state taxes.--Plotnek made an assignment of his business to Libman for the benefit of creditors. After Libman had operated the business for less than one month, Adams became assignee in her place with the approval of the creditors' committee. The assets were sold after Adams had operated the business for about three months. The Court held that the assignees were not personally liable and determined the priority of the claims in the following order: (1) the U. S. tax claims which arose prior to the assignment, (2) the wage lien claims of the Division of Labor Law Enforcement, Department of Industrial Relations, State of California and (3) the unsecured tax claims of the State Board of Equalization, City of Los Angeles or County of Los Angeles.

Memorandum of Decision

On December 7, 1950, the defendant Louis Plotnek, doing business as David Jones Radio and Television Co., made an assignment for the benefit of creditors to the defendant M. Libman, and thereupon turned over his assets to her. On that date M. Libman took possession of the assets of the David Jones Radio and Television Co., and operated the business until January 2, 1951 , when, by agreement with Louis Plotnek and the defendant Irving Adams, an auctioneer, M. Libman relinquished her position as assignee and Irving Adams became the assignee for the benefit of creditors. This change had been in the contemplation of the creditors' committee for several weeks and was accomplished with the knowledge and approval of such committee. As a condition of his assuming the duties of assignee, Irving Adams caused an inventory to be taken of the assets by one Ralph Meyer, a prominent person in the insolvency field. Ralph Meyer's inventory was completed on December 18, 1950 , and the inventory was checked against the assets by Irving Adams prior to January 2, 1951 . While the inventory assigns certain values to the items listed therein, the defendant Adams testified that the true valuation for liquidation purposes was the sum of $2500. This testimony was uncontradicted by other testimony.

When Irving Adams became assignee for the benefit of creditors he did not immediately hold an auction or other type of liquidation sale of the estate under assignment, but remained in possession as assignee at the said premises until April 9, 1951 . During this period Irving Adams, in keeping the retail business in operation, maintained at the premises one full-time employee on salary, one full-time salesman on commission, and several other part-time employees. Irving Adams, as assignee, sold all remaining assets at auction on April 9, 1951, realizing $3035.83 from the sale.

[Assignee's Receipts and Disbursements]

The disbursements of Irving Adams during his tenure as assignee for the benefit of creditors are listed as Exhibit "A" of his cross-complaint. These expenses include such items as:

Administrative salary of $1100 paid by Irving Adams to himself.

Salaries and wages amounting to $1638.27 to employees from January 2 to April 9, 1951.

Fees of $325 paid to his attorney and M. Libman's attorney.

Rent in the sum of $637.50 from December 7 to April 9.

Merchandise purchases amounting to $4999.01 and consisting largely of television chassis and parts installed in custom built cabinets, which latter items consisted of the major portion of assignor's stock on hand.

Outside labor and delivery expenses totaling $437.35.

Utility bills in the sum of $146.54.

Advertising costs of $124.68.

The total disbursements amounted to $10,138.48.

As against these disbursements the assignee, Irving Adams, collected in accounts receivable $1536.34, made sales and rendered repairs to appliances aggregating $6812.17, exclusive of the proceeds of the final liquidation sale of $3035.83. The total of all receipts, including miscellaneous items, was $11,552.22, which exceeded disbursements by $1413.74. The latter amount was deposited with the court.

[Claims Filed with Assignee]

The plaintiff and other governmental agencies filed claims with the assignees for unpaid taxes of the defendant Louis Plotnek. These claims are as follows:

First: The claim of the United States in the sum of $806.95.

U. S. Rev. Stats. 3466.

U. S. v. Division of Labor Law Enforcement, 205 Fed. (2d) 857, (C. C. A. 9th) [53-1 USTC 9219]

Second: The wage lien claims of the plaintiff, Division of Labor Law Enforcement, Department of Industrial Relations, State of California , in the sum of $883.98 under the provisions of Section 1204 of the Code of Civil Procedure.

Cheek v. Division of Labor Law Enforcement, 166 Fed. (2d) 429 (C. C. A. 9th)

Sec. 6756 Revenue & Taxation Code of the State of California (Sales and Use Tax Law)

Third: The preferred claim of the State Board of Equalization in the sum of $5367.52.

Sec. 6756 Revenue & Taxation Code of the State of California (Sales and Use Tax Law)

Fourth: The claim of the City of Los Angeles in the sum of $858.76. This claim is made up as follows:

For unpaid City Sales Tax to the date of the first assignment, December 8, 1950, $725.54; for unpaid Business License Tax due at the time of the assignment, $39.00; for unpaid Business License Tax for the year 1951 (the period that Mr. Adams was in control) $74.80; for unpaid City Sales Tax for the time that Mr. Adams was in control $19.42; by stipulation at the trial the amount of the claim was reduced by the last mentioned sum of $19.42 when it appeared that Mr. Adams had paid sales tax to the City on his own sales tax permit. The total of the City's claim is therefore $839.34, of which $74.80 represents the amount incurred during the period that Mr. Adams was in control and operated the business.

Fifth: The claim of the County of Los Angeles in the sum of $315.63, representing the tax on the 1947 unsecured tax roll of the County of Los Angeles , bearing assessment No. 387677.

The defendant Adams cross-complained, joining Federal, State, County and City governments by reason of the fact that they had filed claims for taxes and because there was insufficient money in his possession to pay all the claims.

[Assignees Not Personally Liable]

The first question presented is whether the assignees for the benefit of creditors, by failing to liquidate immediately the assets coming into their possession upon which had become affixed the liens of certain of the governmental agencies and concerning which the claims of these and other governmental agencies had been filed, thereby became personally liable and subject to surcharge. Certain of such agencies claimed that the continued operation of the business by the assignees and their manner of conducting it, caused a diminution of assignor's assets and consequent loss to his creditors.

None of the governmental agencies which were parties to the case at bar consented to the assignment for the benefit of creditors, or to the appointment of either assignee for the benefit of creditors. None of such agencies participated in any creditors' meetings or approved any of the financial activities of the assignees. On the other hand, no objections were voiced by any of the taxing agencies to the continued operation of the business by the assignees, and no contention has been made that the assignees, or either of them acted in bad faith or in violation of the trust imposed upon them. Whether or not an immediate liquidation would have resulted in a better return to creditors has not been shown, and it would be improper for the Court to speculate thereon. There has been no showing of breach of trust, neglect or bad faith on the part of the assignees. No recovery may be had against the assignees personally, for their continued operation of the business pursuant to the express or implied consent of the creditors.

The charges made by the assignees for services rendered appear reasonable and the accounting made by the assignee Irving Adams and attached to his cross-complaint on file herein, is approved save and except with respect to the handling of funds by said assignee against which a lien or liens had attached.

[U. S. Tax Claims Had Priority]

All but one of the items of tax sought to be collected by the United States were secured by lien arising prior to the assignment pursuant to Internal Revenue Code Sections 3670 and 3671, and the Supreme Court of the United States has held that it is of the very nature and essence of a lien that no matter into whose hands the property goes, it passes cum onere. Michigan v. U. S. 317 U. S. 338. In the case of U. S. v. Division of Labor Law Enforcement, No. 13150, 205 Fed. (2d) 857, decided February 11, 1953, 1953 C. C. H. Federal Tax, par. 9219 [53-1 USTC 9219], the court held that a claim of the United States under Revenue Statute 3466 was entitled to priority over labor claimants of the State of California who allege a priority by reason of the Code of Civil Procedure, Section 1204. Under this decision the withholding and social security tax for the fourth quarter of 1950, which was incurred by the assignor in the case at bar prior to the assignment, but which was not assessed by the Commissioner of Internal Revenue until April 9, 1951, is entitled to priority over all other claims of State, County and City government agencies.

Therefore, out of any funds coming into the hands of the trustees or either of them, first there should have been paid the claim of the United States for federal taxes assessed prior to December, 1950, in the amount of $696.56 which were secured by a lien arising prior to the first assignment. (Internal Revenue Code Sections 3670 and 3671)

Next, there should have been paid the one item of withholding and social security tax for the fourth quarter of 1950 which was incurred by the assignor prior to the assignment but which was not assessed by the Commissioner of Internal Revenue until April 9, 1951. (Revised Statute 3466) These claims of the federal government take priority over the claims of liens of the plaintiff herein under C. C. P. 1204. ( United States v. Div. of Labor Law Enforcement, No. 13150, 205 Fed. (2d) 857, decided Feb. 11, 1953, 1953 C. C. H. Federal Tax Par. 9219 [53-1 USTC 9219].)

The funds deposited in court by the assignee Irving Adams, are impressed with the lien of the above-mentioned claims of the United States and such funds are ordered applied in the discharge thereof.

[Plaintiff's Claims Next]

The claims of plaintiff, Division of Labor Law Enforcement, etc., which are secured by a lien under C. C. P. 1204, are next entitled to payment, subordinate in priority to the claims of the United States, out of any and all funds of the defendant Plotnek which came into the hands of the trustees.

The claims of the plaintiff are entitled to payment before the allowance to the trustees of any of their fees or expenses. The assignments made were not statutory, but were common law assignments, and from its inception Section 1204 of the C. C. P. has contained no provision to allow a common law assignee fees or expenses ahead of priority wages. In 1931 the statute was amended to allow a special priority to current operating expenses in the case of a court receivership. Since the legislature limited the expense authorization to such an extent the rule of expressio unius est exclusio alterius is applicable.

The remainder of the funds on deposit with the court are ordered to be applied in discharge of the above-mentioned claim of the plaintiff, Division of Labor Law Enforcement, etc. Judgment shall issue against the defendant assignees, M. Libman and Irving Adams, individually, for the balance remaining of plaintiff's claims after application thereon of the balance of the fund on deposit with the court.

[Other Claims Not Secured by Liens]

None of the claims of the other governmental agencies, State Board of Equalization, City of Los Angeles or County of Los Angeles were secured by liens on the assets of the assignor or on funds coming into the hands of the assignees. The court having approved the account of the assignee Irving Adams, setting forth a balance of $1413.74 upon final liquidation of all assets of the assignor, which balance will be entirely consumed in payment of the secured claims of the United States and of plaintiff, the court finds that there are no funds in the hands of assignees with which to pay the remaining claims and except as stated elsewhere in their memorandum, no recovery may be had against the assignees personally therefor.

