Prior Law Page4

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Other claims were filed by general creditors having no preferential rights, but the entire fund in hand, less costs, is applicable either to the claim of the United States or to the claim of the Delaware Unemployment Compensation Commission and the question is which has priority.

[Priority of Claims]

The United States contends (1) that under U. S. Revised Statutes §3466, 31 U. S. C. A. §191, its claim for withholding and social security taxes due from the corporation is preferred in payment to unpaid contributions to the State Unemployment Commission, and (2) that its claim is also a prior lien on the assets of the corporation under Title 26 U. S. C. A. §3670-3672.

Section 3466 (31 U. S. C. A. §191) provides:

"Whenever any person indebted to the United States is insolvent * * * the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor not having sufficient property to pay all his debts, makes a voluntary assignment thereof, * * * as to cases in which an act of bankruptcy is committed."

The priority given the debts of the United States under this section, therefore, applies only in cases of the insolvency of a debtor, and that condition must be manifested in one of the modes mentioned in the statute.

A voluntary or "consent receivership" on the ground of insolvency is a "voluntary assignment" of the debtor's property within the meaning of Section 3466. Price v. United States, 269 U. S. 491 [1 USTC ¶158]; United States v. Butterworth-Judson Co., 269 U. S. 504 [1 USTC ¶159]; see also West Coast Power Co. v. Southern Kans. Gas Co., 20 Del. Ch. 130. Furthermore, an act of bankruptcy is committed is a person "(5) while insolvent or unable to pay his debts as they mature, procured, permitted, or suffered voluntarily or involuntarily the appointment of a receiver or trustee to take charge of his property." 11 U. S. C. A. §21(a), supp., p. 87, 52 Stat. 844.

Indeed, under the facts of this case, when the receiver was appointed, insolvency in the broad sense could hardly be denied. Cf. Illinois v. Campbell, 329 U. S. 362; Massachusetts , et al., v. United States , 333 U. S. 611.

Section 3466 is construed liberally and the word "debts" includes taxes due the United States . Price v. United States, supra; United States v. Emory, 314 U. S. 432; Massachusetts , et al. v. United States , supra; Churchill v. S. W. Straus Invest. Corp., 25 Fed Supp. 316 [38-2 USTC ¶9574].

The Unemployment Compensation Statute (§14, Chapt. 258, Vol. 41, Laws of Del, p. 774, as amended by §20, Chapt. 280, Vol. 43, Laws of Del., p. 1155) provides:

"In the event of any distribution of an employer's assets pursuant to an order of any court under the laws of this State, including any receivership, assignment for benefit of creditors, adjudicated insolvency, composition or similar proceeding, contributions then due or thereafter falling due shall be paid in full prior to all other claims except taxes due the United States or the State of Delaware which by statutory provisions are prior liens on the said assets * * *."

In distributing an employer's assets in a receivership, this statute, with certain exceptions, therefore, purports to give prior rights to unpaid contributions due the Commission, but the priority given the United States by Section 3466, though not a lien, cannot be impaired or superseded by state law. Spokane County v. United States, 279 U. S. 80 [1 USTC ¶387]; Illinois v. Campbell , supra; Churchill v. S. W. Straus Invest. Corp., supra; Decker v. Decker Bldg. Material Co., 118 N. J. Eq. 177; West Coast Power Co. v. Southern Kans. Gas Co., supra. In the latter case, in paying claims against an insolvent corporation in the hands of a receiver, the question was whether income taxes due the United States were entitled to priority over the State's claim for franchise taxes. The Chancellor said:

"The provisions of article 6 of the Constitution of the United States, which declare inter alia, that the laws of the United States which shall be made in pursuance of the Constitution, shall be the supreme law of the land, require that the priority conferred by section 3466 of the U. S. Revised Statutes, above quoted, should outrank the preference which is given to the State by section 69 of the Franchise Tax Law * * *."

[Proceeds of Mortgaged Property]

Applying these principles, in the absence of other controlling circumstances, the claim filed by the United States for taxes would be entitled to be priority in payment over the claim of the State Unemployment Compensation Commission. The Unemployment Compensation Commission concedes this, with respect to the proceeds of corporate assets not subject to the chattel mortgage at the time of the appointment of the receiver. It claims, however, that applying the principles of Ferris v. Chic-Mint Gum Co. (14 Del. Ch. 232), its claim for unpaid contributions has a prior right to that of the United States, with respect to the proceeds of the sale of the mortgaged property. The receiver, pursuant to authority given, sold all the corporate assets in a single lot, and in the absence of some evidence as to the amount received from the mortgaged property, the Commission also claims that the proceeds should be determined by apportionment based on appraised value and the relation of that value to the total sale price.

As a general rule, by statute taxes due the United States are liens on the property of the taxable from the time the assessment list is received by the collector, though it seems that a demand for payment must be made and a notice of the lien filed in a place which may be prescribed by state statute. Title 26, U. S. C. A. §§ 3670, 3671, 3672, 53 Stat. 448, 449. Pursuant to that power, the Legislature by Section 3355 of the Revised Code of 1935 provided:

"Notice of liens for taxes payable to the United States of America * * * shall be filed in the office of the Recorder of Deeds of the County or Counties in this State, within which the property subject to such lien is situated."

But, though the notice be filed pursuant to this statutory provision, the tax lien of the United States is not valid "as against any mortgagee, pledgee or purchaser of such security, for an adequate and full consideration in money or money's worth, if at the time of such mortgage, pledge or purchase such mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of such lien." Title 26, U. S. C. A. §3672. Cf. In re Decker's Est., 335 Pa. State 331 [46-2 USTC ¶9399], certiorari denied 331 U. S. 807.

The acts of Congress above referred to, largely stem from United States Revised Statute §1386, as amended.

The chattel mortgage covering a part of the corporate property was dated November 26, 1946, and it is at least tacitly conceded that it was a duly and promptly recorded lien. The United States ' tax liens were filed in the office of the Recorder of Deeds for the county between May 20, 1947, and December 29th of that year, and no assessment was received by the Collector of Internal Revenue until May 13, 1947.

In Ferris v. Chic-Mint Gum Co., supra., there was a mortgage lien on corporate real property which came within the exception in 26 U. S. C. A. §3672, and also unpaid state, county and city taxes which, pursuant to state statute, were conceded to have priority over the mortgage. All of these claims were filed. There was also a claim for unpaid corporate income taxes due the United States . The fund in the hands of the receiver was insufficient to pay both the mortgage and the preceding local tax liens in full. Under the circumstances, the Chancellor held that such tax liens, as well as the mortgage creditor, had prior rights to the claim of the United States . In reaching that conclusion, he said:

"When the government agreed by Section 3186 to take rank after the mortgagee, it must necessarily follow that it is subordinate in rank to those who are superior to its immediate senior.

"This conclusion is applicable to the peculiar facts of this case."

See, however, Spokane County v. United States , supra.

But that part of the Unemployment Compensation Commission statute, as amended, above quoted, and the agreed facts do not indicate that the unpaid contributions due the Commission were liens on the corporate assets, and Ferris v. Chic-Mint Gum Co. is not in point. Furthermore, it is unnecessary to consider whether such claims could have been made valid liens under other provisions of the statute prior to the appointment of the receiver. Cf. Theisen, admr., v. Hoey, et al., -- Del. Ch. --, 58 A. 2d 569.

In the Ferris Case, the Chancellor also said:

"Because of the fact that the proceeds from the sale of the real estate are insufficient to take care of all liens, it has not been necessary to examine the general question of the relative rights of Federal and State governments in asserting their respective claims for taxes."

As we have seen, the Chancellor subsequently discussed that question in West-Coast Power Company v. Southern Kansas Gas Company, supra.

The United States does not attack the order directing the payment of the principal debt of the chattel mortgage from the proceeds of the sale of the property in bulk. 26 U. S. C. A. §3672, supra. Furthermore, while the procedure was somewhat unusual, there is nothing to indicate that the property covered by the mortgage was worth less than its appraised value.

The fund in the hands of the receiver, less any unpaid costs (Ferris v. Chic-Mint Gum Co., supra), is applicable to the claim of the United States .

An order will be entered accordingly.

¹ After the appointment of the receiver, it was discovered that, through some oversight, the corporate charter had not been filed in the office of the Secretary of State and recorded according to law, but Mitchell's Restaurant, Inc., having operated as a corporate entity, was held to be a de facto corporation, for which a receiver could be appointed.

 

 

[47-2 USTC ¶9360]Harrisburg Trust Company v. Snyder

In the Court of Common Pleas, Cumberland County, Pennsylvania, February Term, 1946, Filed March 21, 1947

Lien of United States for taxes: Validity against mortgages: Wages and attorneys' fees under Pennsylvania law.--In an action to determine the distribution of proceeds of sale of chattel mortgage property in the hands of the sheriff, it was held that the lien of the United States for taxes had priority over claims of the holder of the mortgage recorded subsequent to the attachment of the tax lien, but the latter was subordinate to a lien for wages earned prior to the date of the tax lien to the extent that, under Pennsylvania law, they were earned in the 6-month period preceding the sheriff's sale. Attorneys' fees in that State are not a preference out of the money raised by their services when the proceedings are in a common law action or form money in the hands of a sheriff under a writ of execution. Nor are such fees in a confession judgment in a better position than the principal debt confessed.

Russell B. Updegraff, for plaintiff and himself. Frederick V. Follmer, for United States . Rob ert L. Meyers, Jr., for Arthur E. Love, wage claimant. Harold S. Irwin, for Sheriff.

REESE, P. J.:

On October 3, 1945 there was filed in the prothonotary's office a chattel mortgage executed by the defendant herein in favor of the plaintiff. On September 19, 1945 the Collector of Internal Revenue, on behalf of the United States , had filed three tax liens in the prothonotary's office against the defendant herein, aggregating approximately $5400.00.

On December 5, 1945 a writ of vend. ex. was issued on a judgment, entered on a warrant to confess judgment contained in a note attached to the chattel mortgage. Judgment was for the balance then due on the chattel mortgage, $3900.00, with interest from October 8, 1945, together with costs and an attorney's commission of fifteen per cent as provided in the warrant to confess judgment.

Thereafter, on December 17, 1945, after proper notice, the sheriff sold the personal property of the defendant to the plaintiff herein for $900.00. After deducting the costs of sale in the sum of $50.25, the balance, $849.75 was, by the return of the sheriff, placed in the hands of the prothonotary, the sheriff stating that it was impossible for him to determine proper distribution. Thereupon an auditor was appointed to make distribution.

Prior to the sheriff's sale two wage claims were filed with the sheriff, one by Arthur E. Love for $541.38 and the other by L. A. Johnson for $216.00. The auditor held hearings, at which various claims were proved. The wage claim of Love was proved, but the other wage claimant, Johnson, did not appear to prove his claim. A claim was also presented by Russell B. Updegraff, Esq., as attorney for the plaintiff herein, for $585.00, which he claims as the attorney's commission of fifteen per cent provided for in the warrant to confess judgment. In his report the auditor distributed the fund, as follows: (1) the payment of the costs of audit; (2) the docket costs of $60.25 in connection with the judgment and vend. ex.; (3) the wage claim of Arthur E. Love in the sum of $200.00, and (4) the balance to the Collector of Internal Revenue.

The United States has filed an exception, objecting to the allowance of the wage claim, and Mr. Updegraff has filed an exception, objecting to the disallowance of his claim for $585.00 as an attorney's fee.

In our opinion, the wage claim was properly allowed. Under the provisions of 36 USCA 3670 and 3672, unpaid taxes due the United States are a lien on all property, real and personal, of the delinquent taxpayer, but the lien is not valid as against any mortgagee, pledgee, purchaser, or judgment creditor until filed in the proper office, which, in this case, is the prothonotary's office of this court. Under 36 USCA 3671, "the lien shall arise at the time the assessment list was received by the collector and shall continue until satisfied." Two of the tax claims herein are dated September 10, 1945 and the other is dated September 12, 1945. Each of the claims recites the assessment against the defendant herein, but the date on which the assessment list was received by the collector is left blank in each claim and no evidence was offered before the auditor as to the date of which the assessment list was received by the collector. In the absence of any such evidence, the auditor properly assumed that the assessment list was received on the date of the claims, to wit, as to two of them on September 10, 1945, and as to the other on September 12, 1945. Therefore the government's lien dates from September 10th and 12th. The government made no claim for priority by reason of any sovereign prerogative. The sections quoted above merely give the government a lien for unpaid taxes.

[Lien for Wages]

The Act of April 9, 1872, P. L. 47, as amended, 43 P. S. 221, provides that wages of the type defined in the statute shall be a lien upon the employer's personal property used in his business to the extent of the interest of the employer in the property, and shall be preferred and first paid out of the proceeds of the sale of such personal property. It is also provided that protection against wage claims is accorded only to mortgages or judgments entered before such labor is performed. Liens created by mortgage or otherwise after the work is done cannot prevail against the wage claim: Bank v. Chemical Co., 9 Pa. Super. 275. Under the Act of 1872, supra, preference is given to a wage claim for any period not exceeding six months preceding the sale, and not exceeding $200.00. The wages claimed by the wage claimant herein were earned in the six months preceding the sale and ware also earned before the date of the government lien. As stated above, the government does not claim any sovereign priority. Therefore, it depends merely upon the position of its lien. Inasmuch as the lien for the wage claim dates from the time the wages were earned, it antedates the government's lien. The auditor was therefore correct in allowing the wage claim of $200.00 ahead of the government's lien for unpaid taxes.

