¶9394]State Tax Commission v. Union General Corporation (National City
Bank of N. Y.)
Supreme Court. Special Term. Part 1, No. 41507, 1953, 144 NYS2d 75, July
[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.
15 Park Row,
, N. Y., for plaintiff. William I. Rodier, Jr., and Sherman, Sterling
20 Exchange Place
, N. Y., for defendant. J.
Attorney for the Southern District of New York, for the
Motion by the
State Tax Commission of the State of
, 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
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.
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,
April 9, 1953
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.
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).
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).
the motion is denied without prejudice to the institution of a plenary
¶9310]Art Motors, Inc. v. Scheer
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.
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
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.
295 Madison Ave.
, for plaintiff. Leonard P. Moore, United States Attorney, 521 Federal
, for defendant. Mr. Javitts for the Attorney General's office for the
. Jacob Levy,
82 Fourth Ave.
, Bay Shore,
, was the referee.
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
. 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
claims a lien of $17,493.36, and the State of
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
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
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 * * *."
introduced into evidence without objection before the referee claimant
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.
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
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
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 * * *."
appear from this language that the State of
would be a "judgment-creditor" as claimed.
Court of the
, however, has decreed otherwise. Moreover, the relative priority of the
lien of the
for unpaid taxes is always a federal question, to be determined by
federal law (Illinois v. Campbell, 329
, 362, 371). It has held that while a state is free to give its own
interpretation for the purpose of its own internal
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
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
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.
shall be paid to the
United States of America
. Settle order on notice.
¶9663]Josephine Geitz, Plaintiff, R. Shad Bennett, Intervenor,
Appellant v. Chester Gray, Defendant, United States of America,
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.
Bennett, 44 South Central Avenue, Clayton 5, Mo., pro se. Harry
Richards, United States Attorney,
ert E. Brauer, Assistant to United States Attorney, Room 402, New
Federal Building, Twelfth and Market Streets, St. Louis 1, Mo., for
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
, 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
, (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.
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
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
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.
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.
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
The lien of
respondent came into existence on the date the assessment list was
received by the collector. Section 3671, supra; Citizens Bank of
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
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.,
. 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];
v. Phillips, supra; MacKenzie v.
v. Security Tr. & Sav. Bk., 340
47 [50-2 USTC ¶9492].
Acquired Property Subject to Lien]
Title 26, U.
S. C. A., Section 3670, has been construed as extending the lien of the
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.
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.
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.
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.
concluded that the judgment of the trial court was proper and should be
affirmed. It is so ordered.
Special Judge, concurs.
Motion for Rehearing--(July 15, 1955)
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
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.
Sup., 201 S. W. (2d) 342.
that the claim of the National Refining Company was entitled to
priority, the Circuit Court of Appeals said, 1. c. 955:
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.
motion for rehearing should be overruled. It is so ordered.
"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."
"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
3672. Validity against mortgagees, pledgees, purchasers, and judgment
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--
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
¶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
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.
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.
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.
deposited said sum in Court and names as defendants in interpleader
certain parties who may be classified as follows:
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.
Division of Labor Law Enforcement, State of
, on behalf of Frank Francisco, its statutory assignor, claiming a lien
for wages incurred and owed in connection with construction of the
Department of Employment, State of
, claiming three separate liens on the property to secure payment of
contributions owing under the Unemployment Insurance Act of California.
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.
Mechanic's lien claimants, whose liens have been filed but not reduced
to judgment nor supported by action for foreclosure within the statutory
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
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
It has been
stipulated by counsel for all parties as follows:
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
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.
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
Gibson Lumber Company
Division of Labor Law Enforcement as statutory assignee of Frank
Suverkrup Lumber Company
in order of priority (excepting as may be determined to be entitled to
full preference, i. e., claim of
United States of America
California Department of Employment
Smith-Grubb Company (as Judgment Creditor)
Elliott Precision Block Company
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:
The second trust deed on the property having been lost by merger with
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;
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;
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.