[Assignee's Expenses Should Be Paid]

Section 6756 of the Revenue & Taxation Code grants certain priority to claims of the State Board of Equalization, subject to labor liens or recorded liens, but makes no mention as to whether expenses of an assignee for benefit of creditors shall take priority thereof. Since such expenses are not debts of the assignor, but of the assignee, incurred in liquidating the assets of the assignor for the benefit of creditors, the court finds that said statute does not grant the said State Board any priority over the court approved expenses of the assignees. Counsel for the State Board of Equalization maintains that in the absence of express statutory authorization an assignee for benefit of creditors may not be allowed to deduct his reasonable and necessary expense in the carrying on of the business from any funds coming into his hands, which funds are necessary to pay the priority claims of said State Board. In his oral argument he conceded that it might be construed to be unconscionable not to permit the assignee to deduct his actual costs of liquidation and sale. However, if it were held to be the law, that the reasonable and necessary expenses of an assignee were not deductible out of funds of the assignor coming into the hands of assignees prior to the payment of such claims, it would undoubtedly result in this time-honored method of providing an orderly liquidation of claims of creditors falling into disuse. There would be a dearth of persons willing to serve as assignees in such cases since there would be little or no likelihood of such assignees being paid for their costs or services.

The court construes the language of Section 6756 of the Revenue & Taxation Code as establishing a priority in favor of the State for sales and use taxes as against all other creditors, save and except the ones specifically excepted by the section. It has not been contended or shown that the assignees preferred any creditors of the assignor out of funds coming into their hands. It is conceded that the assignees did pay their current costs of operating and liquidating the business out of receipts coming into their hands.

The court holds that the legislature in enacting Section 6756 had in contemplation the practice and custom in insolvency matters and in assignments for benefit of creditors of allowing the costs of an orderly liquidation to be deducted from funds coming into the hands of the trustee or assignee before the payment of any claims of creditors. Read in this light the assignees in this case could only be held personally liable if they committed acts amounting to a breach of trust. No such acts were shown save and except the disbursement by them of funds which were subject to a lien in favor of the Division of Labor Law Enforcement as heretofore stated.

Judgment shall issue in favor of the State Board of Equalization on its cross-complaint against the defendant, Louis Plotnek, for the full amount of the claims of said State Board of Equalization and for costs of suit.

Since there are no funds of the assignor's remaining in the hands of the assignees out of which attorney's fees might be paid to counsel for defendant, Irving Adams, no order is made with respect thereto.

The defendant City of Los Angeles shall have judgment against cross-complainant Irving Adams, personally for $74.80 for business license taxes due the City for his operations.

 

 

[53-2 USTC 9504] United States of America v. Eisinger Mill & Lumber Co., Inc., et al.

In the Court of Appeals of Maryland , No. 158. October Term, 1952, July 2, 1953

Appeal from the Circuit Court for Montgomery County .

Lien for taxes: Priority of creditors: Mechanic's lien.--Labor and materials had been furnished before the assertion of a U. S. tax assessment and the recording of a U. S. tax lien upon certain property, but the mechanics' liens for labor and materials were recorded subsequent to the U. S. tax lien. Priority of the mechanics' liens was based upon a state statute providing that such liens were valid and subsisting from the date that the debt arose, if recorded within six months after completion of work. However, Code section 3672, which subordinates U. S. tax liens to mortgagees, pledgees, purchasers and judgment creditors, did not include "unperfected" mechanics' liens which were not reduced to judgment, and since the tax liens imposed by law of Congress cannot be displaced by subsequent liens imposed by state laws, the priority of of the U. S. tax lien was upheld.

Fred E. Youngman, Special Assistant to Attorney General, Washington, D. C. (H. Brian Holland, Assistant Attorney General, Ellis N. Slack, A. F. Prescott, Special Assistants to Attorney General, both of Washington, D. C., Bernard J. Flynn, United States Attorney and Paul C. Wolman, Jr., Assistant United States Attorney, both of Baltimore, Md., on the brief), for appellant. No brief and no appearance for appellees.

Before SOBELOFF, Chief Judge, DELAPLAINE, COLLINS, HENDERSON and HAMMOND, Judges.

COLLINS, Judge:

This is an appeal from the ratification of an amended auditor's report preferring certain mechanic's liens over tax liens of the United States of America , ( United States ), appellant.

On July 17, 1951 , Frank C. Bates, III, and Wayne E. Bates executed a deed of trust on a parcel of real estate to secure the payment of a note of $2,490.00. Default having occurred in the payment of this indebtedness the trustees on March 10, 1952 , sold the property at public sale for $4,200.00 and on May 1, 1952 , that sale was ratified by the court. This trustee's sale was made subject to a prior deed of trust in the amount of $8,302.13. The case having been submitted to the auditor, he filed his report. This report showed that after payment of costs and expenses and the balance due on the second deed of trust, which was foreclosed, there remained a balance of $1,119.50. In distributing this sum the auditor in his report allowed payment in full of the claim of the United States , appellant, in the amount of $951.08, filed by the Collector of Internal Revenue. He apportioned the balance of $168.42 among the mechanic's lien holders, recorded on the liens docket of Montgomery County . As stipulated these liens follow: A. Lien filed on February 6, 1952, by Edward F. Reifsnyder, et al., against Frank C. Bates, III, et al., in the amount of $495.00. B. Lien filed on January 26, 1952, by Eisinger Mill & Lumber Co., Inc., against Frank C. Bates, III, et al., in the amount of $3,010.27. C. Lien filed on January 19, 1952, by Eisinger Builders Supply Co., Inc., against Frank C. Bates, III, et al., in the amount of $414.52. It was stipulated that these liens were filed in accordance with the laws of the State of Maryland, no objection being made as to time of filing, for the amounts contained therein and that all of these liens were for material or labor furnished to the owners of the property and used in the construction of a house thereon on the dates set forth in the liens by the owners who were the makers of the deed of trust which was foreclosed.

It was also stipulated and agreed that a Federal Tax Lien was filed December 28, 1951, in folio 43, Federal Tax Lien docket in the Office of the Clerk of the Circuit Court for Montgomery County, Maryland, said lien being dated December 17, 1951, against Frank C. Bates, III and Wayne E. Bates, trading as Bates Bros., in the total amount of $923.38, said total claim of $923.38 represented the following individual claims: Unpaid withholding taxes for April, May and June 1951 in the amount of $409.64. Withholding taxes for July, August and September 1951 in the amount of $513.74. The records of the Collector of Internal Revenue, Baltimore, Maryland, disclose that the assessment of $409.64 for unpaid withholding taxes for April, May and June 1951 was pursuant to an assessment list received by the Collector from the Commissioner of Internal Revenue on October 29, 1951; that the first demand upon the debtors for payment of that amount was made on October 31, 1951, and that second demand for payment on the debtors was made on November 30, 1951. The records of the Collector of Internal Revenue, Baltimore, Maryland, disclose that the assessment of $513.74 for unpaid withholding taxes for July, August and September 1951 was pursuant to an assessment list received by the Collector from the Commissioner of Internal Revenue on November 23, 1951; that the first demand upon the debtors for payment of that amount was made on November 30, 1951, and that second demand for payment on the debtors was made on December 28, 1951. It is stipulated and agreed that in this case the Bates, although insolvent debtors, were not bankrupt or persons who had made assignments for the benefit of creditors. It is further stipulated and agreed that the second deed of trust foreclosed in this case was recorded prior to commencement of work on the house constructed on the property involved in the proceedings. The chancellor held that the above mentioned mechanic's liens were entitled to priority, in payment of the sum of $1,119.50 aforesaid, over the unpaid tax liens of the United States . As a result thereof an amended report was filed by the auditor and a final order of ratification of that report was signed by the chancellor on November 21, 1952, and an appeal therefrom taken to this Court by the appellant on December 4, 1952.

[Statutory Effect of Mechanic's Lien]

The chancellor found that all labor and materials had been furnished, except cellotex sheathing in the amount of $136.08 furnished on November 21, 1951, covered by lien B above, and this labor and these materials had gone into the house on the property here in question before the lien of the appellant attached either on December 28, 1951, when the lien was filed, or on October 29 or November 30, 1951, when the Collector received the assessment list. We find nothing in the record to dispute these facts. We also agree with the chancellor that the mechanic's liens had not been "perfected", that is, filed as required by Code, 1951, Article 63, Sections 17 and 19, when the lien of the United States attached.

The chancellor held, although these liens had not been "perfected", that the unrecorded mechanic's liens were more than a potential right of contingent lien, but were an absolute lien on the specific property for six months after the work had been finished or the material furnished although no claim was filed, and claimant only loses his lien by failing to file it within the time limited. The chancellor cited as authority Code, 1951, Article 63, Section 23, which provides: "Every such debt shall be a lien until after the expiration of six months after the work has been finished or the materials furnished, although no claim has been filed therefor, but no longer, unless a claim shall be filed at or before the expiration of that period."

These tax liens of the United States arose by virtue of Title 26, Internal Revenue Code, Section 3670, which provides that, if any person who is liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. By Section 3671, unless another date is specifically provided by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time. An exception to the provision that the tax shall be a lien in favor of the appellant upon all property and rights to property, as provided in Section 3670, is that contained in Section 3672 which states in part: "(a) Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector * * *."

It is well established law that the meaning of a federal statute is ultimately for the Federal Courts to decide. United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC 9492], 95 L. Ed. 53; United States v. Waddill, Holland & Flinn, Inc., 323 U. S. 353 [45-1 USTC 9126], 89 L. Ed. 294; United States v. Gilbert Associates, Inc., 345 U. S. 361, -- L. Ed. --, decided April 6, 1953 [53-1 USTC 9291]. The tax lien in this case was filed on December 28, 1951, before the mechanic's liens were filed. Mr. Justice Jackson said in his concurring opinion in United States v. Security Trust & Savings Bank, supra: "My conclusion from this history is that the statute excludes from the provisions of this secret lien those types of interests which it specifically included in the statute and no others."