[Attorney's Lien Subordinate]

Passing to the claim of Mr. Updegraff for an attorney's fee of $585.00, it is urged that he has a charging lien therefor on the fund for distribution under the principal that an attorney has a charging or equitable lien upon a fund which has been procured by the efforts of the attorney while acting on behalf of his client. That an attorney does have a charging lien under proper circumstances has been recognized in many cases; for example, in Harris's Appeal, 323 Pa. 124; Turtle Creek Bank and Trust Co. v. Murdock, 150 Pa. Super. 277; but, it was pointed out in Zinsser v. Zinsser, 83 Pa. Super. 461, 464 that the rule that an attorney may claim his fees as a preference out of money raised by his services when it has come within the grasp of the court, applies only to a court of equity, or to a proceeding in the Orphans' Court; and that it does not apply to a common law action or to money in the hands of a sheriff under a writ of execution. It was also held in Quakertown & Eastern Railroad Co. v. Guarantors' Liability Indemnity Co., 206 Pa. 350, and Irwin v. Workman, 3 Watts 357, that an attorney's charging lien does not apply to money in the hands of a sheriff under a writ of execution. To the same effect is Miners Savings Bank of Pittston v. Shepris, 25 Luz. L. R. 381; Blakeley's Petition, 39 D. & C. 675, and Dubois's Appeal, 38 Pa. 231. In the Dubois case, the court said that in distributing money in court the common pleas is guided by the liens of rocord; that the attorney has no title to the judgment which he secures, and not being an owner he cannot claim as a distributee. It was also pointed out in Harper v. Consolidated Rubber Co., 284 Pa. 444, that an attorney's commissions stipulated for in a warrant to confess judgment, are not costs but are part of the judgment and belong, not to the attorney, but to the plaintiff in the judgment, and that therefore such commissioners are to be preferred or postponed as the principal debt is preferred or postponed.

In Turtle Creek Bank & Trust Co. v. Murdock, 150 Pa. Super. 277, 283, it was pointed out that the cases, herein cited, holding that an attorney's charging lien does not apply to money in the hands of a sheriff under a writ of execution, were decided prior to Harris's Appeal, 323 Pa. 124, which has considerably broadened the scope of an attorney's common law charging lien. However, we do not think that what was decided in Harris's Appeal would permit a charging lien under facts such as those now before us. In Harris's Appeal, an attorney, after litigation, secured a favorable award in a condemnation proceeding for the owner of the condemned property. After the award was made, but before it was paid by the city, the holder of a mortgage on the property filed a petition to have the whole award paid to it as lien creditor, and it was held that the fund was first subject to the attorney's claim for the reasonable value of his services. Two facts must be particularly noted. The fund produced by the attorney's services was created for his client and belonged primarily to the client, and under an agreement with the client the attorney was to look to the fund for his compensation.

The facts in the Turtle Creek case are somewhat similar. An attorney for one Murdock, after the trial of an equity suit, finally established that Murdock was the legal owner of certain real estate, title to which was held by another as a resulting trustee. Shortly after the decree vesting title in Murdock, the plaintiff bank revived a judgment against Murdock, thus making it a lien on the real estate and thereafter execution was issued against the real estate and the property sold for less than the amount of the judgment. It was held that Murdock's attorney had a charging lien on the fund ahead of the judgment of the bank. Here again, the attorney's services succeeded in procuring a property for his client and which belonged primarily to his client, and under an agreement with the client the attorney was to look to the property or any fund derived therefrom for his compensation.

In the case before us the property that was sold belonged to the defendant herein, the judgment debtor. Mr. Updegraff's services did not procure any property or money for his client, the plaintiff herein, which belonged primarily to the plaintiff. It cannot be said that the fund realized by the sheriff's sale ever belonged, in any sense, to the plaintiff herein. The plaintiff merely had a lien, which post-dated the lien of the United States . Furthermore, there is nothing on the record to show any agreement with his client under which the attorney was to look to any fund realized by the sale for his compensation. The attorney seeks the full fifteen per cent on the amount owed to his client, or, in other words, fifteen per cent of $3900.00, although the sheriff's sale realized only $900.00. As already pointed out, such attorney's commission did not belong to the attorney nor does he have a changing lien therefor.

AND NOW, March 21, 1947, the exceptions to the auditor's report are overruled and dismissed, and distribution is ordered in accordance with the schedule of distribution in the auditor's report.

 

 

[46-2 USTC ¶9333]Joseph Dannenberg v. L. Leopold & Co.; U. S. , Intervenor

City Court of New York, N. Y., 65 NYS2d 549, July 1, 1946

Priority of lien for Federal taxes: Proceedings under Sec. 794 of New York Civil Practice Act: When judgment creditor's lien superior.--In a proceeding under Sec. 794 of the Civil Practice Act of New York, which allows intervention of judgment creditors to enforce their liens, it was held that a judgment creditor acquired a vested superior interest in a fund held by the City of New York by the institution of such proceeding, of which he was not divested when the United States subsequently perfected its tax lien as required by Code Secs. 3670 to 3672, although prior to the creditor's proceedings the Collector had served notice of lien upon the city. The lien of the United States had no validity against others until notice thereof was filed in the office of the clerk of the district court.

Justice SCHIMMEL:

Motions numbers 23 and 29 have been consolidated.

By the service of the third party subpoena upon the City of New York the judgment creditor acquired a lien upon the fund held by the city (Matter of Wickwire Spencer Co. v. Kemkit, &c., 292 N. Y., 139). It is, therefore, clear that the right of the judgment creditor is superior to that of Healy, who became the assignee of the fund after the third party order had been served. I do not consider the averments of the judgment debtor's employee, Bova, even if taken at full value, sufficient to establish a binding agreement by Dannenberg to subordinate to Healy.

The motion will therefore be granted to the extent of directing payment by the third party to the judgment creditor Dannenberg under section 794, Civil Practice Act, of the sum of $720.98, which is arrived at by deducting from $950 the city's set-off for taxes, amounting to $229.02.

The court cannot direct payment by the third party of any moneys to Cranford Co., Inc., as there is no statutory or other authority which would warrant the making of a summary order by this court requiring the third party to pay anything to that corporation. Section 794, Civil Practice Act, authorizes the making of an order directing a payment to a judgment creditor who has established his right under that statute. It does not provide for payment to anyone other than a judgment creditor. No order under section 794 may be made which is in derogation of the superior interest in the fund of Cranford Co., Inc., and enough of the fund should be left with the city to cover the Cranford claim plus interest, plus possible costs of litigation. For that reason it is directed that the third party, the city, pay to the creditor Dannenberg not $1,040.12, as asked by the latter, but $950 less the amount of the city's set-off for taxes. If there should be a surplus left after Cranford Co., Inc., has been paid in full, the creditor Dannenberg may make another application to take that surplus.

The claim of the United States of America , based upon its tax liens, is subordinate to that of the creditor Dannenberg. This, I think, is the necessary effect of Matter of Wickwire Spencer Co. v. Kemkit, &c. (supra). By the service of the third party subpoena the judgment creditor acquired a vested interest of which he was not divested when the United States of America subsequently perfected its levy. Concededly this occurred after the third party subpoena had been served. The third party subpoena was served November 2, 1944. The first of the various assessments upon which the government's claim is predicated was contained in an assessment list received in the officer of the Collector of Internal Revenue for the Third District of New York about November 14, 1944, and note and demand for payment were made the same day. The notice of levy was served by the Collector of Internal Revenue upon the Treasurer and Comptroller of the City of New York on July 16, 1945, and the final notice and demand were served upon the said treasurer and comptroller on November 5, 1945.

The applicable federal statute provides that the lien of the government is not "valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed by the collector--* * *. In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the state or territory has not, by law, provided for the filing of such notice; * * *" (53 U. S. Stat. at Large, 448; U. S. C., Title 26, paragraphs 3670 to 3672).

The government concedes that the notice of lien was not filed as required by the aforesaid statute, but claims that its right to the fund is derived from the service by it upon the City of New York of the notice of levy and warrant of distraint on July 16, 1945 . However, the right thus acquired by the city is "subject to an attachment or execution under any judicial process" (U. S. C., Title 26, section 3710).

The service of the third party subpoena by this judgment creditor effected an attachment upon the fund; it gave the judgment creditor a legal interest therein, the right of a lienor, superior to any which the government could acquire by a subsequent levy. In short, when the government made its levy there was no thing for it to levy upon as, for all practical purposes, the fund had then already been legally appropriated to the use of this judgment creditor.

Whatever view might have been taken before the Wickwire case was decided, it is clear now that the service of the third party subpoena gives the judgment creditor a specific lien or interest in the fund which has been subjected to the attaching or injunctive provision contained in such subpoena.

Settle order on notice to all parties.

 

 

[42-2 USTC ¶9688]Shenk Realty and Construction Company, Judgment Creditor, v. James W. Barrett, Judgment Debtor

City Court of New York, New York County, Special Term, 36 NYS2d 624, July 24, 1942

Lien for taxes: Priority of government lien.--Where a judgment creditor had done no more than serve its subpoena in an action to levy on royalties due to its judgment debtor from a third party, the right of the government to the royalties became complete by service of a copy of notice of tax lien, notice of levy and a warrant of distraint upon the third party which thereupon became liable for the amount of the tax, to the amount of the royalties in its possession.

Harry W. Pitt, for the judgment creditor. Stern & Reubens [Arthur E. Farmer of counsel], for the third party.

MOTION by judgment creditor, under section 794 of Civil Practice Act, to compel third party indebted to judgment debtor to pay over amount of indebtedness to judgment creditor. The motion is resisted on the ground that the Collector of Internal Revenue has a superior right to the indebtedness for taxes due the government from the judgment debtor, and that to compel the third party to pay over would subject it to liability to the government.

The relevant dates, so far as they appear from the papers are these. The judgment was obtained December 4, 1939 . On November 15, 1940 , a subpoena containing a reference to the restraining provision of section 781 of the Civil Practice Act, was served upon the third party. September 12, 1941 , the third party and the judgment creditor entered into a stipulation with respect to royalties then due the judgment debtor from the third party. On December 15, 1941 , the Collector served upon the third party a notice of levy, a notice of tax lien and a warrant of distraint. (53 U. S. Stat. at Large 456; U. S. Code, tit. 26, §3710.) The notice of lien was dated December 10, 1941 , and recited that there had been an assessment against the judgment debtor for income taxes for the year 1936. Neither the date of assessment nor the date of the receipt of the assessment list by the Collector is given; (53 Stat. at Large 449; U. S. Code, tit. 26, §3671) nor the date of the filing of the notice of lien with the appropriate court (53 U. S. Stat. at Large 449 as amd.; U. S. Code, tit. 26, §3672) but we must assume that it was filed and I shall assume that assessment and filing came after the service of the third party subpoena.

COLEMAN, J.:

The motion by the judgment creditor is denied. The right of the Government to the royalties became complete by the service of a copy of notice of tax lien, notice of levy and a warrant of distraint upon the third party which thereupon became liable for the amount of the tax, to the amount of the royalties in its possession. (53 U. S. Stat. at Large 456; U. S. Code, tit. 26, §3710.) "This [the service of a notice of levy and of a warrant of distraint] was an actual levy by the Collector upon the property of the tax debtors." (Sport-Craft, Inc. v. Lasker, 177 Misc. 872, 873.) Up to the time of the Collector's action the judgment creditor had done no more than to serve its subpoena. But the service of the subpoena alone gave the judgment creditor no such interest in any property or property rights of the judgment debtor in the hands of the third party as would stand in the way of the Federal statutes dealing with distraint. Those statutes prevail and under them the Government's right is paramount unless at the time of levy and demand the property was "subject to an attachment or execution under any judicial process." (53 U. S. Stat. at Large 456; U. S. Code, tit. 26, §3710.) There was no attachment or execution here in the strict sense, and the judgment creditor had yet, by taking other steps, to acquire a specific lien or interest in the judgment debtor's property. (Reynolds v. AEtna Life Ins. Co., 160 N. Y. 635; McCorkle v. Herrman, 117 id. 297.) In Manufacturers Trust Co. v. Sobel (175 Misc. 1067), where the government had filed a notice of lien, but had made no levy or had not distrained, its lien was held to be subordinate to that of a judgment creditor.

 

 

[41-1 USTC ¶9328]First National Bank of Alex , Oklahoma , a corporation, and L.O. Carter, Plaintiffs in Error, v. Southland Production Company, et al., Defendants in Error. First National Bank of Alex , Oklahoma , a corporation, and L.O. Carter, Plaintiffs in Error, v. Southland Production Company, et al., Defendants in Error.

In the Supreme Court of the State of Oklahoma. , Nos. 27,260, 27,261., 112 P2d 1087, 03/18/41

Appeal from the District Court of Oklahoma County .

Priority of claims.--In determining the validity of a first lien arising out of the preference of one creditor, the Court further determines the relative priorities of certain intervening parties. The lien for all taxes due the State for motor fuel is held superior to both the lien of the U.S. Government and that of various labor claimants, and the lien of the U.S. Government is held superior to that of the labor claimants. Two dissents.

Spielman, Cantrell & McCloud, for plaintiffs in error. William C. Lewis and George E. Massey, Jr., for appellee and cross-petitioner, United States . C.D. Cund, Thomas H. Owen, and Albert D. Lynn, for appellee and cross-petitioner, Oklahoma Tax Commission. Gordon Fuller and Frank Field, for appellees and cross-petitioners, Jack B. White and T.H. White. Roddie & Beckett, for defendants in error, cross-petitioners O.T. McNeil and others, labor claimants.

OSBORN, J.:

This is an appeal from a judgment of the District Court of Oklahoma County in Causes No. 88,307 and No. 88,320, consolidated for trial in that court.

[The Facts]

 

In Cause No. 88,307, the Southland Production Company, an express trust, through its trustees, hereinafter referred to as plaintiff, sued the Olympic Refining Company for a balance due on an open account in the sum of $943.18. Plaintiff petitioned the court for appointment of a receiver. The receiver was appointed and took charge of certain property of defendant.

It appears that defendant Olympic Refining Company, located at Oklahoma City , was engaged in the business of refining and marketing crude petroleum and its products. Certain motor fuel taxes were due the State of Oklahoma and to the United States Government. The Oklahoma Tax Commission and the Collector of Internal Revenue of the United States had issued tax warrants which were levied upon certain tank cars of oil involved in this action and under said warrants the Sheriff of Oklahoma County took possession of said cars of oil.

The First National Bank of Alex and L.O. Carter instituted a replevin action in the District Court, which is Cause No. 88,320, against the Sheriff for recovery of possession of the cars of oil and oil products herein involved. The Bank and Carter also intervened in Cause No. 88,307, and for convenience will be hereinafter referred to as interveners. The trial court entered an order requiring the Sheriff to deliver possession of the cars of oil to the receiver of defendant, Olympic Refining Company, which order was issued over the protest of the First National Bank of Alex and L.O. Carter.