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:
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
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.'
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."
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
, were entitled to priority. This decision was based upon a similar
statutory provision in
to that existing under the laws of
, 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
existed by virtue of Section 3670, Title 26, Internal Revenue Code.
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:
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."
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
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:
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
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
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].
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
It is the
opinion of the Court that claims of the
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
be entered finding that the find on deposit with the
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
¶9556]Division of Labor Law Enforcement, Department of Industrial
Relations, State of California, Plaintiff v. Louis Plotnek et al.,
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,
became assignee in her place with the approval of the creditors'
committee. The assets were sold after
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
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.
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.
Receipts and Disbursements]
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:
salary of $1100 paid by Irving Adams to himself.
and wages amounting to $1638.27 to employees from January 2 to April 9,
of $325 paid to his attorney and M. Libman's attorney.
in the sum of $637.50 from December 7 to April 9.
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.
labor and delivery expenses totaling $437.35.
bills in the sum of $146.54.
costs of $124.68.
total disbursements amounted to $10,138.48.
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.
Filed with Assignee]
and other governmental agencies filed claims with the assignees for
unpaid taxes of the defendant Louis Plotnek. These claims are as
The claim of the
in the sum of $806.95.
S. Rev. Stats. 3466.
v. Division of Labor Law Enforcement, 205 Fed. (2d) 857, (C. C.
A. 9th) [53-1 USTC ¶9219]
The wage lien claims of the plaintiff, Division of Labor Law
Enforcement, Department of Industrial Relations, State of
, in the sum of $883.98 under the provisions of Section 1204 of the Code
of Civil Procedure.
v. Division of Labor Law Enforcement, 166 Fed. (2d) 429 (C. C. A.
6756 Revenue & Taxation Code of the State of
(Sales and Use Tax Law)
The preferred claim of the State Board of Equalization in the sum of
6756 Revenue & Taxation Code of the State of
(Sales and Use Tax Law)
The claim of the City of
in the sum of $858.76. This claim is made up as follows:
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.
The claim of the
in the sum of $315.63, representing the tax on the 1947 unsecured tax
roll of the
, bearing assessment No. 387677.
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
Not Personally Liable]
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.
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
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.
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.
of any funds coming into the hands of the trustees or either of them,
first there should have been paid the claim of the
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)
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. (
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].)
deposited in court by the assignee Irving Adams, are impressed with the
lien of the above-mentioned claims of the
and such funds are ordered applied in the discharge thereof.
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.
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.
Claims Not Secured by Liens]
None of the
claims of the other governmental agencies, State Board of Equalization,
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.
Expenses Should Be Paid]
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.
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.
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
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.
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.
shall have judgment against cross-complainant Irving Adams, personally
for $74.80 for business license taxes due the City for his operations.
United States of America
v. Eisinger Mill & Lumber Co., Inc., et al.
the Court of Appeals of
, No. 158. October Term, 1952, July 2, 1953
Appeal from the Circuit Court for
Lien for taxes: Priority of creditors: Mechanic's lien.--Labor
and materials had been furnished before the assertion of a
tax assessment and the recording of a
tax lien upon certain property, but the mechanics' liens for labor and
materials were recorded subsequent to the
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.
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.
SOBELOFF, Chief Judge, DELAPLAINE, COLLINS, HENDERSON and HAMMOND,
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
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
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
, 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
. 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
. 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.
Effect of Mechanic's Lien]
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.
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."
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
question before us in this case is whether, under the Federal decisions,
the recorded lien of the
, 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
210, was decided on May 1, 1893, the Internal Revenue Code contained no
protection for third parties against the secret unrecorded tax lien of
. In that case the Supreme Court held that the tax lien of the
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
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
329 [43-1 USTC ¶9224] and Michigan v. United States, 317
338 [43-1 USTC ¶9225].
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
71, 76. It was said by this Court in
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
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.
Cas. Co. v. Lacios, 121
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.
, 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
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,
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
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
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.