[Issue]

The single question before us in this case is whether, under the Federal decisions, the recorded lien of the United States , appellant, for unpaid federal taxes is entitled to priority in payment over these mechanic's liens which were not recorded at the time of the recordation of the Federal lien.

At the time that the case of United States v. Snyder, 149 U. S. 210, was decided on May 1, 1893, the Internal Revenue Code contained no protection for third parties against the secret unrecorded tax lien of the United States . In that case the Supreme Court held that the tax lien of the United States was preferred over even an innocent purchaser for value, in good faith, and in ignorance of the secret tax assessment against the owner. Therefore "Congress enacted Section 3672 to meet the harsh condition created by the holding in United States v. Snyder, 149 U. S. 210, when federal liens were few, that a secret federal tax lien was good against a purchaser for value without notice." United States v. Gilbert Associates, supra. The amendment, aforesaid, excluding "mortgagees", "purchasers" and "judgment creditors", and the further amendment as the result of the decision in United States v. Rosenfield, 26 Fed. Supp. 433 [39-1 USTC 9204], excluding "pledgees" is persuasive that only those particular interests are excluded from this secret federal lien. See also Detroit Bank v. United States, 317 U. S. 329 [43-1 USTC 9224] and Michigan v. United States, 317 U. S. 338 [43-1 USTC 9225].

Code, 1951, Article 63, Section 28, provides for enforcement of the lien in equity. It is well settled in this State that a mechanic's lien is purely statutory. McLaughlin v. Reinhart, 54 Md. 71, 76. It was said by this Court in Maryland Cas. Co. v. Lacios, 121 Md. 686, at page 690: "It is settled by numerous decisions of this Court, that the right to a mechanic's lien for labor, work done and materials furnished under the law, is not a vested right, but is a remedy only created by positive statutory enactment. The right to the lien depends entirely upon the statute, and the party seeking the remedy for the lien must come within the provisions of the statute." Also in the recent case of Goldberg v. Ford, 188 Md. 658, it was pointed out "* * * where labor and material is furnished by a sub-contractor for improvements to property, it is only by virtue of statute (Code, Art. 63) that a remedy is available. Maryland Cas. Co. v. Lacios, 121 Md. 686, 690, 89 A. 323. If recovery could be had in Equity in such a case, there would have been no need for such legislation." As above set forth these liens, although filed within the period of six months, had not been filed and recorded previous to the filing of the federal tax lien. Subsequent steps were necessary to proceed against the property as in United States v. Security Trust & Savings Bank, supra.

In State v. Woodroof, Alabama , 46 So. (2d) 553 [50-1 USTC 9315], it was held by the Supreme Court of Alabama that the state's claim for taxes was a specific and perfected lien and as such held priority over Section 3466 of the Revised Statutes of the United States, 31 U. S. C. A. Section 191, which provided that the debts due the United States should be first satisfied where the debtor was insolvent or bankrupt. In United States v. Griffin-Moore Lumber Co., Supreme Court of Florida, 62 So. (2d) 589, it was held that a mechanic's lien recorded prior to the recording of a federal tax lien was to be preferred over that federal tax lien. Apparently no petitions for certiorari were filed to the United States Supreme Court in these cases. This last decision was based on In Re Taylorcraft Aviation Corporation, 168 Fed. (2d) 808 [48-1 USTC 9288], and Cranford Co., Inc. v. L. Leopold, 70 N. Y. S. (2d) 183, affirmed by the Court of Appeals of New York without opinion, 298 N. Y. 676, hereafter discussed.

In In Re Taylorcraft Aviation Corp., 168 Fed. (2d) 808 [48-1 USTC 9288], supra, decided June 1, 1948, relied on by the chancellor, Taylorcraft Aviation Corporaton was adjudicated a bankrupt on April 25, 1947. On November 8, 1946, the United States filed a notice of tax lien as required by Section 3672, supra. Labor and materials had been furnished to the debtor beginning on August 6, 1946, and ending on September 22, 1946. An affidavit for mechanic's lien had been filed on November 20, 1946, "which complied in all respects with the statutes of Ohio for obtaining a valid mechanic's lien upon the real property of the debtor, the affidavit for the lien being duly filed within sixty days after the last item was furnished." The Government conceded that it had no priority under the bankruptcy act. It claimed priority under Sections 3670 and 3671, supra. Circuit Judge Allen held in that case that as the bankruptcy act did not apply and as the mechanic's lien was a perfected lien on specific property on equitable considerations of unjust enrichment, the federal lien for taxes did not have priority over the mechanic's lien. This decision was questioned in United States v. Sands, 174 Fed. (2d) 384 [49-1 USTC 9264]. We have been unable to find a petition to the Supreme Court of the United States for certiorari in this decision of the Circuit Court of Appeals and the case seems to be in conflict with United States v. Security Trust & Savings Bank, supra, decided November 13, 1950.

In Michigan v. United States , supra, the Supreme Court held that the unrecorded lien of the United States for estate taxes which arose at the date of death held priority over tax liens of the State of Michigan regardless of the construction of the state statutes by the state courts.

[Federal Authority Cited]

In United States v. Security Trust & Savings Bank, supra, Morrison sued on an unsecured note on October 17, 1946, and procured an attachment on four parcels of real estate owned by Stylianos. Morrison obtained judgment on April 24, 1947, and it was recorded on May 2, 1947. Meanwhile, on December 3, 5, and 10, 1946, the United States had filed notices of federal tax liens in the same office. The Superior Court of California held that Morrison's judgment was to be paid before the federal tax lien. The District Court of Appeals affirmed. The Supreme Court of California declined to hear the case, and certiorari was granted to the Supreme Court of the United States . That Court, in reversing and holding that the federal tax lien had priority over the attachments, said among other things: "The effect of a line 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. * * * The attachment lien gives the attachment creditor no right to proceed against the property unless he gets a judgment within three years or within such extension as the statute provides. Numerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded. Thus the attachment lien is contingent or inchoate--merely a lis pendens notice that a right to perfect a lien exists. Nor can the doctrine of relation back--which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment--operate to destroy the realities of the situation. When the tax liens of the United States were recorded Morrison did not have a judgment lien. He had a mere 'caveat of a more perfect lien to come.' New York v. Maclay, 288 U. S. 290, 294, 77 L ed 754, 757, 53 S. Ct. 323. * * * In cases involving a kindred matter, i. e., the federal priority under Rev. Stat, Sec. 3466, it has never been held sufficient to defeat the federal priority merely to show a lien effective to protect the lienor against others than the Government, but contingent upon taking subsequent steps for enforcing it. Illinois ex rel. Gordon v. Campbell , supra (329 U. S. 362, 374, 91 L ed 348, 357, 67 S. Ct. 340). If the purpose of the federal tax lien statute to insure prompt and certain collection of taxes due the United States from tax delinquents is to be fulfilled a similar rule must prevail here."

[Specific Lien Defined]

What the Supreme Court considers as a specific lien is illustrated in the case of United States v. Gilbert Associates, Inc., supra, which involved among other things the priority of an ad valorem tax of the Town of Walpole, New Hampshire, levied against an insolvent, Gilbert Associates, Inc., over the lien of the United States for employment, withholding and income taxes. In holding the United States had priority that Court said among other things: "We conclude that whatever the tax proceedings of the Town of Walpole may amount to for the purposes of the State of New Hampshire , they were not such proceedings as resulted in making the Town a judgment creditor within the meaning of Sec. 3672. While the Town was not a judgment creditor, it was the holder of a general lien on all the taxpayer's property. So was the United States a general lienholder on all the taxpayer's property. But since the taxpayer was insolvent, the United States claims the benefit of another statute to give it priority, Sec. 3466 of the Revised Statutes, 31 U. S. C. (1946 ed.) Sec. 191, the provisions of which are set forth in the margin. [Sec. 3466, supra, provided that the debts due the United States should be first satisfied where the debtor was insolvent or bankrupt.] As is usual in cases like this, the Town asserts that its lien is a perfected and specific lien which is impliedly excepted from this statute. This Court has never actually held that there is such an exception. Once again, we find it unnecessary to meet this issue because the lien asserted here does not raise the question. In claims of this type, 'specificity' requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the possession of the debtor. Thelusson v. Smith, 2 Wheat. 396. Until such possession it remains a general lien. There is no ground for the contention here that the Town had perfected its lien by reducing the property to possession. The record reveals no such action. The mere attachment of the Town's lien before the recording of the federal lien does not, contrary to the holding of the Supreme Court of New Hampshire, give the Town priority over the United States . The taxpayer had not been divested by the Town of either title or possession. The Town, therefore, had only a general, unperfected lien. United States v. Waddill Co., supra; Illinois v. Campbell, 329 U. S. 362, 370. Where the lien of the Town and that of the Federal Government are both general, and the taxpayer is insolvent, Sec. 3466 clearly awards priority to the United States . United States v. Texas , 314 U. S. 480, 488."

The chancellor was also of opinion that "the State of Maryland, by statute, has in substance placed the property in question in the position of a pledge, and the mechanics and suppliers, as pledgees, to the end that they will receive their wages and payment for what they supply, out of the very building that is erected through their labor and out of their materials." We cannot agree that the mechanic's liens here could be treated as "pledges". The learned chancellor relied upon the cases of Franklin Insurance Co. v. Coates, 14 Md. 285, in which this Court held that the material man between the time of the furnishing of the material and the filing of the mechanic's lien had a subsisting lien on the property and an insurable interest therein and upon Sodini v. Winter, 32 Md. 130, in which it was held that the mechanic's lien did not originate in contract but was a purely statutory enactment to be maintained and enforced to the extent and in the mode in which the statute prescribed and under the statute by extending credit, the lien was not waived. It was said in the case of Textor v. Orr, 86 Md. 392, at page 397: "It is clear, we think, that the contract above set forth did not constitute a pledge of the hoops as security for the debt, because transfer of possession of the thing pledged to the pledgee or to a third party for his benefit is essential to the creation of a pledge. Casey v. Cavaroc, 96 U. S. 490; Moors v. Reading , 167 Mass. 322. In the case now before us, the hoops remained in the possession and under the control of McCauley."