Other parties intervened in the action including the State of Oklahoma and the United States claiming taxes for motor fuel sales, and laborers seeking to establish and foreclose laborers' liens.

The interveners, First National Bank of Alex and L.O. Carter, contended that there was a sale of the property involved herein by defendant Olympic Refining Company to Carter and a mortgage executed by him to the First National Bank of Alex and as a result of said transaction the Bank had a lien upon the property superior to the liens of the other parties asserting claims against the Olympic Refining Company. The trial court held that the sale was void and as a consequence the mortgage to the Bank was likewise ineffective and that the Bank was only a general creditor of the Olympic Refining Company. Joined in a cross-appeal are the Oklahoma Tax Commission and the United States , and various labor claimants appealing only from the order of payment of the various claims. The contentions of the First National Bank of Alex and L.O. Carter will be considered first. The circumstances under which they lay claim to the property involved herein are as follows:

The Olympic Refining Company was handling most of its sales of its products through L.O. Carter, an individual doing business at Tulsa , Oklahoma , as L.O. Carter Company. The Olympic Company did its banking business with the First National Bank of Alex , Oklahoma . Its affairs were practically all handled by Leslie Cole, the manager of the company. The manager would draw up invoices of carloads of its refined products and attach a draft drawn upon L.O. Carter, and deposit same in the First National Bank of Alex, to the credit of the Olympic Refining Company. The Alex Bank would then send the drafts with invoices to the First National Bank at Tulsa for collection from L.O. Carter. When Cole of the Olympic Company deposited these drafts with the Alex Bank, that bank would immediately give the Olympic Company credit on his checking account for the amount. The Alex Bank would allow these drafts to remain in the Tulsa Bank until Carter took them up; which usually was only when Carter sold the products which were represented by the draft and invoice. As a result, there accumulated an advancement by the Alex Bank to the Olympic Company of over $11,000.00. This practice had existed from July to September, 1935.

It appears that about the middle of September the cashier of the Bank, Mr. Grady Harris, became aware that the Bank had advanced more money to the Refining Company than banking regulations permitted. Said cashier met Leslie Cole, the manager of the Company, and L.O. Carter, on September 23, 1935, for the purpose of effecting some arrangement to relieve the condition occasioned by non-payment of the drafts. It is shown that the manager of the Refining Company offered to give a chattel mortgage to the bank on certain carloads of oil which it owned which were upon the freight yards in Oklahoma City . This was unsatisfactory to the Bank because it would not result in reducing the amount of the advancements from the Bank to the Company, which were already excessive. It was finally agreed between the three parties that Carter would buy all of the products of the Refining Company and would in turn give his promissory notes and chattel mortgage to the Bank upon the carloads of oil hereinabove referred to as security for the payment thereof. The amount of said notes was $4,949.61, and of said amount $3,122.79 was credited to the account of the Refining Company thereby reducing its indebtedness to the Bank in said amount and the sum of $1,823.82 was loaned from the Bank to the Refining Company for the purpose of paying taxes then due the Oklahoma Tax Commission. It does not appear that any consideration was paid by Carter to the Refining Company nor did he receive any portion of the proceeds of the notes hereinabove referred to. The good faith of the transactions related is not questioned, legal fraud only being relied on to assert invalidity.

The trial court found, and it is argued here, that the sale to Carter was violative of the provisions of section 10,008, O.S. 1931, 24 Okl. St. Ann. 6, which is as follows:

Every transfer of personal property other than a thing in action, and every lien thereon, other than a mortgage, when allowed by law, is conclusively presumed, if made by a person having at the time the possession or control of the property, and not accompanied by an immediate delivery, and followed by an actual change of possession of the things transferred, to be fraudulent and therefore void, against those who are his creditors while he remains in possession, and the successors in interest of such creditors, and against any person on whom his estate devolves in trust for the benefit of others than himself, and against purchasers or incumbrancers in good faith subsequent to the transfer.

[Status of Transaction in Question]

 

In the findings of the trial court it appears that this arrangement between the company, the bank and Carter is broken down into two separate transactions, it being held that the sale to Carter was void since there was no change of possession of the property sold, therefore the mortgage executed by him to the Bank was likewise void; but, as we see it, the transaction between the Refining Company, the Bank and Carter was a single transaction. There was not, in a strict sense of the word, a sale of the property to Carter within the meaning of that term as used in Section 10,008, O.S. 1931, 24 Okl. St. Ann. 6; but viewing the transaction as a whole it is apparent that Carter was selected by the Refining Company and the Bank as an intermediary or agent for the purpose of executing a mortgage which was designed to furnish protection to the Bank and to relieve the situation created by the excessive indebtedness of the Refining Company to the Bank. As a part of the same transaction Carter was appointed an agent for the bank to proceed to sell the carloads of oil upon which the mortgage was given and upon the sale thereof was to transmit the proceeds to the Bank to be applied upon the notes which he had executed to the Bank for the debt of the Refining Company. Summarizing, we are driven to the conclusion that the whole purpose of the transaction was to give to the bank which had advanced the money for the operation of the business a certain priority over the other creditors of the Refining Company which, under the provisions of the applicable statutes, is expressly authorized. Said statute, Section 10,012, O.S. 1931, 24 Okl. St. Ann. 11, is as follows:

Any person in this State indebted to other persons shall have the right to prefer one or more of such creditors in good faith to secure a valid debt, which preference may be manifested by payment, by mortgages, either real or chattel, or by the transfer of personal property or real estate, and if received by the creditor in good faith, such conveyance or mortgage shall be valid in the hands of the mortgagee and constitute a preference to the extent thereof, subject to the laws relating to the filing and recording of mortgages.

The fact situation to which we have just referred is somewhat analagous to the facts involved in Iowa National Bank v. Citizens National Bank, 70 Okl. 1, 172 P. 924, wherein it was held:

Where the owner of personal property, without fraud, executes a bill of sale therefor to another, said bill of sale being executed without consideration, and for the purpose of procuring money for the owner, of the property, retaining the actual possession of the property, and the one to whom such a bill of sale is made, with the knowledge and approval of the owner of the property, executes a mortgage upon the property, and the proceeds resulting from the sale and assignment of said mortgage is delivered to the owner of the property, such mortgage is a prior lien on said property to that of a mortgage subsequently executed by the owner of said property to secure a past indebtedness, where the mortgagee of said subsequent mortgage at the time of taking said mortgage from the owner of said property had actual knowledge of the prior mortgages, and the manner in which the same were brought about.

The above rule has been free from criticism except in those cases where effort was made to apply it outside of the field of its intended operation. It is evident that effort has been made to use this authority in support of the minority rule that the recording of a chattel mortgage by a stranger to the title thereof constitutes notice to subsequent purchasers and incumbrancers of said property. See People's Finance & Thrift Co. v. Shirk, 181 Okl. 418, 74 P. (2d) 379, wherein the court discusses the Texas case of Rhea Mortgage Co. v. Lemmerman, 10 S.W. (2d) 232. Therein this court follows the rule supported by the overwhelming weight of authority to the effect that the filing of a chattel mortgage on personal property by a stranger to the title thereof is void as to a subsequent bona fide purchaser. Such is not the question decided in the case of Iowa Natl. Bank v. Citizens Natl. Bank, supra.

In the instant case it must be conceded that the Olympic Refining Company could have executed a chattel mortgage on the property herein involved to the Bank which would have been valid and binding upon all the parties herein involved. Section 10,012, O.S. 1931, 24 Okl. St. Ann. 11, supra; Nix v. Underhill, 8 Okl. 123, 56 P. 959; Smith-McCord Dry Goods Co. v. John B. Farwell, 6 Okl. 318, 50 P. 159; Cobbey on Chattel Mortgages, sec. 780, page 1010. Generally a person may do through an agent whatever he is empowered to do in his own proper person. McNulty v. Dean, ( Wash. ) 281 P. 9, 66 A.L.R. 1417; 2 Am. Jr., Agency, sec. 22, page 24; 2 C.J.S., Agency, sec. 11, page 1039. Since the Olympic Refining Company had a right, fixed by statute, to prefer the Bank as a creditor by the execution of a mortgage upon its property, it necessarily follows that it could execute such mortgage through an agent or intermediary and that said mortgage would have the same identical force and effect as if it had been executed by said Company. Such is one of the fundamental principles of agency and such is the rule announced in the case of Iowa Natl. Bank v. Citizens Natl. Bank, supra.

The finding of the trial court that there was a sale of the property to Carter, and a subsequent mortgage thereof to the Bank, is not supported by any competent evidence for the reason that no consideration passed from Carter to the Olympic Refining Company and none of the proceeds derived from a loan passed from the Bank to Carter. It is true that after the transaction was closed he announced to the Railroad Company, the bailee of the property, that he was the owner thereof and subsequently exercised some dominion over said property, but this was pursuant to the agreement and understanding that he should proceed to dispose of the property at the earliest possible date and should procure funds from the sale thereof which funds were to be transmitted to the bank and used to reduce the indebtedness which was the indebtedness of the Olympic Refining Company and not the indebtedness of Carter, notwithstanding the fact that the evidences of such indebtedness were executed by him.

[Preference of Creditor]

 

We are not here concerned with the rights of subsequent purchasers or incumbrancers of the property covered by the mortgage. The claims asserted by the other parties herein were for indebtedness which had accrued prior to the execution of the mortgage herein involved. It is not shown that any of said claimants were deceived, misled or were induced to change position by virtue of the chattel mortgage herein involved. There is involved herein nothing more nor less than a preference of a creditor, an attempt to secure the bank which had furnished the funds upon which the Olympic Refining Company had operated. Such preference is specifically authorized by statute, therefore, the other creditors are without lawful grounds of complaint.

It is thus clear that the chattel mortgage held by the Bank constitutes a valid and first lien and that the trial court erred in holding same void.

[Priority of Claimants]

 

We will next consider the contentions of the United States Government, the State Tax Commission, and the various labor claimants as to the priority of their claims as found by the trial court insofar as there are contentions of error.

The trial court held that the various claims, including State and United States Government excise taxes, be paid in the following order:

 

It is the contention of the United States that it has a prior lien for all unpaid taxes, subject only to the lien of the State of Oklahoma in the sum of $1,286.28, which is in accord with the finding of the trial court, except as to place the government's lien for the sum due on its second seizure for the taxes in the sum of $1,629.67 ahead of the second assessment of lien for the State of Oklahoma and for labor.

It is the contention of the Oklahoma Tax Commission that the State of Oklahoma is entitled to have both its claims for taxes reported, the $1,286.28, and for taxes unreported at the time of the seizure in the sum of $656.72 allowed as one claim and decreed to be prior to all other claims.

[State v. U.S. ]

 

We will first consider the contentions of priority of liens as they relate to the State of Oklahoma and the United States Government.

The record shows that in October, 1935, the Olympic Company filed its report for September with the Oklahoma Tax Commission, showing a tax liability of $1,286.28. Payment was not made at the time required and on October 9, 1935, the Oklahoma Tax Commission issued a tax warrant for the enforcement of the payment of that sum, under the authority of section 12573, O.S. 1931, para. (b). This warrant was delivered to the sheriff and a levy made the same day upon 36 cars of refined products, it being the same property described in the mortgage given by Carter to the Alex Bank.

On October 11, 1935, a warrant was issued by the United States Government and on the same day a levy upon the same property made by the government for taxes due it for September and October, 1935.

On October 12, 1935, a receiver was appointed for the Olympic Company and by order of the court, the possession of the property levied upon was turned over to the receiver.

On November 1, 1935, notice of demand for taxes due for August, 1935, was mailed by the Government to the Olympic Company in the sum of $1,629.67, and a copy of same filed with the clerk of the Federal District Court and the District Court at Oklahoma City on November 2nd.

On December 5, 1935, at the time of the trial of the cause the Oklahoma Tax Commission filed a supplemental petition alleging that in addition to the sum of $1,286.28 formerly stated it had discovered $656.72 additional due for taxes for the same period of time, but that the Olympic Company had neglected and failed to report the same. No tax warrant was issued therefor. This sum with costs and penalty was likewise asked to be made a prior lien and claim upon the property.

It is the contention of the Government that the State of Oklahoma made no seizure on its second assessment in the sum of $656.72, and that no claim for same was filed until December 5, 1935, and that both of the Government's claims would be superior to the second assessment of the State, even though this Court should decide that the creation of the liens of the Government, of the State and of the laborers and the determination of their priorities is not dependent upon recording or proceedings taken for their foreclosure, but rests entirely upon the dates of their accrual.

It is the contention of the Oklahoma Tax Commission that the additional claim of $656.72 is only a part of the first claim filed by the State; that the taxpayer reported the taxes due for September, 1935, to be $1,286.28 and that was the amount for which the tax warrant was issued, but the report of the auditor disclosed that the additional sum of $656.72 was due for the same month; that the tax warrant and seizure of the property was made to enforce the payment of the September taxes due and that it should be held to cover the correct amount of such taxes without regard to the amount actually reported to be due by the taxpayer. It is contended that to hold otherwise would result in penalizing the State of Oklahoma in causing it to lose its priority by reason of the neglect and failure of the taxpayer to report the correct amount of tax due in the first instance. The United States Government, which hereinafter will be referred to as the Government, admits that its lien for each of its two assessments could not possibly accrue under the statute until October 11, and November 1, 1935, the respective dates that the Collector of Internal Revenue received the assessments against the Olympic Company and issues its notice to and served the collector's warrant upon said Company. It is admitted that a receiver was appointed by the court on October 12, 1935, and that an order was issued by the court on October 14, ordering the property to be surrendered to the receiver and that all of the property seized was surrendered to the receiver on October 15, 1935.

It is contended by the Government that no tax warrant was ever levied by the Tax Commission against the property of the Olympic Company for the $656.72, the last amount found to be due for taxes for September, 1935, but the Government did have served upon the receiver a warrant of distraint for its last assessment.