, supra, the Supreme Court held that the unrecorded lien of the
for estate taxes which arose at the date of death held priority over tax
liens of the State of
regardless of the construction of the state statutes by the state
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
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
. 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
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
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
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
ex rel. Gordon v.
, supra (329
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."
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
had priority that Court said among other things: "We conclude that
whatever the tax proceedings of the Town of
may amount to for the purposes of the State of
, 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
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
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
. 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
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
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
490; Moors v.
322. In the case now before us, the hoops remained in the possession and
under the control of McCauley."
Liens Not Judgments]
liens here could not be regarded as within the exception of
"judgments". It was said in
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
, 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
. Van Bibber v. Reese, 71
608, 615; McHugh v. Martin, --
--, 81 Atl. (2d) 623, 626.
of Federal Law]
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.
v. Snyder, 149
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.'
v. Smith, 13 Pet. 464, 483; Rankin v. Scott, 12 Wheat. 177,
179; Howard v. Railway Co., 101
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
authorities hereinbefore cited, we must hold that the recorded tax liens
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.
reversed, with costs, and cause remanded for further proceedings.
Sturgill, et al. v. Lovell Lumber Company, a Corporation, et al.
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
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
by federal statute.
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
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.
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.
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
, intervenor, filed a claim for corporation license taxes, unemployment
compensation taxes, and business and occupation taxes, amounting to a
total of $3,064.92.
Findings on Priorities]
Upon a hearing
before the special commissioner in chancery, the claims of the original
United States of America
and the State of
, 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.
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.
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
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
Government relies on a statute reading in part as follows:
"Whenever any person indebted to the
is insolvent, * * * the debts due to the
shall be first satisfied; * * *" §3466, id.
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
debts due the
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
, 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.
483, 129 S. E. 399.
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
, 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.
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
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
v. Campbell, 329
362, 67 S. Ct. 340, 91 L. ed. 348;
747, 92 L. ed. 968.
In many of the
foregoing instances where the
was given priority under §3466, id., there was a question of
whether the lien asserted in opposition to priority of the
was specific. The Supreme Court of the
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
v. Maclay, supra; United States v. Waddill Co., supra;
, 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.
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.
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
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
, 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.
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.
part; reversed in part; and remanded.
Given, J., does not participate in the decision of this case.
¶9109]I. W. Leggett v. Southeastern People's College, Inc.
Supreme Court, No. 524. Fall Term, 1951, 68 SE2d 263, Filed December 12,
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
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.
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
proceeding heard on the report of the receiver allowing and fixing the
priorities of claims filed for payment.
was adjudged insolvent and on
12 January 1950
, a receiver was appointed to liquidate its assets. Claims were filed as
employees of the corporation aggregating more than $65,000, claiming a
lien on the assets of the corporation for the payment thereof under G.
(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:
(4) By the
for income tax, employer's contributions, etc., with penalties and
interest in the sum of $1,417.99; and
unsecured creditors in the amount of $27,475.31.
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:
Priority of Claims]
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
for taxes in the amount of $3,541.29 plus interest, classified second in
order of payment.
(3) The State
claim for taxes in the amount of $1,417.99, classified third in order of
claims allowed in the amount of $17,683.36, classified fourth in order
States Government fines, allowed $88,000, classified fifth in order of
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.
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.
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
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.
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. . . ."
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
. 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.
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.
v. Marxen, 307
200, 83 L. ed. 1222.
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.
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
881; U. S. v. Anderson, 269
422, 70 L. ed. 347 [1 USTC ¶155].
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
within the meaning of 31 USCA sec. 191. Bishop v. Black, supra; Price
v. U. S., 269
492, 70 L. ed. 373 [1 USTC ¶158]; Ill. v. Campbell, 329
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.
, 44 Fed. (2d) 437 [1930 CCH ¶9633].
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
Const., Art. VI, sec. 2.
priority of payment demanded by R. S. 3466, 31 USCA sec. 191, cannot be
set aside by State legislation. Michigan v. U. S., 317
338, 87 L. ed. 312 [43-1 USTC ¶9225], and cases cited; U. S. v.