[General Liens Not Judgments]

The mechanic's liens here could not be regarded as within the exception of "judgments". It was said in United States v. Gilbert Associates, supra: "In this instance, we think Congress used the words 'judgment creditor' in Section 3672 in the usual, conventional sense of a judgment of a court of record, since all states have such courts." United States v. Security Trust & Savings Bank, supra.

There seems to be no question that the appellees are not "mortgagees". In Grossman v. City of New York, 66 N. Y. S. (2d) 363, where a mechanic's lien was recorded before the filing of a federal lien for taxes, it was held that the assignee for value of the mechanic's lien was a "purchaser" under Section 3672 and that lien was preferred over the federal tax lien. Cranford Co. v. L. Leopold & Co., 70 N. Y. S. (2d) 183, supra, which followed, decided a similar question and based its decision primarily on Grossman v. City of New York , supra. These cases are not persuasive and apparently never reached a federal court. It is of course evident that the holder of an unrecorded mechanic's lien is not a purchaser in Maryland . Van Bibber v. Reese, 71 Md. 608, 615; McHugh v. Martin, -- Md. --, 81 Atl. (2d) 623, 626.

[Supremacy of Federal Law]

In deciding the question before us we must of course bear in mind what was said by Mr. Chief Justice Stone in Michigan v. United States, supra: "We do not stop to inquire whether this construction of the state statutes is the correct one, for we think the argument ignores the effect of a lien for federal taxes under the supremacy clause of the Constitution. The establishment of a tax lien by Congress is an exercise of its constitutional power 'to lay and collect taxes.' Article I, Section 8 of the Constitution. United States v. Snyder, 149 U. S. 210. And laws of Congress enacted pursuant to the Constitution are by Article 6 of the Constitution declared to be 'the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.' 'It is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere.' Burton v. Smith, 13 Pet. 464, 483; Rankin v. Scott, 12 Wheat. 177, 179; Howard v. Railway Co., 101 U. S. 837, 845. Hence it is not debatable that a tax lien imposed by a law of Congress, as we have held the present lien is imposed, cannot, without the consent of Congress, be displaced by later liens imposed by authority of any state law or judicial decision. United States v. Snyder, supra; United States v. Greenville, 118 Fed. (2d) 963 [41-1 USTC 9381]."

Under the authorities hereinbefore cited, we must hold that the recorded tax liens of the United States have priority in the payment of the funds over the subsequently recorded mechanic's liens in this case, and that the order ratifying the amended audit be reversed.

Order reversed, with costs, and cause remanded for further proceedings.

 

 

[52-1 USTC 9177] Monroe Sturgill, et al. v. Lovell Lumber Company, a Corporation, et al.

In the Supreme Court of Appeals of West Virginia, Wyoming County, No. 10398, 67 SE2d 321, Filed October 30, 1951

Payment of debts of insolvent debtor: Priority in admin istration: Laborers' liens v. U. S. claim for taxes.--Claims of the United States for unpaid taxes against an insolvent corporation in receivership were entitled to priority, under 3466, R. S., over laborers' liens. The provisions of Code Secs. 3670, 3671, and 3672 did not act to bar the priority of the United States in the absence of a showing that an assessment list had been received by the Collector of Internal Revenue prior to institution of the receivership suit because, the case did not involve a question of liens for taxes or priorities as between the United States and a mortgagee, pledgee, purchaser, or judgment creditor, but rather a claim by the United States for priority based on 3466, R. S., which declares a statutory right of priority to exist in the United States in certain instances, such as here, where an insolvent debtor owes the United States a debt. The priority so created applies to such debts whether they are payable before or after the insolvency. Moreover, since the laborers' liens were not specific liens, they could not be given preference over the priority accorded the United States by federal statute.


[Facts]

LOVINS, Judge: *

This suit was instituted by Monroe Sturgill and others, plaintiffs, against Lovell Lumber Company, a corporation, the Bank of Raleigh, a corporation, and Donald Hayhurst, defendants. The suit had for its purpose, among others, the appointment of a special receiver for the defendant, Lovell Lumber Company, such receiver to reduce all the property of the company to cash, to operate the company's sawmill and sell all lumber and logs produced from such operation for cash, and to wind up the affairs of the company.

During the progress of the suit an amended and supplemental bill was filed, alleging that the Lovell Lumber Company had illegally preferred James O. Ball Sr., and James O. Ball, Jr., creditors. The trial court decided that issue adversely to plaintiffs, who prosecuted an appeal to this Court. Upon hearing the appeal this Court reversed the decree of the trial court and remanded the cause. For a statement of facts, and the conclusions of this Court, see Sturgill v. Lovell Lumber Co., -- W. Va. --, 51 S. E. (2d) 126.

The present appeal is not concerned with any phase of this cause except that part of the final decree of the Circuit Court of Wyoming County which adjudged priorities of the claims and debts against the Lovell Lumber Company.

The original plaintiffs filed notices of laborers' liens as authorized by Chapter 38, Article 2, Section 32, Code of West Virginia, various amounts having been claimed by them aggregating the sum of $5,292.93.

The cause was referred to a special commissioner in chancery. The United States of America filed its claims before such special commissioner, though not made a party defendant. Those claims were for withholding taxes, federal insurance contributions taxes, federal unemployment taxes, and other miscellaneous taxes, aggregating $3,216.75. The State of West Virginia , intervenor, filed a claim for corporation license taxes, unemployment compensation taxes, and business and occupation taxes, amounting to a total of $3,064.92.

[Prior Findings on Priorities]

Upon a hearing before the special commissioner in chancery, the claims of the original plaintiffs, the United States of America and the State of West Virginia , among others, were approved. The special commissioner reported that the debts due plaintiffs were first in priority; that the debts due the government of the United States were second in priority; that the debts due the State of West Virginia were third in priority; and that the debts due the general creditors could not be paid out of the money in the hands of the special receiver.

Upon the exceptions to the report of the special commissioner, filed by the Federal Government and the State of West Virginia, the Circuit Court decreed that certain of the claims of the United States of America, totaling $1,226.99, were first in priority; that the claims of Monroe Sturgill and the other laborers were second in priority; that the claims of the United States Government for federal insurance contributions taxes for the period ending June 30, 1947, and federal unemployment taxes to October, 1947, aggregating $1,989.76, were third in priority; that the claims of the State of West Virginia were fourth in priority; and that the general and unsecured claims allowed were fifth in priority, but could not be satisfied out of available assets.

The debts due the United States given third priority were so adjudicated because they had not been received by the Collector of Internal Revenue prior to the institution of the present suit, as were those given first priority.

The assets of the Lovell Lumber Company, after satisfying the debts due the United States decreed to be first in priority, were not sufficient to satisfy and discharge in full the debts due plaintiffs. The $1,909.70 in the hands of the special receiver was decreed to be distributed rateably among plaintiffs asserting laborers' liens.

The United States of America prosecutes this appeal from the decree of the circuit court, contending that the debts decreed to be third in priority should have also been decreed as first in priority under the authority of 3466, Revised Statutes of the United States (191, Title 31 of the United States Code), in that (a) the United States of America had a claim or debt against an insolvent debtor, (b) that the liens of the plaintiff decreed to be second in point of priority did not amount to a perfected lien but were inchoate under Code, 38-2-31, and (c) that the provisions of 3670, 3671, and 3672 of Title 26 of the United States Code, governing taxes due the government, have no application to the question of priority.

[Question]

The sole question for decision is: Are the two debts due the United States of America , decreed as third in priority, entitled to priority over the laborers' liens asserted by the plaintiffs? A determination of this question rests upon pertinent federal and state statutes and the application thereof by the courts.

The Federal Government relies on a statute reading in part as follows: "Whenever any person indebted to the United States is insolvent, * * * the debts due to the United States shall be first satisfied; * * *" 3466, id.

The plaintiffs in their original bill alleged that the Lovell Lumber Company was largely indebted and did not have sufficient property, real and personal, out of which to pay its debts and "is otherwise insolvent." Upon that bill of complaint the trial court appointed a special receiver. The special commissioner in chancery, to whom this cause was referred, reported that all the assets of the company were not sufficient to pay all the claims allowed. Ordinarily, a person is insolvent when all of his property is not sufficient to pay all of his debts. Wolf v. McGugin, 37 W. Va. 552, 16 S. E. 797; Carr v. Summerfield, 47 W. Va. 155, 34 S. E. 804; see Ream's Drug Store v. Bank, 115 W. Va. 66, 70, 174 S. E. 788. The allegations of the plaintiffs's original bill, the finding of the special commissioner in chancery, and the subsequent confirmation of the commissioner's report sufficiently established the existence of insolvency of the Lovell Lumber Company on July 1, 1947. Hence 3466, id., is applicable to the indebtedness of the Lovell Lumber Company to the United States of America .

Priority of debts due the United States does not rest on any common law principle, but it is founded on statute based on the common law right accorded the Sovereign of England as a royal prerogative. United States v. State Bank of North Carolina, 6 Peters 28, 8 L. ed. 308; see Spokane County v. United States, 279 U. S. 80, 49 S. Ct. 321, 73 L. Ed. 621 [1 USTC 387]; New York v. Maclay, 288 U. S. 290, 53 S. Ct. 323, 77 L. ed. 754 [3 USTC 1044]. As contrasted with the statutory right of priority possessed by the United States , the power of states to create priorities arises from the common law. The principle of preference arising out of sovereignty has been adopted in this jurisdiction. Woodyard v. Sayre, 90 W. Va. 295, 110 S. E. 689; see Fidelity and Guar. Co. v. Trust Co., 95 W. Va. 458, 121 S. E. 430; Trust Co. v. Bank, 107 W. Va. 679, 681, 150 S. E. 221. But that doctrine does not extend to counties. County Court v. Mathews, 99 W. Va. 483, 129 S. E. 399.

[Insolvency Established]

The insolvency of the Lovell Lumber Company being established, we are of the opinion that 3466, id., clearly applies, but that it operates only to give priority and in no wise creates any lien in favor of the United States of America. Beaston v. Farmers' Bank of Delaware , 12 Peters 102, 9 L. ed. 1017.