Since the property had been turned over to the receiver by order of the court prior to the dates the Oklahoma Tax Commission or the Government presented their claims for their second amount claimed for taxes, we think it immaterial whether or not either served their warrant on the receiver and that such service could not be relied upon for a basis of priority, in so far as the Government and State of Oklahoma are concerned.

[General Rule v. Special Statute]

 

It might be stated as a general rule, both under the State and Federal Statutes, that different liens on the same property have priority according to the time of their respective creation and perfection, other things being equal. Bank of Quawpaw v. Denney, 98 Okl. 279, 225 P. 362; Portneuf-Mara Valley Canal Co. v. Brown, 274 U.S. 630. But a general rule cannot always prevail against a special statute.

Let us review some of our state statutes pertaining to the right and priority of the state in enforcing the lien for excise taxes due in the instant case.

Section 12,558, O.S. 1931, 68 Okl. St. Ann. 690, provides:

(a) Every distributor shall make and transmit to the Oklahoma Tax Commission, on or before the fifteenth day of each calendar month, upon forms prescribed and furnished by said Commission, a report, under oath, showing the quantity of motor fuel sold, distributed or used by such distributor, within this state, during the preceding calendar month, and showing such other facts and matters as the said commission may require.

(b) Every distributor, at the time of making the monthly report above-mentioned, shall pay to the Oklahoma Tax Commission the amount of excise tax due for the month covered by such report.

It is conceded in the brief of the Government that under the provisions of this section and section 12,561, O.S. 1931, 68 Okl. St. Ann. 693, relative to making reports to the Oklahoma Tax Commission, they operate to vest in the State of Oklahoma a lien upon all of the property of its agent, the refinery, or distributor, for his failure to remit to the Tax Commissioner, the taxes so collected for the state. Let us then determine when the lien of the state sets up and what is necessary to put the lien in effect.

Section 12.573, O.S. 1931, as amended in section 13, Chapter 111. Session Laws of 1933, 68 Okl. St. Ann. 705, provides:

(a) All excise taxes, penalties and costs accruing to the State of Oklahoma against any distributor or against any retailer or retail dealer, shall be a first and paramount lien upon all of the personal property of such distributor or such retailer or retail dealer devoted to or used in his business as such, and a lien superior to any subsequent lien, upon any and all other property both real and personal, in the State of Oklahoma, not exempt under the Constitution of the State, which lien shall date from the date upon which the tax became due and delinquent. * * *

Under the provisions of this section, the lien of the State set up on the 7th day of October, 1935, when the distributor, the Olympic Company, made its report for taxes due for September, 1935, but failed to pay any part of same. The lien covered all of the property of the Olympic Company including the property in controversy here, and such lien did not depend for its existence and priority upon the issuance of a warrant, or seizure of the property under the warrant. The existence of the lien not depending upon the issuance of the warrant or the seizure of the property for the taxes then due would extend to and include the $656.72 last reported due, as well as the $1,286.28 for which the warrant was issued and seizure made. The issuance of the warrant and the seizure of the property performed no function in the creation of the lien, but was only the primary step in the procedure for the collection of the taxes from the property upon which the prior lien had attached.

In addition to the above quoted statutes, section 12565, O.S. 1931 as amended by sec. 8, ch. 111, S.L. 1933, 68 Okl. St. Ann. 697, provides for a special lien of the State in cases of bankruptcy and receivership proceedings, and provides:

When the property of any person shall be seized in any means or final process of any court of this state, or when the business of any such person shall be suspended, by the action of creditors, or put into the hands of any receiver, assignee or trustee or when any such person shall file a petition in bankruptcy or against whom bankruptcy proceedings may have been commenced, then, in any and all such cases, the excise tax due by such person to the State of Oklahoma shall be considered as a first and paramount claim, and the State shall in such cases have a first and paramount lien thereon.

The Government cites section 115, title 26, U.S.C.A. (Revenue Act 1928, sec. 613, 26 U.S.C.A., Int. Rev. Acts, Ch. 461) in support of its contention that its lien is superior to all liens herein, except the lien of the state for the $1,286.28, the original sum for which warrant was issued and seizure made under same for the state. It provides:

Lien for Taxes. (a) If any person liable to pay any taxes neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such taxes, 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. 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.

(b) Such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until the notice thereof has been filed by the collector.

Section 191 of Title 31, U.S.C.A., provides:

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

This section was section 3466 of the Revised statutes of the United States . It has been frequently interpreted and held not to create a lien on the property of the creditor. United States v. State of Oklahoma , 261 U.S. 523. In Spokane County v. United States, 279 U.S. 80, 73 L. Ed. 621 [1 USTC ¶387], the question of priority of the United States for income tax and the State of Washington for personal property tax was before the court. The taxpayer was insolvent and a receiver had been appointed. The court held:

Under U.S. Rev. Stat. sec. 3466, requiring debts to the United States to be first satisfied if the debtor is insolvent, taxes levied by the United States, after the property of the insolvent passes into the hands of a receiver, have priority over state taxes subsequently levied and those levied before the property goes into the receiver's hands, if the proper statutory steps have not been taken to fix a lien upon the property prior to that time.

It is the insolvency that causes the section to go into being or effect in so far as the claim of the Government is concerned, and it is shown in the instant case that prior to such insolvency the lien of the state for all reported and unreported tax was perfected under the provisions of section 12565, supra, causing the lien to attach on October 7, 1935, when the Olympic Company made a partial report to the Tax Commission as to the taxes then due the state.

In In re Caswell Const. Co., (D.C.N.Y. 1936) 13 Fed. (2d) 667, the court said, in part:

Whatever be the law as to the status of taxes of the United States as an attribute of sovereignty or as existing at common law, it is clear that the United States may limit its priority by statute, when it does so expressly and this it has done by sections 3466 and 3186 of the Revised Statutes (Comp. St. secs. 6372 and 5908) and sections 64a and 67d of the Bankruptcy Law.

Section 3466 referred to is section 191 of Title 31, U.S.C.A., supra, relative to insolvency estates.

In Gerson, Beasley & Hampton Inc. v. Shubert Theater Corp., et al., (D.C. So. Dist. of N.Y.) 1934, 7 Fed. Supp. 399, wherein there was a contest as to the priority of Federal and state claims for taxes, the court said:

It is clear, therefore, that if the question of priority, as between the two governments, depends on the comparative dates when their respective liens on the property of the corporation had their inception, then the state comes ahead, because it is conceded that the $81,000 proceeds of sale of the property now held by the receiver, stands in the place of the property.

To the same effect is the holding of the court in City of Winston-Salem v. Powell Paving Co., et al., (D.C. North Carolina 1934) 7 Fed. Supp. 425 [4 USTC ¶1309].

The Government contends that before the lien for the $656.72 will benefit the State of Oklahoma , it must be made perfect and specific. We find nothing in the case of New York v. Maclay Rec'r., 288 U.S. 290, cited by the Government which would be controlling in the instant case. The court in that case held that the lien for taxes to the State of New York might be good as against purchasers and mortgagees but not against the United States under the priority statute; that as against the United States it was nothing but an inchoate and imperfect lien designated by the court as "merely a caveat of a more perfect lien to come." The priority of the Government was based upon the fact that no distraint or seizure had been made. As has been shown herein, prior to the date that the Olympic Company was adjudged insolvent, which would put the priority statute into action, and before the Government perfected its lien for the first assessment on October 11, 1935, the Oklahoma Tax Commission issued a tax warrant and a levy was made by the sheriff on October 9th for the September taxes due the State. Under the very decisions relied upon by the Government, the lien of the State of Oklahoma was perfected and made specific and which is admitted by the Government, but such admission is confined to the amount of taxes actually reported as being due by the Olympic Company. Since under the provisions of section 12573, O.S. 1931, as amended by Ch. 111, S.L. 1933, 68 Okl. St. Ann. 705, supra, the lien of the state was made a first lien and to date from the date upon which the taxes became due and delinquent, and since the lien extended to all of the taxes due, whether reported or unreported and the additional sum found to be due for the same period of time, we must conclude and hold that it consisted of a single tax and one lien and was perfected and the right of the state set up when the single levy was made without any additional seizure of the property. The receiver being duly notified by the Tax Commission of the extra sum found to be due for September we can see no good reason why the entire claim should not be paid as one prior claim when disbursement is made. We must therefore conclude that the trial court committed error in not holding that the lien for all of the taxes due the state from the Olympic Company for the month of September was prior and superior to the lien of the United States for taxes due it.

[State Taxes v. Labor Claimants]

 

It is the contention of the Oklahoma Tax Commission that the taxes due the state by the Olympic Company for both amounts found to be due for September, 1935, are entitled to priority over the claims of the laborers filed herein.

It is contended on the part of the labor claimants O.T. McNeil, J.W. Miller, Donald Pierce, L. Lingerfoot, Bob Mahoney, E. Hall, J.J. Crew, J.E. Holmes and J.D. Brown, interveners herein, that their claims for labor are based upon sections 11007 and 11011, O.S. 1931, which provide for a lien on the production of their labor and for priority thereof. It is further contended that the statutes under which the State of Oklahoma claims its lien are in violation of section 57, article 5 of the State Constitution and void, and if not void, no tax is due the state and no basis exists for a lien. That if the state ever had a lien, it waived same by taking other security for taxes.

Claimants Jack B. White and T.H. White concur in the contentions of the United States Government as to the priority of liens.

Let us review some of the labor lien statutes as interpreted by the court. Section 11007, O.S. 1931, 42 Okl. St. Ann. 92, provides that where laborers perform work under a contract, if unpaid, shall have a lien on the production of their labor and the lien shall attach only while title to the property remains in the original owner. In Pacific Petroleum Co. v. Sunbeam Oil Co., 176 Okl. 293, 54 P. (2d) 1054, this court, following the language of section 11011, O.S. 1931, 42 Okl. St. Ann. 96, relative to precedence of liens, and the holding in Morley v. McCaskey, 134 Okl. 50, 270 P. 1107, held that such lien for production of labor takes precedence over all other liens, whether created prior or subsequent to such laborer's lien. To the same effect was the holding in Home Building & Loan Ass'n. et al. v. White et al., 141 Okl. 240, 284 P. 889, relative to the lien of a prior mortgage. This court further held in the Pacific Pet. Co. case, supra, that where the record discloses that the lien statement was not filed within the time specified in the statute and the record fails to disclose an excuse for the failure to file such lien statement within the statutory time, the lien claimant is not entitled to the statutory lien, and that filing a lien claim with a receiver does not constitute a substantial compliance with the statute as to filing liens.

This court further interpreting section 11007, O.S. 1931, in Haggard v. Sunray Oil Co., 176 Okl. 81, 54 P. (2d) 662, held that a lien upon oil well casing for labor performed in pulling such casing from an abandoned well cannot be sustained under this section, for the reason that in such case, the casing cannot be said to be "the production of their labor."

In Shefts Supply, Inc. v. Brady, 170 Okl. 590, 41 P. (2d) 820, this court held:

A lien granted to a laborer under section 11007, O.S. 1931, (Sec. 7468, C.O.S. 1921) and under section 11011, O.S. 1931 (Sec. 7472, C.O.S. 1921) takes precedence over prior recorded mortgage, but is enforceable only against the improvements which represent the production of the claimants' labor.

and said:

From the examination of previous decisions of this court, we find that the cases wherein sections 7468 and 7472, C.O.S. 1921 are held to be applicable are cases wherein the lien claimant has performed manual labor with his own hands in the construction of an improvement upon real estate, and in such case, it has been held that such a laborer has a lien on the improvements so constructed by him, which is superior to a prior mortgage against the real estate itself.

We fail to find any case where the lien under this section was attempted to be enforced except where the improvements were upon real estate.

Section 11001, O.S. 1931, is a labor lien statute and provides that any person who furnishes labor for the production of, altering or repairing, of any personal property at the request of the owner shall have a lien for the value of his labor upon said personal property as provided for in section 2 of the Act (sec. 11002, O.S. 1931) the lien to date from the commencement of furnishing of labor. Section 11002, supra, referred to, provides that the lien must be perfected by the filing of a claim in the office of the county clerk.

With this picture of the various labor lien statutes and their interpretation by this court before us, we will consider the status of the labor lien claimants in the instant case. It is very evident that they cannot base their claim under sections 11007 and 11011, O.S. 1931, supra, relied upon, for the reason (1) no real estate is involved; (2) the record shows that they did not perfect their lien as required by law. Pacific Petroleum Co. v. Sunbeam Oil Co., supra.

The lien claimants cannot rely upon section 11001, O.S. 1931, supra, relative to lien for altering and repairing personal property, even though we were to hold that the lien was applicable in the manufacturing of such products as are here in controversy, since section 11002, supra, specifically requires that such lien must be perfected by the filing of a lien claim in the office of the County Clerk which was not done in the instant case.

It is very apparent that the original petitions in intervention filed herein on the part of the claimants for labor performed came within section 10999, O.S. 1931, relative to insolvent corporations and estates. The petitions state, in substance, that the laborers worked for the Olympic Corporation and that certain sums were due them and unpaid; that the corporation was insolvent; that their liens were prior to other liens. This section requires no specific act on the part of the lien holder for the protection of his lien. It is true that these labor claimants, later, filed amended petitions attempting to bring their cause within section 11007, supra, which, as we have shown, was without avail.

Section 10999, O.S. 1931, referred to, provides, in substance, that when a corporation doing business in this state shall become insolvent, the employees performing labor or services in regular employment, shall have a lien upon the assets of such corporation for the amount of salary or wages which shall have accrued prior to the adjudication of the insolvency of such corporation, "which lien shall be paid prior to any other debts, charges or claims against said corporation, except taxes due the United States Government or the State of Oklahoma."

If it were conceded that the laborers had an existing lien under the provisions of section 11007, supra, and that the property involved was the production of their labor, or had such lien under the provisions of section 11001, supra, for altering or repairing personal property, and the lien claim had been perfected by filing same in time with the Clerk, then their liens would be inferior to the lien of the State of Oklahoma, because of the more recent statutes quoted herein relative to liens for state taxes. Sections 12565 and 12573, O.S. 1931, as amended by sections 8 and 13, of Chapter 111, S.L. 1933, supra, and the provision in the latter Act which has a section repealing all laws or parts of laws in conflict therewith.