480, 86 L. ed. 356 [42-1 USTC ¶9162]. It must be observed,
notwithstanding the positive language of G. S. 55-136.
v. Emory, 314
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.
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
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.
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.
¶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
the Supreme Court of
, No. 164 Spring Term, 1951, 64 SE2d 167,
March 21, 1951
Appeal by the
from RUDISILL, J., December Term, 1950, of
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.
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
, the pertinent parts of which are as follows:
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:
The cost of this action to be taxed by the court.
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.
State Trust Company, $7,158.83. Secured by chattel mortgage on farm
equipment which has already been paid under former order of the court.
To the U. S. Government for income tax liens filed: amount at this time
not absolutely determined, but approximately, $2,691.39.
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.
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.
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
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.
were filed to the report of the Receiver.
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.
December Term, 1950, of the
, 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
to the Collector of Internal Revenue, in
, against the defendants until several months thereafter", the
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.
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.
apprised of the entry of this judgment, the
excepted thereto and gave notice of appeal to the Supreme Court.
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.
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.
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."
having been taken to the report of the Receiver, this appeal turns upon
is entitled to priority of payment on the findings of the Receiver.
of Tax Claims]
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
. 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:
any person indebted to the
is insolvent, or whenever the estate of any deceased debtor, in the
hands of the executors or
istrators, is insufficient to pay all the debts due from the deceased,
the debts due to the
shall be first satisfied."
is well settled that the priority statute does not create a lien upon
the debtor's property in favor of the
, 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.
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
(2d) 186, 130 P. (2d) 373 [42-2 USTC ¶9827].
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.
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
, supra; MacKenzie v.
(C. C. A. 9th Cir.), 109 Fed. (2d) 540 [40-1 USTC ¶9229].
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
210, 37 L. ed. 705; MacKenzie v.
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
C. A. 191, does not arise unless the debtor is insolvent.
State University v. Hart, 210
78, 26 So. (2d) 361, 174 A. L. R. 1366 [46-1 USTC ¶9245]; United
States v. Oklahoma, 261
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
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.
entered below is vacated and this cause is remanded for judgment in
accord with this opinion.
¶9150]Victor L. Hicks, Receiver for Hensley E. Tann, Plaintiff v. Jean
the Circuit Court for the
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.
, Attorney for Plaintiff. Edward N. Barnard, 906 Dime Building, Henry M.
, both of
, for Defendant.
of 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
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.
filing of the bill it was made to appear to this Court that there was
certain real estate in the City of
which needed to be
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
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
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
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
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
. 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
reasons, the petition of the
The Receiver's account will stand approved as presented?
Yes, the Receiver's account will stand approved as presented.
And, the Receiver is ordered to pay the balance according to the
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
notice of the presentation of the order.
¶9332]In re Receivership of Mitchell's Restaurant, Inc.
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
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.
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
Unemployment Compensation Commission, Daniel L. Herrmann, Assistant
United States District Attorney, of
, for the
the receiver for instructions with respect to the priority of certain
claims filed by creditors.
for the Delaware Unemployment Compensation Commission and for the United
States Government filed an agreed statement of facts.
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
Restaurant, Inc., was engaged in the retail liquor business in the City
, 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"
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.
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
. The residue of such property not subject to any liens was appraised at
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.
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.
and Federal Tax Claims]
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:
"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
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
, as follows:
Filing Date Assessment
Notice Amount of Lists Received Taxable Period
of Lien Assessments by Collector Ended
1947 ...... $923.28 May 13, 1947 Dec. 31, 1946
1947 ...... 203.04 April 22, 1947 Dec. 31, 1946
1947 ...... 122.21 April 24, 1947 Dec. 31, 1946
1947 ...... 806.01 June 11, 1947 March 31, 1947
1947 ...... 617.04 Sept. 25, 1947 June 30, 1947
Oct. 15, 1947
June 13, 1947"