It would seem that the foregoing discussion would resolve the question, but the view was adopted by the trial court that 3670, 3671, and 3672 of Title 26 of the United States Code, apply and bar the priority of the United States of America in the absence of a showing that an assessment list had been received by the Collector of Internal Revenue prior to the instituion of the present suit. 3670, id., provides as follows: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 3671, id., reads as follows: "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time." 3672, id., reads in part as follows: "Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--(1) In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice; * * *"

It is provided under the law of this state that such liens shall be recorded in the office of the clerk of the county court. Code, 38-2-33, as amended.

It will be noted that 3672, id., restricts the protection given therein to a mortgagee, pledgee, purchaser, or judgment creditor in the event the lien in favor of the United States is not recorded.

3466, id., was enacted in 1797 while the statute out of which 3670, 3671, and 3672, Title 26, grew was enacted in 1866, and a cursory consideration would seem to indicate that the onactment in 1866 superseded or modified the prior enactment by Congress. But it has not been so held. The later sections deal with liens and the procedure to preserve them as against mortgagees, pledgees, purchasers, and judgment creditors. 3466, id., declares a statutory right of priority to exist in the United States of America in certain instances, as here, where an insolvent debtor owes the United States a debt. The priority so created applies to debts whether they are payable before or after the insolvency. United States v. State Bank of North Caroling, supra. The debts here denied priority by the trial court were owing to the United States as a matter of law.

In applying 3466, id., the United States was given priority over the lien of a judgment creditor, Thelusson, et al. v. Smith, 2 Wheaton 396; over a county's tax assessment on the funds of an insolvent taxpayer made after the federal assessment, and over county taxes assessed on personal property of a taxpayer before the appointment of a receiver, but which assessment was not supported by a specific lien, Spokane County v. United States, supra; over a claim of the United States founded upon estreated bail bonds as against the claim of the state and its citizens to the assets of a surety company on deposit with the state treasurer, United States v. Knott, 298 U. S. 544, 56 S. Ct. 902, 80 L. ed. 132; over the claim of the State of New York for franchise and gross earnings tax, New York v. Maclay, supra; over the claim of a state for motor fuel taxes owing the state by an insolvent motor fuel distributor, United States v. State of Texas, 314 U. S. 480, 62 S. Ct. 350, 86 L. ed. 356 [42-1 USTC 9162]; over a claim made by a landlord for rent under the state law and over taxes due a municipality, both of which were given a lien under the state law, United States v. Waddill Co., 323 U. S. 353, 65 S. Ct. 304, 89 L. ed. 294 [45-1 USTC 9126]. See Illinois v. Campbell, 329 U. S. 362, 67 S. Ct. 340, 91 L. ed. 348; Massachusetts v. United States , 333 U. S. 611, 68 S. Ct. 747, 92 L. ed. 968.

[Specific Liens]

In many of the foregoing instances where the United States was given priority under 3466, id., there was a question of whether the lien asserted in opposition to priority of the United States was specific. The Supreme Court of the United States has not decided the question of whether a specific lien would give way to the priority declared by the federal statute, but it has held in many instances that a lien lacking specificness would not be accorded priority. See New York v. Maclay, supra; United States v. Waddill Co., supra; Illinois v. Campbell , supra. In many instances the liens asserted have been treated "merely as a caveat of a more perfect lien to come." New York v. Maclay, supra.

Are the liens asserted by the plaintiffs specific liens? Code, 38-2-31, as amended by Chapter 77, Acts of the Legislature. Regular Session, 1939, provides that, "Every workman, laborer or other person who shall do or perform any work or labor, for an incorporated company doing business in this State, by virtue of a contract either directly with such incorporated company or with its general contractor, or with any sub-contractor, shall have a lien for the value of such work or labor upon all real estate and personal property of such company; * * *". Other provisions are to the effect that such lien to the value of one month's work or labor shall have priority over a lien created by deed or otherwise. The lien created by Code, 38-2-31, as amended, is discharged unless a notice thereof is filed with the clerk of the county court of the county in which such work or labor was performed. Code, 38-2-32. In order that such lien may be preserved, a suit in chancery to enforce the same must be commenced within six months after the claimant shall have filed his notice in the county clerk's office. Code, 38-2-34.

It is thus seen that the liens here asserted by the plaintiffs attached to all of the property of the insolvent corporation and requires for their preservation and enforcement recordation in the county clerk's office, and ascertainment and adjudication thereof in a court of equity.

"The long-established rule requires that the lien must be definite, and not merely ascertainable in the future by taking further steps, in at least three respects as of the crucial time. These are: (1) the identity of the lienor, * * *; (2) the amount of the lien, * * *; and (3) the property to which it attaches, * * *. It is not enough that the lienor has power to bring these elements, or any of them, down from broad generality to the earth of specific identity." Illinois v. Campbell, supra.

Measured by the foregoing criteria, we hold that the liens asserted by plaintiffs were not specific enough on July 1, 1947 , to take priority over the indebtedness due the United States .

We are confronted with some expressions in the opinion of this Court in the case of Coal Co. v. Fuel Co., 130 W. Va. 720, 45 S. E. 2d 750. An examination of the syllabus and opinion in that case discloses that there was no question of priority within the meaning of 3466, id., since the debtor in that case, a corporation, not clearly shown to be insolvent, had made a voluntary assignment. There was no attachment of an absconding, concealed or absent debtor, nor had an act of bankruptcy been committed within the meaning of the Federal Bankruptcy Act. This Court was there concerned with the priority of a tax lien as against a purchaser within the meaning of Title 26, U. S. Int. Rev. Code. It is true that there are statements in the opinion of Coal Co. v. Fuel Co., supra, at page 735, et seq., to the effect that the United States , in asserting its claims, had not shown the application of the provisions of that section. Clearly the expressions with reference to the applicability of Revised Statutes, 3466, are dicta.

[Conclusion]

We are of opinion that since no question has been presented relative to liens for taxes or priorities as between the United States and a mortgagee, pledgee, purchaser, or judgment creditor, all the claims of the United States presented in this cause were entitled to priority over the laborers' liens asserted by the plaintiffs, and accordingly we reverse the decree of the Circuit Court of Wyoming County in that particular. No question relative to the other parts of the decree of the trial court is raised on this appeal, and accordingly we affirm those parts of the decree not questioned on this appeal.

Affirmed in part; reversed in part; and remanded.

* Given, J., does not participate in the decision of this case.

 

 

[52-1 USTC 9109]I. W. Leggett v. Southeastern People's College, Inc.

In the North Carolina Supreme Court, No. 524. Fall Term, 1951, 68 SE2d 263, Filed December 12, 1951

Appeal by the United States, creditor, from Bennett, Special J., June Extra Term, 1951, Mecklenburg.

Priority of creditors: Employees of insolvent debtor v. Federal Government: Time right of priority is fixed.--The Federal Government was entitled to priority on its claim for taxes due over the claims of the employees of an insolvent debtor in receivership. The taxable year was 1949. The receiver was appointed in January of 1950. At that time, however, the taxes had accrued and were due. The employees' claims were subordinate to that of the Federal Government under R. S. 3466 notwithstanding the North Carolina statute classifying employee's claims as having first priority. The claim of the employees was not a lien that could be recorded. Neither could there be a levy upon or sequestration of property by the lienee for the satisfaction thereof. Such a lien arises only upon the institution of an action for the sequestration of the property in the hands of the court for the purpose of liquidation. Even then, the segregation of the property by the court is for the benefit of all the creditors and not the employees alone. This is not sufficient to bring the lien within the exceptive provisions of Code Sec. 3672.

Theron Lamar Caudle, Assistant Attorney General, Ellis N. Slack, A. F. Prescott, Homer R. Miller, Special Assistants to the Attorney General, Thomas A. Uzzell, Jr., United States Attorney, Francis H. Fairley, Assistant United States Attorney, for appellant. Covington & Lobdell, for appellee.

Receivership proceeding heard on the report of the receiver allowing and fixing the priorities of claims filed for payment.

The defendant was adjudged insolvent and on 12 January 1950 , a receiver was appointed to liquidate its assets. Claims were filed as follows:

(1) By employees of the corporation aggregating more than $65,000, claiming a lien on the assets of the corporation for the payment thereof under G. S. 55-136;

(2) By the plaintiff who asserts a debt secured by mortgage;

(3) By the Federal Government for (a) income tax, Federal insurance contribution and unemployment taxes, with interest, penalties, etc., in the amount of $4,467.38, (b) overpayments for services rendered veterans, allegedly procured by fraud, and, (c) fines imposed in criminal proceedings: $88,000;

(4) By the State of North Carolina for income tax, employer's contributions, etc., with penalties and interest in the sum of $1,417.99; and

(5) By unsecured creditors in the amount of $27,475.31.

The receiver disallowed the claim of the plaintiff and also the claim of the Government for fraudulent overpayments. He allowed the other claims and classified them for payment as follows:

[Receiver's Priority of Claims]

(1) Employees allowed $31,002.74 as secured claims under G. S. 55-136, classified first in order of payment, and $6,519.70, classified as unsecured and placed in the fourth class.

(2) The claim by the United States for taxes in the amount of $3,541.29 plus interest, classified second in order of payment.

(3) The State of North Carolina claim for taxes in the amount of $1,417.99, classified third in order of payment.

(4) Unsecured claims allowed in the amount of $17,683.36, classified fourth in order of payment.

(5) United States Government fines, allowed $88,000, classified fifth in order of payment.

The United States Government excepted and appealed. In its exceptions it requested that its claim for fines imposed be classified as an unsecured claim to be paid in the same order as other unsecured claims.

On the appeal the court below, in ruling on the conflicting claims to priority between the employees and the Federal Government and as a basis for its decision, found that the taxes due the Federal Government for the year 1950 for which the Federal Government filed claim did not become due until after the appointment of the receiver. It likewise, by consent, allowed $30,000 for overpayments made by the Federal Government to the defendant for services rendered veterans and, as so amended, affirmed the report of the receiver. The court expressly rejected the Government's claim for penalties but allowed its claim for interest.

The United States excepted for that (1) the court erred in overruling its exception to the report of the receiver and entering the judgment which appears of record; (2) the court erroneously concluded that the lien on the assets of the corporation created by G. S. 55-136 in favor of employees for wages due for services rendered within two months next preceding the appointment of the receiver is entitled to priority of payment over the claim of the United States for taxes, interest, and penalties for that "none of the taxes became due and payable until after the appointment of the Receiver"; (3) the court affirmed the report of the receiver "insofar as it allows priority of payment of claims of employees for wages earned within two months preceding the date of the Receivership over claims of the United States for . . . overpayment of vouchers, because of alleged fraud on the part of" the defendant; and (4) the court disallowed its claim for penalties. Having so excepted, the United States Government appealed.