We must, therefore, conclude and hold that the claim and lien for the taxes due the State of Oklahoma herein, is a superior lien to that of the lien for labor filed herein, and that such lien for the state includes all of the taxes found to be due the state for September, 1935.

[ U.S. v. Labor Claimants]

 

Considering now the priority of the lien of the United States Government and the lien of the labor claimants, we think that under the provisions of section 10999, supra, the lien of the Government is superior to that of the laborers. This section also was enacted long after the enactment of section 11007 or section 11001, supra, and gives a prior lien in favor of both the State and Government. Further, we think that under the provisions of section 191 of Title 31, U.S.C.A., supra, (formerly section 3466 of Revised Statutes of the U.S.) as interpreted and quoted in Spokane County v. United States, supra, the Government would have a superior lien to that of the labor claimants, since no proper statutory steps had been taken to fix the lien of the laborers prior to the time the property passed into the hands of a receiver.

In Guaranty Title & Tr. Co., Trustee, v. Title Guaranty & Surety Co., 224 U.S. 152, 56 L. Ed. 706, that court, construing section 3466, U.S. Comp. Stat. 1901, supra, in the light of the act of July 1, 1898, relative to priority of claims of the United States and claims for labor in bankruptcy cases, said:

Labor claims are given priority, and it is provided that debts having priority shall be paid in full. The only exception is taxes legally due and owing by the bankrupt to the United States , state, county, district or municipality.

In Portneuf-Marsh Valley Canal Co. v. Howard Brown, et al., Trustee, 274 U.S. 630, 71 L. Ed. 1243, that court, speaking of the superior lien rights under the Cary Act project passed by Congress, said:

It is, of course, an implied term of every lien statute that the lien authorized is subordinate to liens of taxes.

The court cited Continental & Commercial Trust & Sav. Bank v. Warner, 36 Idaho 601, 215 P. 458, construing the same in which the court held: "a lien for taxes is superior and prior to the lien of a Carey Act contract." We hold, therefore, that the lien of the United States Government for taxes due it by the Olympic Refining Company is superior to the lien of the labor claimants filed herein.

[Constitutionality of Statutes]

 

The labor lien claimants assert that the lien claimed by the State should be denied because the portions of the statutes under which it is claimed were promulgated as provisions of an amendatory act and that the provisions or similar provisions were not incorporated in sections of the statute amended. They therefore urge that a consideration and application of section 57, of article 5, of the Constitution of Oklahoma demonstrates the invalidity of the portions of the act referred to in view of the holdings of this court. Gilmer v. Hunt, 167 Okl. 175, 29 P. (2d) 59; Nixon v. Wright, 69 Okl. 159, 36 P. (2d) 280; Board of Com'rs. of Pott. Co. v. Alexander, 68 Okl. 126, 172 P. 436.

On the threshold of this question, we are confronted with the suggestion that the record does not indicate its presentation in the trial tribunal, and that therefore we are not authorized to treat it on appeal in view of those cases holding that questions relating to the constitutionality of statutes will not be considered for the first time on appeal. Duffy v. Scientific American Comp. Dept., 30 Okl. 742, 120 P. 1088; Fast v. Gilbert, 102 Okl. 245, 229 P. 275; M.K. & T.R. Co. v. Prince, Co. Treas., 133 Okl. 228, 271 P. 253.

The rule alluded to is but a concrete application of the more general rule that a case presented to this court on appeal will not be decided upon a theory different than that presented to the trial court, or sometimes stated in a prohibitive manner, that the parties will not be allowed to change their theory on appeal.

This is a rule of practice of general application. It is based upon practical necessity and orderly admin istration of the law and does not denote a limitation of the power of the appellate tribunal (3 Am. Jur. 26 and 32). It is not without exception or limitation. Thus where questions of public policy or widespread public interest are involved an appellate court may review a cause on a theory not presented in the trial tribunal. Magnolia Pet. Co. v. State, 175 Okl. 11, 52 P. (2d) 81; Shaffer Oil & Ref. Co. v. County Treasurer of Creek County , 175 Okl. 6, 52 P. (2d) 76. See also 3 Am. Jur. 35. The wisdom of this exemption is, we think, self evident, for the rule itself is one of practice and designed to limit the scope of inquiry on appeal strictly to the controversy as it was presented to the lower tribunal. It is fair to the parties, however, when the question is of such a nature that the present welfare of the people at large, or a substantial portion thereof, is involved that the consideration of their rights merits a departure from the general rule and authorizes the court in its discretion to direct its attention to the general welfare, rather than the interests of the parties to the immediate cause.

[Exception to General Rule]

 

That the exception to the general rule applies with equal force to the narrower concrete rule applying the principle to questions relating to the constitutionality of statutes is self-evident.

The statute here involved relates to taxation. It is a matter of daily and vital concern to the commonwealth. The tax collecting authorities are operating under it constantly. We regard the interest of the public sufficiently involved to bring the matter within the exception mentioned, supra, and shall therefore consider the matter on its merits rather than dispose of it under the general rule of appellate procedure. We therefore return to a consideration of the constitutional question.

Section 57, of article 5, of the Oklahoma Constitution provides:

Every act of the Legislature shall embrace but one subject, which shall be clearly expressed in its title, except general appropriation bills, general revenue bills, and bills adopting a code, digest, or revision of statutes; and no law shall be revived, amended, or the provisions thereof extended or conferred, by reference to its title only; but so much thereof as is revived, amended, extended, or conferred shall be reenacted and published at length; Provided. That if any subject be embraced in any act contrary to the provisions of this section, such act shall be void only as to so much of the law as may not be expressed in the title thereof.

It is pointed out that the sections of the statute under which the state is claiming its lien are sections 12,565 and 12,573, as respectively amended by sections 8 and 13 of chapter 111, Session Laws 1933, and it is urged that the sections as they were worded prior to the amendment were insufficient to authorize a lien on the property as previously upheld in this opinion. It is urged that the language under which it was created was brought into the act by the 1933 amendment and being a new and different provision could not be properly justified in an amendatory act.

In the case of Pottawatomie County v. Alexander, County Assessor , 68 Okl. 126, 172 P. 436, relied upon by lien claimants, this court held:

Though a particular section of a law may by amendment be broadened so as to bring within its provisions matter which could logically and legally have been placed in it originally, such new matter must be something which had not been already specially and differently provided for in another section of the same statute and to which section no reference is made in the amendatory law. (Italics ours.)

With this rule relating to the proper breadth of acts amending, particular statutory provisions in mind, we address ourselves to the title of the Act now before us. It reads:

AN ACT amending Sections 12549, 12550, 12551, 12556, 12557, 12562, 12563, 12565, 12566, 12567, 12569, 12571, 12573, and 12529 Oklahoma Statutes, 1931, relating to, and providing for, the enforcement of the Gasoline Excise Tax Laws and the Collection of Tax thereunder by the Oklahoma Tax Commission; defining the term 'Gasoline' and other terms; prescribing additional penalties for violation of the Gasoline Excise Tax Laws and authorizing additional Rules and Regulations pertaining thereto; defining Embezzlement and Perjury, for violation of this Act and prescribing penalties; further extending provision for injunction and giving the Commission authority in certain cases to declare the Excise Tax due and payable forthwith; authorizing excise of discretion by Commission in Issuance, Extension, Reinstatement, Suspension and Cancellation of Licenses; declaring what may be admitted as evidence in certain cases; repealing conflicting laws and declaring an emergency.

Both of the sections with which we are here concerned, and which were amended by chapter 111, S.L. 1933, supra, were before amendment a part of chapter 66, S.L. 1931, the title of which read:

AN ACT providing for the enforcement of the gasoline excise tax laws, and the collection of taxes thereunder, by the Oklahoma Tax Commission; providing for rules and regulations by said Commission, and for the expense of such collection and enforcement; prescribing penalties for the violation of this Act; exempting certain purchasers from payment of said excise taxes; providing for the disposition of the monies collected hereunder; repealing conflicting laws, and for other purposes.

Thus both the amended act and the amendatory act, especially the particular sections herein involved, relate to the "enforcement of the gasoline excise tax."

The lien authorized by the amendatory sections is but a method of enforcement. It could have been originally included in the amended sections. Thus the law was by amendment "broadened" so as to bring within its provisions matter which could logically and legally have been placed in its originally."

[Conclusion]

 

We are of the opinion that the provisions of the amendatory act authorizing the lien were, "in view of the subject matter of the sections amended" within the proper purview of the amendatory act and free from objection upon consideration of section 57, article 5, of the Oklahoma Constitution.

Additional authorities supporting the view herein announced are: Fox v. Dunning et al., 124 Okl. 228, 255 P. 582; Dunlap v. Carter County , Board of Commissioners, 85 Okl. 295, 205 P. 1100; Griffin et al. v. Thomas, County Supt. , et al., 86 Okl. 70, 206 P. 604; State ex rel. City of Durant v. Bonner, County Treasurer, 86 Okl. 280, 208 P. 825; Protest of Chicago, R.I. & P. Ry. Co., 162 Okl. 68, 19 P. (2d) 152.

The judgment of the trial court is reversed with directions to enter judgment as follows:

First, the chattel mortgage of the First National Bank of Alex shall be fixed as a first and valid lien upon the property herein involved,

Second, the priority of the various claims filed and found to exist and to be paid in the following order:

(a) The claim of the State of Oklahoma by the Oklahoma Tax Commission for taxes in the sum of $1,943.00,

(b) The claim of the United States Government for taxes in the sum of $2,855.66,

(c) The claims of the labor lien claimants, claims to be paid in proportion as provided in the judgment of the trial court.

WELCH, C.J., CORN, V.C.J., and BAYLESS, GIBSON, and HURST, JJ., concur.

RILEY and DAVISON, JJ., dissent.

ARNOLD, J., absent.

 

 

[79-2 USTC ¶9645]Schaumburg State Bank, Plaintiff-Appellee v. Walter J. Seyffert, Ruby A. Seyffert, American National Bank and Trust Company of Chicago, Chicago Federation of Musicians, Local 10-208, Western Illinois University, Woodfield Bank and Unknown Owners, Defendants-Appellees, and United States of America, Defendant-Appellant

Ill. Appellate Court, First Dist., 78-1479, 5/4/79

[Code Sec. 6323 and prior bankruptcy law]

Lien for taxes: Bankrupt taxpayer: Validity and priority of lien.--A tax lien assessed, perfected and filed after the filing of a voluntary bankruptcy petition constituted a valid lien against real property of the bankrupt. Thus, a trial court decision declaring that the tax lien was void was vacated, and the case remanded so that the proceeds from the sale of the real property could be redistributed among all the creditors, including the United States . According to the appellate court, bankruptcy rules prohibited neither post-petition assessment of tax deficiencies nor post-petition perfection of a tax lien. The court noted that the opposite result would probably be reached under the provisions of the Revised Bankruptcy Act, effective October 1, 1979.

MR. JUSTICE MEJDA delivered the opinion of the court:

Defendant , United States of America ( U. S. A. ), appeals from orders granting summary judgment to co-defendant, Chicago Federation of Musicians, Local 10-208 ( Union ), and approving a decree for private sale of certain real estate. On appeal, U. S. A. contends that the trial court erroneously declared a Federal tax lien void and thereby subordinated it to a subsequent judgment lien on either of two grounds: (1) because Rule 601 of the Rules of Bankruptcy Procedure (11 U. S. C. (1976)) prohibits perfection of a tax lien after filing of a voluntary petition for bankruptcy; or (2) because the underlying tax liability had been discharged in bankruptcy.

On December 13, 1977 , plaintiff, Schaumburg State Bank, brought suit against Walter J. and Ruby A. Seyffert to foreclose a mortgage executed by them on May 15, 1976 , and recorded on May 24, 1976 . U. S. A., American National Bank and Trust Company of Chicago (American National), the Union, Western Illinois University (Western), Woodfield Bank (Woodfield), and Unknown Owners were named as defendants who might have some right, title, interest or lien in the subject real estate. The complaint also stated that U. S. A. had filed a notice of tax lien against Walter J. Seyffert in the amount of $14,747.84. From a later amendment to the complaint, it appears that this notice was filed in the Recorder's Office on February 25, 1977 , as document number 23831506.

Woodfield did not admit or deny the allegations of the complaint but claimed to be judgment lien creditor of Ruby A. Seyffert in the amount of $2,079.16 by filing a copy of the judgment in the Recorder's Office on February 25, 1977 , as document number 23832210.

Western claimed to be a judgment lien creditor of Ruby A. Seyffert in the amount of $474.25, a copy of which was filed with the Recorder's Office as document number 24121942.

U. S. A. answered that it claimed an interest in the property by reason of assessment, demand, and notice of tax lien filed as alleged in Schaumburg 's complaint. It denied that its claim was subordinate to plaintiff's claim and sought to have the property sold and the funds distributed to the competing parties according to their priorities as the court would determine.

An order of default was entered against the Seyfferts, American National, and the Unknown Owners for their failure to answer. Schaumburg then moved for summary judgment against the U. S. A. contending that since it had recorded first, its lien was superior to U. S. A. 's. Summary judgment was granted. That order is not challenged in this appeal.

The union then answered Schaumburg's complaint, claiming to be a judgment lien creditor of Walter J. Seyffert in the amount of $49,691.25 by reason of nondischargeable judgment entered on July 21, 1977, by the Bankruptcy Court in Walter Seyffert's bankruptcy proceeding. ¹ A memorandum of this judgment was filed with the Recorder of Deeds on July 21, 1977, as document number 24023209. The Union also moved for summary judgment against U. S. A. contending that: (1) the filing of the notice of Federal tax lien after Walter Seyffert's filing of a voluntary petition for bankruptcy violated Rule 601(a) of the Rules of Bankruptcy Procedure (11 U. S. C. (1976)), and the tax lien was of no force; and (2) the tax indebtedness of Walter Seyffert was discharged in the prior bankruptcy proceeding, citing In re Sotelo (7th Cir. 1977) [77-1 USTC ¶9307], 551 F. 2d 1090.