"* * *"

[Opinion]

BARNHILL, Judge:

The appellant, without waiving its position in respect thereto, withdraws its exception to the disallowance of the small amount of penalties claimed by it, and the first exception is general in nature, presenting no question for decision.

In its appeal to the superior court and in the hearing in the court below on its exceptions to the report of the receiver, the appellant took the position that its claim for fraudulent overpayments should be classified in the fourth class along with other unsecured claims. There was no exception to the receiver's report which presented any other contention. Even so, pending its appeal to this Court, it takes another mount and seeks to ride a different horse here. This it may not do.

It is well established that a party to a suit may not change his position with respect to a material matter during the course of litigation. Hill v. R. R., 178 NC 607, 101 SE 376; Lindsey v. Mitchell, 174 NC 458, 93 SE 955. "Especially is this so where the change of front is sought to be made between the trial and the appellate courts." Shipp v. Stage Lines, 192 NC 475, 135 SE 339; Ingram v. Power Co., 181 NC 359, 107 SE 209; Coble v. Barringer, 171 NC 445, 88 SE 518. After he has elected to try his case on one theory in the lower court, he may not be permitted to change his attitude with respect thereto on appeal. Walker v. Burt, 182 NC 325, 109 SE 43, and cases cited. Instead, the appeal, ex necessitate, must follow the theory of the trial in the court below. Hargett v. Lee, 206 NC 536, 174 SE 498, and cases cited; Wilson v. Hood, Comr of Banks, 208 NC 200, 179 SE 660.

It is apparent that the two claims clearly entitled to priority in payment exceed in amount the total available assets of the insolvent corporation. Therefore, the question whether this claim should be classified as an unsecured claim is, on this record, purely academic. Decision thereof should await the time when it is more clearly presented in a case in which it is a material issue. We therefore pass the question without decision other than to say the contention of the Government, made for the first time in this Court, that it is entitled to first priority in payment may not now be considered.

[Claims of Employees v. Government's Claim for Taxes and Interest]

As between the claims of the employees secured under the terms of G. S. 55-136 and the claim of the United States Government for taxes and interest, which is entitled to priority in payment? This is the crux of the controversy. The court below answered in favor of the employees. A careful examination of the authorities leads us to the contrary view.

31 USCA sec. 191 (R. S. 3466) provides that "whenever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied . . .", and G. S. 55-136 gives the employees a lien on the property of their insolvent employer in this language: "In case of the insolvency of a corporation . . . all persons doing labor or service of whatever character in its regular employment have a lien upon the assets thereof for the amount of wages due to them for all labor, work, and services rendered within two months next preceding the date when proceedings in insolvency were actually instituted and begun against the corporation . . . which lien is prior to all other liens that can be acquired against such assets. . . ."

While the Federal statute merely uses the word "insolvent," it is now well established that no right to priority of payment comes into being under the statute, however insolvent the debtor may be, until or unless the debtor is divested of possession of his property for the purpose of liquidation. In a receivership proceedings, the receiver, in distributing the assets among the creditors, shall first pay the debts due the United States . It is a mere right of prior payment out of the general fund of the debtor in the hands of the receiver or assignee which attaches upon the appointment of a receiver or upon the date of the debtor's assignment for the benefit of creditors. Bishop v. Black, 233 NC 333.

[Time Lien Arises]

Likewise, the lien of the employees arises upon the sequestration of the property of the insolvent for the purpose of liquidation, or rather the institution of a proceedings for that purpose. Thus the right of priority of payment of the claim of the United States Government and the lien of the employees are created and come into being contemporaneously by virtue of one and the same act. Neither exists so long as the property remains in the hands of the insolvent. Both arise when the property is taken in custodia legis for the purpose of distribution among the creditors. Each is a legislative directive as to such distribution.

In the first place, however, the appellee contends that on this record the question is not presented for the reason there was no debt due the United States at the time the receiver was appointed; that since there was no debt due at that time, no right of priority of payment exists; that the right of priority is created in respect to debts due the Government at the time the property is segregated for the benefit of creditors and the rights and priorities of creditors are to be fixed as of that time. U. S. v. Marxen, 307 U. S. 200, 83 L. ed. 1222.

[Meaning of "Debts Due" Under Federal Statute]

This brings us to a construction of the meaning of "debts due" as used in the Federal statute. The term does not connote a debt past due or in default. It simply means debts owed or owing; that which one contracts or is under legal obligation to pay; a legal charge, fee, toll, tribute, or the like. Webster, New Int. Dic.; Black, Law Dic., 3rd ed. It denotes a state of indebtedness. U. S. v. The State Bank of N. C., 31 U. S. 29, 8 L. ed. 308; N. J. v. Anderson, 203 U. S. 483, 51 L. ed. 284; Kavanas v. Mead, 171 Fed. (2d) 195. A debt due is a debt accrued, and a debt is accrued when all events have occurred which fix and determine the liability of the debtor to the creditor. Comr. v. Oil Co., 148 Fed. (2d) 671, Cert. denied 325 U. S. 881; U. S. v. Anderson, 269 U. S. 422, 70 L. ed. 347 [1 USTC 155].

The taxes which are the subject matter of the Government's claim are taxes due for the year 1949. While the taxpayer was not required to report and pay the same until a later date, they accrued during the year 1949 and were payable as of the first day of January 1950. The amount thereof was readily ascertainable. The receiver was appointed 12 January 1950. So then, at that time there was a debt due the United States within the meaning of 31 USCA sec. 191. Bishop v. Black, supra; Price v. U. S., 269 U. S. 492, 70 L. ed. 373 [1 USTC 158]; Ill. v. Campbell, 329 U. S. 362, 91 L. ed. 348.

As the Federal statute creates a right to prior payment out of the assets of an insolvent, and not a lien against his property, assessment, registration, or sequestration by levy is not required. Bishop v. Black, supra; U. S. v. Okla., 261 U. S. 253, 67 L. ed. 638; U. S. v. Chamberlin, 219 U. S. 250, 55 L. ed. 204; U. S. v. Ayer, 12 Fed. (2d) 194 [1 USTC 173]; Meyersdale Fuel Co. v. U. S. , 44 Fed. (2d) 437 [1930 CCH 9633].

Thus it appears that the respective statutes upon which the parties rely are in irreconcilable conflict. Both cannot be given full force and effect. One must yield to the other. Which takes precedence?

An Act of the Congress adopted within the field of legislative powers granted to the national Government by the Constitution is a part of the supreme law of the land "and the judges in every state shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding." U. S. Const., Art. VI, sec. 2.

Hence, the priority of payment demanded by R. S. 3466, 31 USCA sec. 191, cannot be set aside by State legislation. Michigan v. U. S., 317 U. S. 338, 87 L. ed. 312 [43-1 USTC 9225], and cases cited; U. S. v. Texas, 314 U. S. 480, 86 L. ed. 356 [42-1 USTC 9162]. It must be observed, notwithstanding the positive language of G. S. 55-136. U. S. v. Emory, 314 U. S. 423, 86 L. ed. 315.

The lien of the employees is not specific or preferred in the sense necessary to give it precedence over the claim of the Government under the provisions of 26 USCA sec. 3672. It is not a lien that may be recorded. Neither may there be any levy upon or sequestration of property by the lienee for the satisfaction thereof. It arises only upon the institution of an action, the purpose of which is the sequestration of the property in the hands of the court for the purpose of liquidation, and the segregation of the property by the court is for the benefit of all the creditors and not the employees alone. This is not sufficient to bring the lien within the exceptive provisions of 26 USCA sec. 3672.

While the statute creates what is denominated a lien, it, in practical effect, grants to the employees of the insolvent a right of payment of the designated wages prior to the payment of any other claim, secured or unsecured. Cf. Rob erts v. Manufacturing Co., 169 NC 27, 85 SE 45. This preference is subordinate to the right of the appellant under the provisions of R. S. 3466, 31 USCA sec. 191.

It follows that the court below erred in directing the payment of the secured claims of the employees prior to the payment of the claim for taxes and interest filed by the appellant herein. To that extent the judgment entered is modified and, as so modified, the same is affirmed.

Modified and affirmed.

 

 

[51-1 USTC 9215]Ossie Bishop, trading and doing business as Bishop Construction Company v. D. H. Black and E. L. Hazen, trading as Mountain Crest Farms, and Vinnie Black

In the Supreme Court of North Carolina , No. 164 Spring Term, 1951, 64 SE2d 167, March 21, 1951

Appeal by the United States from RUDISILL, J., December Term, 1950, of Henderson .

Priority of tax claims against insolvent debtor.--Creditors who attached property of the debtor prior to appointment of a receiver were not entitled to priority of payment over the claims of the United States for income taxes, although the Government had no lien or right that could be enforced "against any mortgagee, pledgee, purchaser or judgment creditor" under Code Sec. 3672, because the attaching creditors had not reduced their claims to judgment prior to appointment of a receiver. Upon appointment of a receiver, the Government's right to priority of payment attached under R. S. 3466, 31 U. S. C. A. 191 (the general priority statute, as distinguished from the lien statute).

A. J. Redden, O. B. Crowell, and Paul K. Barnwell, for appellees. Thomas A. Uzzell, Jr., United States Attorney and James B. Craven, Jr., Assistant United States Attorney, for appellant.

This is an action instituted 11 October, 1949, in which the plaintiff alleged the defendants D. H. Black and C. L. Hazen, trading as Mountain Crest Farms, were nonresidents of North Carolina; that they were indebted to him in the sum of $1,705.88, and in which a warrant of attachment was issued and levied on certain personal property belonging to the defendants.