The trial court entered an order granting Union 's motion for summary judgment on March 30, 1978, finding that: "The filing of the notice of lien on February 25, 1977, without authorization of the Bankruptcy Court, was a void act in violation of Bankruptcy Rule 601" and declaring the lien void and thereby discharged. A motion to reconsider and set aside this order was denied on April 28, 1978.

On May 26, 1978, Schaumburg filed a motion for a decree approving a private sale in lieu of foreclosure and attached a copy of a real estate contract entered into by the Seyfferts and certain purchasers. An order was entered June 5, 1978, denying U. S. A. 's motion for the trial court to reconsider the order of summary judgment for the Union , deny the decree for a private sale, and declare the real estate contract void.

On June 5, 1978, the trial court then entered a decree approving the private sale, that the U. S. A. had no lien upon the real estate ² and that the sale proceeds be disbursed to plaintiff and the lien creditors as set forth in plaintiff's motion. U. S. A. brings this appeal seeking to have: (1) the private sale set aside; (2) the priorities of all parties reestablished; and (3) a judicial sale of the property and dismissal of Schaumburg 's complaint. ³

Opinion

U. S. A. attacks the two apparent beses for the trial court's order granting summary judgment for Union : (1) that the tax liability of the debtor had been discharged in bankruptcy; and (2) Rule 601(a) of the Rules of Bankruptcy Procedure prohibits perfection of the tax lien after the filing of the petition for bankruptcy.

Although there may have been support for the trial court's order on the basis that Seyffert's tax liability had been discharged in bankruptcy, it is clear that this is not now the law. At the time of the order, In re Sotelo (7th Cir. 1977) [77-1 USTC ¶9307], 551 F. 2d 1090, held that the taxpayer's liability under Internal Revenue Code §6672 (26 U. S. C. §6672), the section under which Mr. Seyffert's liability arose, was a penalty and not a tax, and was therefore discharged under section 17a(1) of the Bankruptcy Act. (11 U. S. C. §35(a)(1) (1976).) The Supreme Court reversed the court of appeals, holding that the tax liability was not dischargeable under Bankruptcy Act §17a(1)(e). (United States v. Sotelo [78-1 USTC ¶9446], 436 U. S. 268, 98 S. Ct. 1795, 56 L. Ed. 2d 275.) As both parties concede, the trial court's order cannot be justified on the ground that the tax liability was discharged in bankruptcy.

The remaining justification is that Rule 601(a) of the Rules of Bankruptcy Procedure (11 U. S. C. (1976)) prohibits perfection of the tax lien after the filing of the petition for bankruptcy. That rule provides:

"(a) Stay Against Lien Enforcement. The filing of a petition shall operate as a stay of any act or the commencement or continuation of any court proceeding to enforce (1) a lien against property in the custody of the bankruptcy court, or (2) a lien against the property of the bankrupt obtained within 4 months before bankruptcy by attachment, judgment, levy, or other legal or equitable process or proceedings."

The Advisory Committee's note to this section makes it clear that the purpose of the rule is "to protect creditors against prejudicial dismemberment and disposition of the estate before a trustee or receiver can qualify."

U. S. A. contends that a distinction is drawn between enforcing a lien which would interfere with the admin istration of the bankruptcy estate and merely perfecting a lien to preserve priority vis a vis other creditors. It is argued that since there is no interference with the debtor's property by perfection of the tax lien, the purpose of Rule 601(a) is fulfilled. Union maintains that "any act" to enforce a lien is prohibited.

U. S. A. cited United States v. A Certain Parcel of Land, Etc. (D. Mass. 1944), 59 F. Supp. 65, in support of its position. Regarding this issue the court said:

"The recording of the notice of lien did not, in my opinion, constitute 'any act or other proceeding to enforce a lien,' but rather established or perfected the lien. I do not feel that Congress intended, by section 548, to stay or prevent the establishment or perfection of a lien." (59 F. Supp. 65, 69.)

This same issue was recently raised under the stay provisions of Rule 11-44 of the Rules of Bankruptcy Procedure (11 U. S. C. (1976)) which is applicable in Chapter XI proceedings under the Bankruptcy Act (11 U. S. C. §§ 701-799 (1976)) in the case of In re Marietta Baptist Tabernacle, Inc. (5th Cir. 1978), 576 F. 2d 1237. The court held taht recording a notice of a claim of lien does not constitute an act to enforce, but merely preserves the lien and does not dispose of property.

Rule 11-44 and Rule 601 which is involved in this case are similar in their provisions and purpose (see Baum v. Anderson (5th Cir. 1976), 541 F. 2d 1166) and we feel the interpretation of the former is applicable to the latter. We agree with this reasoning and find that the filing of the notice of tax lien in the instant case did not act to dismember the assets in bankruptcy, but perfected U. S. A. 's position as a lien creditor and as such was not an attempt to enforce a lien.

However, U. S. A. in the present case not only perfected its lien after the bankruptcy petition was filed, but also created the lien afterwards. Internal Revenue Code §6322 (26 U. S. C. §6322) provides:

"Unless another date is specifically fixed by law, the lien imposed by section 6321 [dealing with liens for nonpayment of taxes] shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time."

In order to perfect this tax lien against certain persons, Internal Revenue Code §633 (26 U. S. C. §6323) requires the further step of notice filing, which, in the case of real estate, must be filed under state law in the recorder's office of the county where the property is located.

In the instant case the bankruptcy petition was filed on February 4, 1977 , the tax assessment made on February 21, 1977 , and the notice filed on February 25, 1977 . U. S. A. was not only perfecting a lien after the bankruptcy petition but did not cause the lien to arise until the assessment on February 21, 1977. Until that time, U. S. A. had a potential claim for taxes against Mr. Seyffert. There is a question of whether the act of assessment by U. S. A. is prohibited by the stay in the Bankruptcy Court. Rule 401 of the Rules of Bankruptcy Procedure (11 U. S. C. (1976)) provides for the stay of actions founded on an unsecured provable debt as opposed to enforcement of a lien which Rule 601 addresses. Rule 401(a) provides:

"Stay of Actions. The filing of a petition shall operate as a stay of the commencement or continuation of any action against the bankrupt, or the enforcement of any judgment against him, if the action or judgment is founded on an unsecured provable debt other than one not dischargeable under clause (1), (5), (6), or (7) of section 35(a) of this title."

This rule would not stay the assessment of the tax debt since this liability is non-dischargeable under section 17a(1)(e) of the Bankruptcy Act (11 U. S. C. 35(a)(1)(e) (1976)). (United States v. Sotelo [78-1 USTC ¶9446] (1978), 436 U. S. 268, 98 S. Ct. 1795, 56 L. Ed. 2d 275.) It is also noted that Internal Revenue Code §6871(a) (26 U. S. C. §6871(a)) expressly provides for immediate aessessment of tax deficiencies upon the filing of a petition for bankruptcy. These two provisions make it clear that the assessment of the tax deficiency after the filing of the bankruptcy petition was not prohibited by Rule 401 of the Rules of Bankruptcy Procedure.

At oral argument, Union contended that under the Revised Bankruptcy Act, Act of November 6, 1978 , Pub. L. No. 95-598, 92 Stat. 2549, to be codified in 11 U. S. C., effective October 1, 1979, the action taken by U. S. A. would be prohibited by the stay provisions of section 362 and that this section was intended to be declarative of existing law. An examination of section 362 and the legislative history of the act shows that the assessment and recording of the tax lien in the instant case would be prohibited under the Revised Bankruptcy Act. However, that act is not applicable to the present case. In addition, the major purpose of the act is the modernization of the bankruptcy laws. (See H. R. Rep. No. 95-595, 95th Cong., 2d Sess. 3, reprinted in [1978] U. S. Code Cong. & Ad. News, Bankruptcy Law Revision, 179, 181; S. Rep. No. 95-989, 95th Cong., 2d Sess. 2, reprinted in [1978] U. S. Code Cong. & Ad. News, Bankruptcy Law Revision, 3, 4.) Concerning the automatic stay of section 362 the House Report noted:

"The automatic stay in H. R. 8200 [section 362] differs in some ways from the stays provided by the Rules of Bankruptcy Procedure today. The new stay expands coverage in some areas, reduces it in others, and clarifies many uncertain aspects of the current provisions." H. R. Rep. No. 95-595, 95th Cong., 2d Sess. 174, reprinted in [1978] U. S. Code Cong. & Ad. News, Bankruptcy Law Revision, 179, 351.

Since the scope and purpose of the new stay provisions of section 362 are not identical with Rule 601, we defer to case law construing the latter and holding that perfection of a lien after the filing of the bankruptcy petition does not violate Rule 601. Since neither the assessment of taxes violated Rule 401(a) nor the filing of tax notice violated Rule 601(a), and the tax liability of Mr. Seyffert was not discharged in bankruptcy, the trial court erred in finding U. S. A.'s lien void.

Union argues that this appeal should be dismissed as moot since U. S. A. failed to seek a stay or supersedeas of the decree allowing private sale and distribution of the proceeds. Because of this it would be futile to accord the tax lien priority in property in which the debtor has no interest. Union relies on First Nat. Bank of Jonesboro v. Road Dist. No. 8 (1944), 322 Ill. App. 293, 54 N. E. 2d 847, which admittedly supports their position. However, this case was reversed in First Nat. Bank of Jonesboro v. Road Dist. No. 8 (1945), 389 Ill. 156, 58 N. E. 2d 884 where the court answered a similar contention as follows:

"It is not reasonable to suppose that the legislature intended that a judgment or decree for the payment of money should, upon its enforcement by execution or otherwise, in the absence of a supersedeas pending an appeal, become final and no longer subject to review, so as to require the dismissal of the pending appeal, notwithstanding provision is expressly made for the prosecution of an appeal without supersedeas. A party to a suit is presumed to know of all the errors in the record, and such party cannot acquire any rights or interests based on such erroneous decree that will not be abrogated by a subsequent reversal thereof. If such party has received benefits from the erroneous decree or judgment, he must, after reversal, make restitution, and, if he has sold property erroneously adjudged to belong to him, he must account to the true owner for the value. Titles acquired by parties to the record under an erroneous decree or judgment will be divested by the subsequent reversal of such decree or judgment. [Citations.] A party to a decree cannot acquire any rights thereunder while the same is subject to review which he can assert after the decree is reversed, since the effect of the reversal is to abrogate the decree and leave the cause as it stood prior to the entry of the decree." 389 Ill. 156, 161-162.

Union also cites Supreme Court Rule 305(i) (Ill. Rev. Stat. 1977, ch. 110A, par. 305(i)) as authority for its position. That rule specifically protects rights and interests of non-parties in the absence of a stay of judgment and would not protect the rights of Union , a party below, from reversal on appeal. Rule 305(i) and the First Nat. Bank of Jonesboro case are consistent and make clear that U. S. A. 's failure to seek a stay or supersedeas does not render this appeal moot.

We conclude that U. S. A. has a valid and subsisting lien on the subject property, superior and prior to the judgment lien of Union .

Accordingly, we reverse the trial court's orders of: (1) March 30, 1978, granting Union summary judgment against U. S. A. and declaring U. S. A.'s tax lien void; (2) April 28, 1978, denying U. S. A.'s motion to reconsider the order granting summary judgment; and (3) June 5, 1978, denying U. S. A.'s motion to deny plaintiff's motion for decree approving private sale. We vacate the decree of June 5, 1978 , and remand the cause for further proceedings consistent with this opinion.

Orders reversed;

decree vacated;

and remanded.

LORENZ and WILSON, JJ., concur.

¹ Although not a part of this record, it appears from appellant's brief that the real property subject to the foreclosure suit was not part of the bankruptcy estate since the proceeding was closed as a "no asset" case.

² The property was sold for $77,000. The amounts to be distributed included: (1) Schaumburg --mortgage payment $40,455.99; (2) Western $572.50; (3) Woodfield $2,340.95; and (4) Union $26,540.32.

³ Only U. S. A. and the Union have filed briefs on appeal. In its brief U. S. A. states that it is immaterial whether Woodfield's and Western's judgments are subordinated to the tax lien, since the proceeds are sufficient to cover all three.

 

 

[75-1 USTC ¶9419]In re R & M Container Co., Inc., Bankrupt, Henry A. Stikes, Sr., Trustee, Plaintiff v. The United States of America , Defendant

U. S. District Court, So. Dist. Ala. , So. Div., Civil Action No. 74-538-P, 3/12/75

[Code Sec. 6323]

Validity of tax lien: Filing of notice: Clerk of District Court.--The Bankruptcy Judge's decision that the government had not perfected its lien by filing with the Clerk of the District Court was upheld.

D. Wayne Childress, P. O. Box 1465, Mobile, Ala., for bankrupt, Herbert P. Feibelman, P. O. Box 2082, Mobile, Ala., for plaintiff. Edward J. Vulevich, Jr., Assistant United States Attorney, Mobile , Ala. , for defendant.

Order

PITTMAN, District Judge:

This is an appeal of the order of the Bankruptcy Judge entered in this suit on November 5, 1974 . Pursuant to Rule 806, the appellant United States has designated the record for appeal and has stated the sole issue to be whether the United States properly filed its notice of tax lien with the appropriate party to establish a valid lien against property held by the Trustee. The Bankruptcy Judge decided that the government had not perfected its lien by filing with the Clerk of the District Court as required by 26 U. S. C. §6323. Hoover v. McCullough Industries [73-1 USTC ¶9237], 351 F. Supp. 1023 (S. D. Ala. 1972). The government admits its failure to file with the District Clerk but contests the validity of the Hoover decision and has previously sought to have this court reverse its previous holding. See White Construction Co. v. Southland Investment Co. [74-2 USTC ¶9693], C. A. 74-350-P; Wade v. United States, C. A. 75-31-P.

The issue raised on this appeal has been thrice decided adversely to the United States and these precedents are controlling here.

It is therefore ORDERED, ADJUDGED and DECREED that the dcision of the Bankruptcy Judge should be, and is hereby, AFFIRMED.

Costs are taxed to the appellant.

 

 

[72-2 USTC ¶9499]Latipac, Inc., Plaintiff v. General Tire & Rubber Co., et al., Defendants

U. S. District Court, No. Dist. Calif. , No. C-69 469 SC, 346 FSupp 1043, 8/27/71

[Code Sec. 6323]

Lien for taxes: Priority: Summary judgment: Place of filing tax lien: Intangible property: Other liens: Genuine question of fact.--The Government was awarded a partial summary judgment as to its Federal tax lien, where the lien was properly filed in the taxpayer's domicile with respect to intangible property. As to the liens of other creditors, however, there was a genuine issue of fact as to priority, thus precluding summary judgment for them.

John J. Bartko, Burd, Hunt & Friedman, One Maritime Plaza, Suite 745, San Francisco, Calif., Jay P. Sanders, Tinning & Delap, 1617 Bonanza St., P. O. Box 4713, Walnut Creek, Calif., for plaintiff. James L. Browning, Jr., United States Attorney, Edward O. C. Ord, Assistant United States Attorney, San Francisco, Calif., Bruce D. Gillies, Donahue, Gallagher, Thomas & Woods, 1417 Central Bldg., 436 14th St., Oakland, Calif., for General Tire & Rubber Co.; Stephen M. Chandler, Chandler & Bruner, 220 Juana Ave., San Leandro, Calif., for Braddock, Logan & Valley; Joseph H. Inglese, Roger M. Hughes, 1255 Post St., San Francisco, Calif., for Stores Collection Bureau of Alameda County and Anderson & Perkins, Inc.; Edward N. Jackson, 1255 Post St., San Francisco, Calif., for California Collection Agency, Inc.; Donald E. Anderson, 550 Montgomery St., San Francisco, Calif., for George Ballard Co.; Peter Kakures, 337 17th St., Oakland, Calif., for Collection Service, Inc.; Nat Frankel, 502 Bank of Commerce Bldg., Oakland, Calif., for G. Delaney; Hardin, Fletcher, Cook & Hayes, 1956 Webster St., Oakland, Calif., for Oliver DeSilva, Inc.; Roy E. Hamrick, 438 Estudillo Ave., San Leandro, Calif., for San Leandro Rock Co.; John F. Wells, Stark, Stewart, Simon & Sparrowe, Financial Center Bldg., Franklin & 14th Sts., Oakland, Calif., for R. M. Lee; Evelle J. Younger, Attorney General, William J. Shaw, Deputy Attorney General, 500 Wells Fargo Bank Bldg., 5th St. & Capitol Mall, Sacramento, Calif., for State of Calif., Director of Human Resources Development, for defendants.

Memorandum and Order

CONTI, District Judge:

This is an action in interpleader which was originally filed in the Superior Court of the State of California , in and for the County of Marin . The case is presently before the court on individual motions for partial summary judgment by defendants United States of America, Oliver De Silva, Inc., General Tire and Rubber Co., and Braddock, Logan & Valley Co. The undisputed facts can be summarized as follows:

[Facts]

The plaintiff, Latipac, Inc., became a judgment debtor of J. W. Lee & Co. in the amount of $150,000.00, upon the entry of a judgment in its favor in said amount in a civil action in the Superior Court of Marin County . Pursuant to a stipulated Consent to Entry of Judgment in said Superior Court case, the judgment debtor, Latipac, Inc., on October 23, 1969, filed this action in interpleader in the Superior Court of Marin County and pursuant thereto paid a fund of $90,390.73 into the registry of that court. The United States subsequently removed the action to this district court.

[Basis of Claims]

Most of the defendants claims are based on liens on the chose in action underlying the interpleded fund which were derived from "order for Lien" granted by the Superior Court of Marin County in J. W. Lee & Co.'s action against Latipac, Inc. These liens were obtained pursuant to Section 688.1 of the California Code of Civil Procedure. The claim of De Silva is based on a written assignment of certain funds (Table I) and the claim of the State Compensation Insurance Fund is based on a "stipulation for Lien" (Table I). The liens of the United States are based upon unpaid assessments of internal revenue taxes made against J. W. Lee & Co., notices of federal tax liens filed, and levies made on the plaintiff Latipac in respect of said assessments. (See Table II).

With respect to each of the motions for partial summary judgment, the findings of this court are as follows:

Motion for Partial Summary Judgment in Favor of the United States

Section 6321 of the Internal Revenue Code of 1954 provides for the imposition of a tax lien upon all property and rights to property in which the delinquent taxpayer has an interest. It arises as a secret lien, effective from the date of the assessment of the tax. Section 6323, however, provides that as to certain groups--purchasers, holders of security interests, mechanics lienors or judgment creditors--the government's tax lien is not valid until it is filed in the office designated by state law for such tax lien filings.

Priority of federal tax liens over competing liens is a matter of federal law. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Equitable Life Ass. Soc. of the U. S. [66-1 USTC ¶9444], 384 U. S. 323 (1966); United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964). In determining the priority of federal tax liens and non-federal liens, the common law rule of "first in time is first in right" controls. United States v. Equitable Life Ass. Soc. of U. S. , supra. "However, in determining the priority of liens against a government tax lien, the one which is first in time will be deemed first in right if, and only if, the one first in time is specific and perfected in the federal sense." United States v. Truss Tite, Inc. [68-1 USTC ¶9296], 285 F. Supp. 88 (S. D. Texas 1968). Therefore, only a lien which is perfected prior to the date that the federal tax is assessed (or before the federal tax lien is filed if competing lien is covered by Section 6323) will be entitled to priority over the federal lien.

In the instant case most of the defendants claim to have perfected judgment liens on the fund and, accordingly, come within the protection of Section 6323, e.g., the government's lien will not be valid as to them unless it is properly filed.

In looking at Tables I and II, it is clear that only three claimants contend that they have liens on the chose in action which arose prior to May 13, 1965, the latest date that any of the federal tax liens were filed. The total of these three claims plus the government's claim does not exhaust the fund. Therefore, even if we assume that the liens of Oliver De Silva, Inc., General Tire & Rubber Co. and State of California , Director of Employment have priority over the Government's liens, the government is entitled to summary judgment if it has properly filed its liens.

[Priority of Federal Liens]

Section 6323 provides that federal tax liens are to be filed in the office designated by state law for such tax lien filings. Prior to January 1, 1968, California law (Calif. Government Code §27330) required the filing of notices of federal tax liens to be made "in the office of the county recorder of the county within which the property subject to the lien is situated." In the present case the question arises as to where the intangible personal property "is situated".

The government contends that intangible personal property is situated in the domicile of the taxpayer, which in the case of a corporation is the county in which its principal place of business is located. Accordingly it filed its liens in Alameda County .

[Situs of Intangible Property]

In opposition to the government's motion for summary judgment, defendant Braddock, Logan & Valley contends that the situs of a cause of action is the county in which the cause of action is being prosecuted--where the personal property itself is located.

This court is not aware of any California decision which discusses the situs of intangible personal property within the meaning of Section 27330 of the California Government Code. However, in United States v. Sprekels [43-2 USTC ¶9572], 50 F. Supp. 789 (N. D. Calif. 1943), the district court held that with regard to the taxpayer's intangible personal property the proper place for filing of government tax liens is in the county where the taxpayer resides--the situs of such property. Although the court did not expressly discuss California law, it must have considered said law as it was controlling with respect to the proper place to file government tax liens.

Further, it is generally held that the situs of intangible personal property is the domicile of its owner. In the absence of a contrary statutory or common law definition of the situs of personal property within the meaning of Section 27330, this court feels that the most reasonable construction is that the taxpayer's domicile is the situs of all of his intangible personal property.

Accordingly, it is the finding of this court that the United States properly filed its tax liens in Alameda County , the principal place of business of J. W. Lee & Co. From the affidavits on file with this court it is clear that there is no genuine issue of fact with respect to the motion of the United States for summary judgment and, therefore, it is the order of this court that said motion be, and it hereby is, granted. The United States shall prepare a form of judgment in accordance with the foregoing.

Motion for Partial Summary Judgment in Favor of Oliver De Silva, Inc.

Defendant Oliver De Silva, Inc. contends that prior to April 25, 1963, it completed certain paving work for J. W. Lee & Co. On April 25, 1963, Oliver De Silva, Inc. accepted from J. W. Lee & Co., as payment for said paving work, a promissory note in the sum of $10,343.80, accompanied by an assignment from J. W. Lee & Co. of $10,343.80 of the monies due to Lee from Latipac, Inc. for work done on the Peacock Gap Subdivision No. 2. Subsequently, the sums due from Latipac to J. W. Lee became the subject of an action filed in the Superior Court of Marin County as discussed, supra.

Oliver De Silva, Inc. bases its claim in this action on said assignment of funds, which occurred on May 6, 1963, prior to the alleged effective dates of any of the claims of other defendants in this action. Oliver De Silva, Inc. contends that its affidavits show that the assignment by Lee was valid and prior in time to any of the claimed liens on the interpleded fund. Therefore, it is submitted that as a matter of law Oliver De Silva is entitled to partial summary judgment for the entire amount of its claim.

[Genuine Issue of Fact]

It is the finding of this court that with respect to Oliver De Silva's motion for summary judgment there remains a genuine issue of fact and that, therefore, the motion must be denied. In its amended complaint J. W. Lee & Co. alleged in its second cause of action that Latipac was indebted to Lee in the sum of $735,306.24 "on an account for work, labor, materials and equipment supplied for defendants at their special instance and request in the improvements upon the premises herein described." The "premises" of defendant upon which plaintiff had worked included lands within the boundary of Peacock Lagoon Unit No. 1; lands within the boundary of Marin Bay Unit No. 2a; and lands within the boundary of Peacock Lagoon Unit No. 2.

Plaintiff Lee recovered $150,000.00 on its second cause of action. The problem, however, is that the judgment was for work performed on all three premises of the defendant mentioned above, while the assignment by J. W. Lee to Oliver De Silva was only with regard to money owned by Latipac to J. W. Lee for services performed on Peacock Lagoon No. 2. De Silva's affidavits do not establish what portion of the $150,000.00 judgment is attributable to the work done on Peacock Lagoon No. 2.

Therefore, it is the finding of this court that there is a genuine issue of fact which must be resolved at trial and it is, accordingly, the order of this court that defendant Oliver De Silva, Inc's motion for summary judgment be, and it hereby is, denied. In light of the above disposition of the motion, it is unnecessary for this court to determine at this time the validity and priority of the rights of Oliver De Silva, Inc. by reason of the assignment.

Motions for Partial Summary Judgment in Favor of General Tire & Rubber Co. and Braddock, Logan & Valley Co.

Both General Tire & Rubber Co. and Braddock, Logan & Valley Co. base their claims on liens obtained on the cause of action of J. W. Lee & Co. against Latipac, Inc., pursuant to §688.1 of the California Code of Civil Procedure. In support of their motions they contend that competing liens under §688.1 should be satisfied on a first-in-time, first-in-right basis. Parties who oppose these motions for summary judgment contend that competing liens under §688.1 should be paid on a pro rata basis.

It is the finding of this court that this substantive issue need not be decided at this point in that even if this court accepts the construction of §688.1 as posited by the moving parties, there are still genuine issues of fact which exist.

General Tire and Braddock submit that when §688.1 is read together with §2897 of the California Civil Code, it is clear that each lien claimant in this action, proceeding under §688.1, has prority in accordance with the date of the order granting such lien. In pertinent part, §2897 provides:

"Other things being equal, different liens upon the same property have priority according to the time of their creation . . .." (Emphasis added)

In applying §2897, the court is to consider the time of each lien's creation only after determining that in all other respects the liens are equal. Whether liens are equal in other respects is an equitable determination which this court feels should not generally be resolved on a motion for summary judgment.

Therefore, it is the order of this court that the priority of liens granted pursuant to §688.1 will be determined after a trial. Accordingly, motions for partial summary judgment in behalf of General Tire and Rubber Co. and Braddock, Logan & Valley Co., are denied.

¹ In its answer, Collection Service, Inc. claims the sum of $15,239.46 by virtue of its Abstract recorded with the County Recorder of Alameda County on July 7, 1967.

 

 

[69-1 USTC ¶9233]John T. Dalton and Dorothea C. Dalton, a marital community under the laws of the State of Washington, Plaintiff v. United States of America, Defendant

U. S. District Court, West. Dist. Wash. , No. Div., Civil No. 7117, 2/17/69

[Code Secs. 6321 and 6331]

Tax liens: Levy and distraint: Community property: Washington: Husband's salary: Irreparable damage.--Even though the separation of husband and wife for more than two years is grounds for divorce under Washington law, such, in the absence of the commencement of divorce proceedings, or entry into a property settlement, or other evidences indicating an intention of the parties to permanently and legally terminate the marriage relationship, does not operate to dissolve the marriage relationship. Therefore, the earnings of the taxpayer-husband were marital community property. The Government's tax lien based upon an unpaid tax obligation of the taxpayer-husband did not attach to his interest in the community property. The taxpayer's wife and children had an economic interest in the taxpayer's earnings and the enforcement of a levy against such salary would cause them to suffer irreparable damage.

James F. McAteer, 1115 Norton Bldg., Seattle , Wash. , for plaintiff. Eugene G. Cushing, United States Attorney, Albert E. Stephan, Assistant United States Attorney, 1012 U. S. Courthouse, Seattle, Wash., for defendant.

Findings of Fact and Conclusions of Law

BEEKS, District Judge:

This case was regularly tried before the above-entitled Court on January 15, 1969 . In addition to the admitted facts established by pre-trial Orders entered herein on October 18, 1968 , and on January 14, 1969 , the Court, after hearing testimony (including testimony taken by deposition of John T. Dalton), admitting exhibits into evidence, and being fully advised, now makes the following:

Findings of Fact

I. During the calendar year 1963, John T. Dalton expended the sum of $840.18 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

II. During the calendar year 1964, John T. Dalton expended the sum of $1,228.05 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

III. During the calendar year 1965, John T. Dalton expended the sum of $2,685.50 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

IV. During the calendar year 1966, John T. Dalton expended the sum of $3,779.57 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

V. During the calendar year 1967, John T. Dalton expended the sum of $4,851.41 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

VI. During the calendar year 1968, John T. Dalton expended the sum of $5,243.66 directly and indirectly for the partial support of the children of John T. Dalton and Dorothea C. Dalton and for the partial support of Dorothea C. Dalton.