The plaintiff further alleged other creditors had filed suits and attached property of the defendants; that the debts of the defendants amounted to approximately $100,000, and that a large number of additional creditors were preparing to file suits and attach their property. Wherefore, the plaintiff prayed the court to appoint a receiver to take over the assets of the defendants and to restrain the creditors from instituting further suits and to require all the defendants' creditors to file their claims with the receiver in order that such claims might be adjudicated in said receivership. Accordingly, a temporary receiver was appointed and the appointment was made permanent on 7 November, 1949 . Thereafter, on 6 March, 1950 , the Receiver made his report to the March Term of the Superior Court of Henderson County , the pertinent parts of which are as follows:

"The undersigned duly appointed receiver in the above entitled action respectfully reports to the court * * * a list of the names of all creditors who have filed claims with him, as receiver, with the finding by the receiver as to the priority of each claim as provided by statute:

"1. The cost of this action to be taxed by the court.

"2. State Trust Company mortgage on real estate together with collateral note secured on bean seed, $23,052.22. This the receiver finds to be a first lien and prior claim on the money derived from the sale of the real estate and equipment of the defendants.

"3. State Trust Company, $7,158.83. Secured by chattel mortgage on farm equipment which has already been paid under former order of the court.

"4. To the U. S. Government for income tax liens filed: amount at this time not absolutely determined, but approximately, $2,691.39.

"5. Any other taxes that may be due the Government of the U. S., or the State of North Carolina, that have not been filed with the Receiver.

"6. Ossie Bishop, the sum of $715.00 by reason of sale of Buick automobile to W. R. Johnson for the sum of $730.00, which automobile had been attached by said Ossie Bishop prior to the appointment of your Receiver, your Receiver finding as a fact that such attachment constitutes a prior lien on funds derived from said sale.

"7. To Ben Israel the sum of $632.14, by reason of said Ben Israel having attached one Ford Truck which was sold to W. R. Johnson for the sum of $1,000 prior to the appointment of the Receiver in this cause, which the Receiver finds is a prior lien on the funds derived from the sale of said truck."

The report then deals with additional preferred claims, not pertinent to this appeal, and lists the common creditors who are entitled to share ratably in any assets remaining after payment of the preferred claims.

No exceptions were filed to the report of the Receiver.

After the payment of items two and three, as shown in the report of the Receiver, the only assets remaining in the hands of the Receiver, is a sum slightly in excess of $1000.

At the December Term, 1950, of the Superior Court of Transylvania County , the court entered an order purporting to determine the parties entitled to receive the funds then in the hands of the Receiver.

The court held that since the Receiver was appointed on 12 October, 1949, and "the Collector of Internal Revenue did not transfer and have docketed its claim from the State of Florida to the Collector of Internal Revenue, in Greensboro , against the defendants until several months thereafter", the United States is not entitled to recover on its claim. The order then states that the remaining parties having entered into an agreement prorating their claims which were approved by the Receiver as a preference, or preferred claim, the court ordered the Receiver to pay to Ben Israel the sum of $250.00, to Ossie Bishop $550.00, and to the State Trust Company the sum of $200.00, and to file his report and be discharged.

This judgment was entered by consent of the attorney of record who represents the plaintiff Ossie Bishop, and who also represented the Receiver at the hearing below, and by the respective attorneys representing State Trust Company and Ben Israel.

Upon being apprised of the entry of this judgment, the United States excepted thereto and gave notice of appeal to the Supreme Court.

DENNY, Judge:

The appellees move to dismiss the appeal for that the appellant failed to serve a statement of case on appeal pursuant to the order entered by his Honor on 13 December, 1950, and for the further reason that no notice was given the appellees or their attorneys of the hearing when the court adjudged that the record proper should constitute the case on appeal.

The correctness of the judgment entered below is the only question posed for decision, and that is presented by the exception noted.

When an error relied on by the appellant is presented by the record proper, no case on appeal is required. Russos v. Bailey, 228 N. C. 783, 47 S. E. (2d) 22. This cause was heard below on the report of the Receiver, therefore it was unnecessary to serve a case on appeal. Reece v. Reece, 231 N. C. 321, 56 S. E. (2d) 641; Privette v. Allen, 227 N. C. 164, 41 S. E. (2d) 364; Bessemer Co. v. Hardware Co., 171 N. C. 728, 88 S. E. 867; Commissioners v. Scales, 171 N. C. 523, 88 S. E. 868. The motion to dismiss is denied.

The appellant excepts and assigns as error the signing of the judgment entered below in that it directs the disbursement of the remaining assets in the hands of the Receiver in a manner contrary to the law governing priority of payments among creditors, and for the further reason that his Honor had no jurisdiction to reverse the findings of the Receiver in the absence of appropriate exceptions to his report.

In the case of Surety Corp. v. Sharpe, 232 N. C. 98, 59 S. E. (2d) 593, Ervin, J., speaking for the Court, sets out in a very comprehensive manner the duties of a receiver. It is pointed out that "the receiver must pass upon the validity and priority of the claims presented to him, and allow or disallow them or any part thereof, and notify claimants of his determination. * * * G. S. 55-152 * * * When this is done 'any interested person' may except to the reported finding of the receiver as to the claim, and contest such finding in the original receivership action without any leave from court provided he files his exceptions in apt time. * * * G. S. 55-152."

No exception having been taken to the report of the Receiver, this appeal turns upon whether the United States is entitled to priority of payment on the findings of the Receiver.

[Priority of Tax Claims]

The Congress of the United States in 1797 enacted a statute conferring upon the government a right of priority in payment out of the assets of an insolvent debtor of all claims due the United States . There has been no substantial change in this statute in the meantime, which is now R. S. 3466, 31 U. S. C. A. 191, the pertinent part of which reads as follows:

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied."

"It is well settled that the priority statute does not create a lien upon the debtor's property in favor of the United States , but merely confers upon the government a right of priority in payment out of that property in the hands of the debtor's assignees or other representatives, under the conditions specified in the statute." 28 Am. Jur., Insolvency, section 73, p. 819. Bramwell v. United States Fidelity & G. Co., 269 U. S. 483, 70 L. ed. 386; United States v. Emory, 314 U. S. 432, 86 L. ed. 314; 44 C. J. S., Insolvency, section 14(b), p. 374.

The priority of the United States, under the provisions of the above statute, attaches upon the appointment of a voluntary or involuntary receiver, Gordon v. Campbell, 329 U. S. 362, 91 L. ed. 348, or upon the date of debtor's assignment for the benefit of creditors, United States v. Waddill, Holland & Flinn, 323 U. S. 353, 89 L. ed. 294 [45-1 USTC 9126]; United States v. Texas, 314 U. S. 480, 86 L. ed. 356; Price v. United States, 269 U. S. 492, 70 L. ed. 373 [1 USTC 158]; In re Mitchell's Restaurant, -- Del. --, 67 A. (2d) 64 [49-2 USTC 9332]; Spokane Merchants' Asso. v. State, 15 Wash. (2d) 186, 130 P. (2d) 373 [42-2 USTC 9827].

However, the right to priority of payment under the above statute does not give the government any lien or right that may be enforced "against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector" in accordance with the provisions of 26 U. S. C. A. 3672.

The appellees, Ossie Bishop and Ben Israel, are creditors who attached property of the debtors prior to the appointment of the Receiver. Even so, they had not reduced their claims to judgment at the time the right of priority of payment in favor of the government arose. Hence, they cannot claim priority under the above statute. They were not mortgagees, pledgees, purchasers or judgment creditors at the time the right to priority of payment arose in favor of the United States . United States v. Texas , supra; MacKenzie v. United States (C. C. A. 9th Cir.), 109 Fed. (2d) 540 [40-1 USTC 9229].

Moreover, prior to the adoption of 26 U. S. C. A. 3670, 3671 and 3672, not even innocent purchasers for value, holders of recorded mortgages, or of unsatisfied judgments of record were protected from an unrecorded tax lien. United States v. Snyder, 149 U. S. 210, 37 L. ed. 705; MacKenzie v. United States , supra.

It is well, however, to keep in mind that priority of payment in favor of the government within the meaning of R. S. 3466, 31 U. S. C. A. 191, does not arise unless the debtor is insolvent. Louisiana State University v. Hart, 210 La. 78, 26 So. (2d) 361, 174 A. L. R. 1366 [46-1 USTC 9245]; United States v. Oklahoma, 261 U. S. 253, 67 L. ed. 638. But where a receiver is appointed the insolvency of the debtor, at the time of the appointment, is clearly demonstrated when it appears his assets when liquidated are insufficient to satisfy the claims of contesting creditors. Gordon v. Campbell, supra.

Now, as to the appellee, State Trust Company, it is difficult to understand why the court below approved the payment of any portion of the funds remaining in the hands of the Receiver to this claimant. It appears from the record that the State Trust Company filed only two claims with the Receiver and that both of them were paid in full. Furthermore, the only reference to an additional claim by this concern is found in an order signed by his Honor 10 October, 1950, which contains the following statement: "The court further finds that the State Trust Company has a claim in the amount of $1,020.00, which it claims to be a first claim prior to the three creditors set up in said report." How this claim arose, why it was not filed with the Receiver, and why it should be allowed as either a preferred or common claim is not disclosed by the record.

Since it appears that all claims filed with the Receiver, which were secured and superior to the claim of the United States under the provisions of 26 U. S. C. A. 3670, 3671 and 3672, have been paid in full, it is our opinion, and we so hold, that the claim of the United States for income taxes due from the debtors, claim for which was filed with, approved and reported by the Receiver, is entitled to full satisfaction out of the assets of the insolvent debtors before any additional claim or charge is paid except the costs incident to the receivership.

The judgment entered below is vacated and this cause is remanded for judgment in accord with this opinion.

Error and Remanded.

 

[50-1 USTC 9150]Victor L. Hicks, Receiver for Hensley E. Tann, Plaintiff v. Jean Carpenter, Defendant

In the Circuit Court for the County of Wayne in Chancery. State of Michigan, No. 433,598, January 3, 1950

Lien for taxes: Filing of notice: State requirements.--The U. S. lien for taxes is not valid against a receiver holding the proceeds of a sale of the property where the U. S. did not comply with the Michigan law requiring notices of lien to contain a description of the property subject to the lien.

Charles R. Forster, 2135 Cadillac Tower , Detroit 26, Michigan , Attorney for Plaintiff. Edward N. Barnard, 906 Dime Building, Henry M. Gottlieb, Assistant United States Attorney, 813 Federal Building , both of Detroit 26, Michigan , for Defendant.