[Family Financial Requirements]

VII. John T. Dalton and Dorothea C. Dalton regularly consult together as to the financial requirements for the maintenance of the home in which Dorothea C. Dalton and the children of John T. Dalton and Dorothea C. Dalton reside and the medical and educational expenses of the children.

[Marriage Not Terminated]

VIII. Neither John T. Dalton nor Dorothea C. Dalton sought to legally terminate the marriage relationship by divorce proceedings. John T. Dalton and Dorothea C. Dalton have not entered into a property settlement agreement.

IX. The marriage of John T. Dalton and Doroteha C. Dalton was not dissolved in 1959 or at any point in time thereafter.

X. The children of John T. Dalton and Dorothea C. Dalton, and Dorothea C. Dalton have an economic interest in the earnings of John T. Dalton.

[Irreparable Damage]

XI. The children of John T. Dalton and Dorothea C. Dalton, and Dorothea C. Dalton would suffer irreparable injury if the defendant is permitted to levy on those wages and earnings of John T. Dalton which is the subject of this civil action.

From the foregoing Findings of Fact, the Court now enters the following:

Conclusions of Law

I. Plaintiff constitutes a marital community under the law of the State of Washington and this Court has jurisdiction under the statutory authority of 28 U. S. C. 1346(e) and 26 U. S. C. 7426.

II. The plaintiff marital community would suffer irreparable injury if enforcement of the levy made on Pioneer Industries, Inc. on the salary of John T. Dalton is not enjoined.

[Earnings as Community Property]

III. The earnings of John T. Dalton during the years 1963, 1964, 1965, 1966, 1967 and 1968, constitute community property under the law of the State of Washington.

[Salary Not Subject to Levy]

IV. The interest of the taxpayer John T. Dalton in his salary paid by Pioneer Industries, Inc., may not be levied upon for collection of income tax assessed against the separate taxpayer John T. Dalton even if the identical plaintiff marital community existed both at the time the separate tax liability was incurred and at the time of the levy.

[Marital Community Not Dissolved]

V. The physical separation of husband and wife for more than two years which would constitute grounds for divorce under the law of the State of Washington (RCW 26.08.020(9)) in the absence of commencement of divorce proceedings, or entry into an agreement of property settlement between spouses, or other evidence indicating an intention of the parties to permanently and legally terminate the marriage relationship does not operate to dissolve the marriage relationship under the law of the State of Washington, nor for purposes of collection of internal revenue taxes.

VI. The marital community of John T. Dalton and Dorothea C. Dalton was not dissolved in 1959 or at any point in time thereafter.

VII. The marital community of John T. Dalton and Dorothea C. Dalton has an economic interest in the earnings of John T. Dalton.

VIII. The earnings of John T. Dalton constitute marital community property under the law of the State of Washington .

IX. The marriage of John T. Dalton was emotionally defunct from and after John T. Dalton's release from prison when he did not return to live in the family home, nevertheless the marriage continued for all other legal purposes.

 

 

[68-2 USTC ¶9558]United States of America, Plaintiff v. Ignazio Melchiorre, formerly t/a Italian-American Grocery Company, et al., Defendants.

U. S. District Court, East. Dist. Va., Norfolk Div., Civil Action No. 5431, 292 FSupp 305, 8/16/68

[R. S. §3466]

Lien for taxes: Insolvency proceeding: Priority: Landlord's lien: Virginia.--In an insolvency proceeding under R. S. §3466, a U. S. tax lien was entitled to priority over a Virginia landlord's lien where the tax liability was assessed on June 20, 1963 and the landlords obtained a distress warrant on June 21, 1963. The landlord's lien was not specific and perfected on the date of the voluntary assignment by the delinquent tenant for the benefit of creditors since the amount of the lien had not been established. Waddill, Holland & Flinn, Inc., (Sup. Ct. ) 45-1 USTC ¶9126, 323 U. S. 353, followed.

C. Vernon Spratley, Jr., United States Attorney, P. O. Box 60 , Norfolk , Va. , for plaintiff. Russo, White and Katherman, Plaza One, Norfolk, Va., for I. Melchiorre and N. Hecht; Maurice Steingold, Town Point Bldg., Norfolk, Va., for Char-Ben Corp.; Fine, Fine, Legum, Schwan and Fine, Law Bldg., Norfolk, Va., for Lomin Co., Inc.; Melvin J. Radin, Rotunda Bldg., Norfolk, Va.; for E. Elson; for defendants.

Memorandum

HOFFMAN, District Judge:

Defendant landlords, Lomin Company, Inc., Char-Ben Corp., and Ester Elson, are competing for the fund presently in the possession of the defendant, Norman Hecht, Trustee, alleging that their claim to this fund is senior and prior to that of the federal tax liens asserted here by the Government. In response to requests for admissions filed and served in this case, defendants have admitted the following:

1. That the defendant, Ignazio Melchiorre, t/a Italian-American Grocery Company, was a tenant of the aforesaid defendants by virtue of a written lease calling for the payment of rent in the sum of $200.00 per month.

2. That the defendant taxpayer, Ignazio Melchiorre, defaulted in the payment of his rent, and the defendant landlords obtained a warrant of distress on June 21, 1963 . The warrant of distress was in the sum of $600.00 covering rent at the rate of $200.00 per month for the months of April, May and June of 1963, and it was issued by a justice of the peace.

3. That the defendant, Ignazio Melchiorre, made an assignment for the benefit of his creditors on August 8, 1963.

4. That as a result of this assignment and the sale of Ignazio Melchiorre's stock in trade and fixtures by the defendant, Norman Hecht, Trustee, the said trustee is holding the sum of $1,093.48, subject to certain admin istrative expenses.

The District Director of Internal Revenue made an assessment on June 20, 1963 against the defendant, Ignazio Melchiorre, t/a Italian-American Grocery Co., for withholding taxes, penalties and interest for the four quarters of 1962 in the sum of $3,319.52, and for the first quarter of 1963 in the sum of $812.00. The assessment was based on the filing of no payment returns by the defendant taxpayer. On June 21, 1963 notice of this assessment was given to the taxpayer and demand was made for payment. There is still due and owing to the United States by Ignazio Melchiorre by virtue of the aforesaid assessment the sum of $3,909.91, plus statutory interest. A notice of federal tax lien covering the aforesaid assessment was filed with the Clerk of the Corporation Court in Norfolk , Virginia , on June 24, 1963. On July 5, 1963 and August 2, 1963 the District Director made assessments against Ignazio Melchiorre in the respective sums of $179.21 and $319.25, and duly gave the taxpayer notice of the assessments making demands for payment. These sums, plus statutory interest, thereon, are still due and owing the United States .

The plaintiff, United States of America , moves this Court for summary judgment pursuant to Rule 56, Federal Rules of Civil Procedure. The issue before the Court is whether or not §3466 of the Revised Statutes, 31 U. S. C. 191, gives priority to a tax lien of the United States over a landlord's lien as a matter of law where the District Director of Internal Revenue made the assessment on June 20, 1963, and the defendant landlords obtained a warrant of distress on June 21, 1963. An affidavit as to the insolvency of the taxpayer on August 8, 1963 has been filed and is not controverted.

This issue is substantially the same as that in United States v. Waddill, Holland & Flinn, Inc. (1945), [45-1 USTC ¶9126] 323 U. S. 353, 65 S. Ct. 304, 89 L. Ed. 294 (28 S. E. 2d 741, 182 Va. 351). In this case Mrs. Oeland Roman operated a restaurant in Danville , Virginia , on premises leased from defendant landlords Waddill, Holland & Flinn, Inc. On June 19, 1941, she executed a general deed of assignment to a trustee for the benefit of creditors specifically conveying all personal property, fixtures and equipment used by her in the conduct of the restaurant and located on the premises. The property remained on the premises until sold by the trustee on July 12, 1941. After deduction of appropriate admin istrative expenses, a sum of $1,407.29 remained. Four creditors claimed priority of payment from the fund, two of which are not relevant to the issue under consideration.

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

2. The Virginia Unemployment Compensation Commission made a tax claim which was conceded to be subordinate to 1 above and hence not considered.

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

4. The defendant landlord Waddill, Holland & Flinn, Inc. claimed $1,500.00 for six months' rent due and to become due. On July 1, 1941, twelve days after the deed of assignment was executed, the defendant landlords obtained a distress warrant for 32/5 months' past due rent and an attachment for 23/5 months' future installments of rent. On the same day the firm levied the warrant and attachment on the assignor's property located on the leased premises.

The trustee under the deed of assignment filed a petition in the Corporation Court of Danville, reciting the various claims and requesting advice as to the proper distribution. That court held that the landlord was entitled to priority in payment over the claims of the United States and the Virginia Unemployment Compensation Commission, but that its claim was subordinate to that of the City of Danville . On appeal by the United States , the Supreme Court of Appeals of Virginia affirmed this order of distribution. On certiorari the Supreme Court reversed the holding of the lower court.

Justice Murphy delivered the opinion of the court:

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

"The words of §3466 are broad and sweeping and, on their face, admit of no exception to the priority of claims of the United States . Thelusson v. Smith, 2. Wheat, 396, 425; United States v. Texas, [[42-1 USTC ¶9162] 314 U. S. 480, 484]. But this court in the past has recognized that certain exceptions could be read into this statute. The question has not been expressly decided, however, as to whether the priority of the United States might be defeated by a specific and perfected lien upon the property at the time of the insolvency or voluntary assignment. Conard v. Atlantic Insurance Co., 1 Pet. 386, 441, 444; Spokane County v. United States [1 USTC ¶387], 279 U. S. 80, 95; United States v. Knott, 398 U. S. 544, 551; New York v. Maclay [[3 USTC ¶1044] 288 U. S. 290, 293, 294]; United States v. Texas, [[42-1 USTC ¶9162] 314 U. S. 480, 484, 486]. It is within this suggested exception that the landlord and the municipality seek to bring themselves. Once again, however, we do not reach a decision as to whether such an exception is permissible for we do not believe that the asserted liens of the landlord and the municipality were sufficiently specific and perfected on the date of the voluntary assignment to cast any serious doubt on the priority of the claim of the United States .

"The landlord rests its claim upon certain provisions of the Virginia Code of 1936. Sections 5519 ¹ and 5523 ² authorize a landlord to levy distress for six months' rent upon 'any goods of the lessee . . . found on the premises, or which may have been removed therefrom not more than thirty days . . . for not more than six months' rent if the premises are in a city or town.' Section 5524 ³ provides that the goods of the tenant on leased premises in a city or town may not be removed by a lienor or purchaser, nor taken under legal process, save 'on the terms of paying to the person entitled to the rent so much as in arrear, and securing to him so much as is to become due,' not to exceed six months' rent. Other sections provide for officers making the distress under warrant from a justice, founded upon an affidavit of the person claiming the rent, and for such officers to make returns of their actions and proceedings upon such warrants. Provisions are also made for legal proceedings looking toward the possession and sale of the property to satisfy the debt.

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

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

"Specificity was clearly lacking as to the lien on June 19, 1941 , the date of the assignment. On that day it was still uncertain whether the landlord would ever assert and insist upon its statutory lien. Until that was done it was impossible to determine the particular six months' rent, or a proportion thereof, upon which the lien was based. The lien did not relate to any particular six months' rent but could attach only for the rent which might be due at or after the time when the lien was asserted. Wades v. Figgatt, 75 Va. 575, 582. And if it were asserted at a time when the tenancy had terminated or would terminate within six months of the date to which rent had been fully paid, the lien could only cover less than six months' rent. Conceivably the amount of rent due or to become due was uncertain on the day of the assignment. The landlord may have been mistaken as to the rental rate or as to payments previously made and the tenant may have been entitled to a set-off. See Allen v. Hart, 18 Gratt. [59 Va. ] 722, 737; Hancock v. Whitehall Tobacco Co., 100 Va. 443, 447, 41 S. E. 860. Moreover, while the lien legally attached to all such property as might be on the premises when the lien was asserted or within thirty days prior to distraint, the landlord could distrain goods only to the extent necessary to satisfy the rent justly believed to be due, the tenant possessing an action for damages for excessive distraint. Va. Code §5783 ⁴; Fishburne v. Engledove, 91 Va. 548, 22 S. E. 354; Gurfein v. Howell, 142 Va. 197, 128 S. E. 644. Thus until the extent of the lien was made known by the landlord and until some steps had been taken to distrain or attach sufficient property to satisfy the lien, it was impossible to specify the goods actually and properly subject to the lien. Some of the goods on the premises may have been subject to mortgages or liens which attached before the goods were brought on the premises, in which case the landlord's lien would be inferior. Va. Code §5523. ⁵ And if other goods were removed after the date of the voluntary assignment but more than thirty days before the distraint or attachment, the right of distraint and attachment as to those goods would disappear. Va. Code §5523 ⁶; Dime Deposit Bank v. Wescott, 113 Va. 567, 75 S. E. 179. These factors compel the conclusion that neither the rent secured by the lien nor the property subject to the lien was sufficiently specific and ascertainable on the day of the voluntary assignment to fall within the terms of the suggested exception.

"Nor was the statutory lien perfected as a matter of actual fact, regardless of how complete it may have been as a matter of state law. The tenant was divested of neither title nor possession by the silent existence of the landlord's statutory lien on the date of the assignment. Only after the lien was actually asserted and an attachment or a distraint leveled, enabling the landlord to satisfy his claim out of the seized goods, could it be argued that such goods severed themselves from the general and free assets of the tenant from which the claims of the United States were entitled to priority of payment. Prior to that time, the lien operated to do no more than prevent the removal of goods from the premises by certain classes of persons, Va. Code §5524 ⁷, and give the landlord priority in distribution under state law provided that the goods remained on the premises. Such a potential, inchoate lien could not disturb the clear command of §3466 of the Revised Statutes. Something more than a 'caveat of a more perfect lien to come' was necessary."