Opinion of the Court

THE COURT: This proceeding grows indirectly out of a divorce action filed by Frances Tann against Hensley E. Tann. In that action the bill was filed October 3, 1947 . On November 5, 1947 , an order was entered directing the defendant to pay $150 per month as temporary alimony for the support of a minor child. At the present time the amount of accrued temporary alimony unpaid is far in excess of the sum in the hands of the Receiver in this proceeding and which is now at stake in this proceeding.

After the filing of the bill it was made to appear to this Court that there was certain real estate in the City of Detroit which needed to be admin istered for the protection of the estate. The plaintiff in this action was appointed the Receiver of that property April 28, 1948 . He instituted an action in equity against one Jean Carpenter, the defendant in this proceeding. This bill was filed by him as Receiver June 22, 1948. Service was had, issues were joined, and subsequently the proceeding was settled by stipulation between the parties under such terms and conditions that the property was sold. Fifty per cent went to the defendant, Carpenter; and fifty per cent went to the plaintiff, Hicks, as Receiver. Out of that fifty per cent, certain sums have been paid, as attorney fees, to Mr. Hicks as Receiver. The balance remaining in his hands is somewhere between seventeen and eighteen hundred dollars.

The United States Government has intervened in this proceeding by petition seeking to impress upon this fund a prior lien for income taxes levied as against the husband in the divorce proceedings. The amount of this claim is between eight and nine thousand dollars; and it would, of course, eat up the entire balance in the Receiver's hands.

The history of the United States in this connection is as follows: A warrant for distraint was signed by Giles Kavanaugh, Collector of Internal Revenue, June 20, 1947 . A notice of tax lien was executed September 4, 1947. This notice of tax lien gave notice of a claim for unpaid income taxes by the defendant husband in the divorce proceedings, but did not describe any real estate within the City of Detroit upon which this claim would attach as a lien. This notice of tax lien against Hensley Tann, as already stated, claims an amount of unpaid income taxes around $9000, and claims a lien upon all his real and personal property; but does not describe any real or personal property to which that lien attaches. Nothing further was done under this claim of lien by the United States Government until October 4, 1949, at which time Mr. Hicks, the Receiver of the property, had given notice of an application to have his final account allowed, and to have instructions as to what to do with the balance of around $1700 in his hands. It was not until that moment that the United States Government bestirred itself, appeared in the action, and asked leave to intervene in order to claim under its lien the entire sum. The situation now stands that there is an order of this Court which was made in November of 1947 directing Hensley Tann to pay moneys for the support of his minor child. There is now due and unpaid upon that order several thousand dollars in excess of the sum of $1700 in the hands of the Receiver. That property has been sold, and the proceeds therefrom have been received and divided between the plaintiff Receiver and the defendant on stipulation, so that each party got fifty per cent of the proceeds. The United States Government now enters into the picture and claims that it is entitled to the entire fund in the hands of the Receiver, on the ground that its lien is a prior lien to every other claim against the property.

This is a very far-reaching claim, if valid. If it is valid, the purchaser at the Receiver's sale did not get a good title, because if this lien is valid his purchase was subject to a paramount lien of the United States Government for more than the entire purchase price. The settlement under which Jean Carpenter got fifty per cent of the proceeds of the sale is subject also to the paramount lien of the United States Government, and Miss Carpenter is liable to repay everything which she received as the proceeds of that sale. Also, the Receiver is subject in this proceeding to an order directing him to pay all the cash in his hands over to the United States Government. This is at the expense of a small child who needs food and clothes. The order for alimony was made for the purpose of feeding and clothing that child. Is the United States Government entitled to a paramount lien such as it claims? I don't think it is, for the reason that whatever claim it filed did not specify this property as being subject to the lien. No private citizen can claim a lien as against real estate in the State of Michigan unless he files a claim of lien, whether it be a mortgage or land contract lien, or mechanic's lien, or any other conceivable kind of a lien, including a lien issued or levy under execution issued by this Court, until he files copies of his lien in the Register of Deeds' office, describing and specifying the property to which his lien attaches. That is the law as far as private citizens are concerned, and that law is created for the protection of property rights of innocent third parties who deal with the titles to such lands.

The United States Government now claims the right to file a lien, naming the person who is the lienee, but not naming any property upon which it claims a lien for its unpaid income taxes. Such a claim as that would make it unsafe for anybody to buy and land in the State of Michigan . The only way that any intending purchaser can protect himself against such a claim would be by obtaining a list of all income tax liens which have been filed by the United States Government; and then going through that entire list and satisfying himself that none of those claimed lienees of the United States Treasury Department had any interest in the property involved in his intending purchase.

I think that any such position is totally indefensible. I think that the United States Constitution still prohibits Congress from taking property from individuals without due process of law; and I think that any such law as is claimed in behalf of the United States Government here in this proceeding would be a taking of property without due process of law. It would, in effect, render it impossible to deal in the title to real estate.

For these reasons, the petition of the United States is denied.

MR. FORSTER: The Receiver's account will stand approved as presented?

THE COURT: Yes, the Receiver's account will stand approved as presented.

MR. FORSTER: And, the Receiver is ordered to pay the balance according to the account?

THE COURT: The Receiver is ordered to pay the balance according to the account. You may prepare, and present such an order as that. Of course, you have to give the United States notice of the presentation of the order.

 

 

[49-2 USTC 9332]In re Receivership of Mitchell's Restaurant, Inc.

In the Court of Chancery of the State of Delaware in and for New Castle County, 67 A2d 64, June 28, 1949

Priority of claim for federal taxes over claim for state unemployment contributions.--Under Sec. 3466, Rev. Stat., the claim of the United States for withheld income taxes and social security taxes owing by a taxpayer in voluntary receivership is entitled to priority in payment over a claim for state unemployment contributions. The claim of the United States was also a prior lien on the taxpayer's assets as against the state by virtue of Code Secs. 3670-3672, because even though the lien was subordinate to a prior valid mortgage which allegedly was subordinate to the state claim under state law, it was not shown that the unpaid contributions due the state were also liens on the taxpayer's assets. The United States not having challenged prior payment of the mortgage debt from the proceeds of a bulk sale of the taxpayer's property, the remaining funds were directed to be applied to the claim of the United States .

Frank L. Speakman, of Wilmington , for Delaware Unemployment Compensation Commission, Daniel L. Herrmann, Assistant United States District Attorney, of Wilmington , for the United States .

PETITION of the receiver for instructions with respect to the priority of certain claims filed by creditors.

The attorneys for the Delaware Unemployment Compensation Commission and for the United States Government filed an agreed statement of facts.

[The Facts]

HARRINGTON, Chancellor:

The insolvency of the corporation was alleged in the bill and admitted in the answer, and on December 12, 1947, the receiver was appointed on that ground. 1

[Taxpayer in Receivership]

Mitchell's Restaurant, Inc., was engaged in the retail liquor business in the City of Wilmington , and its personal property which came into the hands of the receiver was appraised as follows:

"Furniture and equipment ....           $1821.30

Alcoholic liquors ............             312.02

Soft drinks ..................              51.25

Total ........................         $2184.57"

 

The corporation had no real property. The furniture and equipment owned by it included a Walk-in refrigerator appraised at $800, which was purchased on a conditional sales contract, and was returned to the conditional vendor by order of this court.

Other furniture and equipment, appraised at $643.70, was subject to a chattel mortgage for $500.00, dated November 26, 1946, held by the Central National Bank of Wilmington . The residue of such property not subject to any liens was appraised at $740.87.

In an effort to find a purchaser for the corporate assets, the receiver was authorized to operate the business for a short period. An offer of $3500 was made for all of the property of the corporation except the fixtures covered by the chattel mortgage, or, in the alternative, an offer for $4,000 for all of such property, clear of liens. The receiver found that he could settle the chattel mortgage by the payment of the principal debt without interest, and by order of this court the $4,000 offer was accepted and the mortgage creditor was paid from the proceeds of the sale. Certain expenditures in connection with the operation of the corporate business by the receiver and allowances to him and his counsel reduced the fund in the receiver's hands for the payment of record costs and claims to $1,367.07.

The agreed statement of facts does not expressly state that Mitchell's Restaurant, Inc. was an employer within the meaning of Chapter 258, Volume 41, Laws of Delaware, as amended by Chapter 280, Volume 43, Laws of Delaware, but that is the necessary inference from the facts agreed on.

[State and Federal Tax Claims]

The Delaware Unemployment Compensation Commission filed a claim for unpaid contributions, including penalties, amounting to $1,139.44, to which interest was to be added from specified dates, as follows:

                                                                                          Interest on

"For the Periods                              Amounts of                                  Amounts of

Covering                                    Contributions         Penalties             Contributions

Oct. 1, 1946 to Dec. 31, 1946 .....              $ 231.33                          From Feb. 1, 1947

Jan. 1, 1947 to Mar. 31, 1947 .....                252.18            $ 5.00        From May 1, 1947

April 1, 1947 to June 30, 1947 ....                115.93              5.00        From Aug. 1, 1947

July 1, 1947 to Sept. 30, 1947 ....                270.00              5.00        From Oct. 1, 1947

Oct. 1, 1947 to Dec. 31, 1947 .....                250.00              5.00        From Feb. 1, 1948

                                                 $1119.44          $20.00"

 

The United States filed a claim for unpaid withholding and social security taxes amounting to $2,671.58. Notices of liens for these taxes were also filed in the Recorder's Office for New Castle County , as follows:

Date of

Filing                                  Date Assessment

Notice                Amount of          Lists Received         Taxable Period

of Lien             Assessments            by Collector                  Ended

May 20,

1947 ......             $923.28            May 13, 1947          Dec. 31, 1946

May 20,

1947 ......              203.04          April 22, 1947          Dec. 31, 1946

May 20,

1947 ......              122.21          April 24, 1947          Dec. 31, 1946

June 17,

1947 ......              806.01           June 11, 1947         March 31, 1947

Dec. 29,

1947 ......              617.04          Sept. 25, 1947          June 30, 1947

                                          Oct. 15, 1947

                                        June 13, 1947"
 

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