Prior Law Page5

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The only factual difference between the instant case and the Waddill Co. case is that in Waddill the landlord obtained a distress warrant and levied thereunder after the execution of the assignment for the benefit of creditors, and here the defendant landlords obtained a distress warrant before the assignment for the benefit of creditors, but did not levy thereunder.

Moreover, in the instant case no act of levy was made on the property presently in the hands of the defendant trustee. Even if a levy had been made, the landlords' lien would not be choate until the amount of the lien was established. The amount of the lien is not established until the date of the sale under an uncontested distress levy or the date of the judgment if the levy is contested; the judgment determines the amount of the tenant's debt. §55-232, Code of Virginia (1950); Hancock v. Whitehall & Co., 100 Va. 443; Allen v. Hart, 18 Gratt. (59 Va. ) 722. Also in the present case there was no sale under an uncontested levy; the sale was under an assignment for the benefit of creditors.

Hence under the authority of United States v. Waddill Co., supra, the United States should be granted its motion for summary judgment and an order has this day been entered directing the Clerk to draw his check in the sum of $808.13 (same being the balance of the proceeds on deposit to the registry of this cause) to "Internal Revenue Service" and forward same to the United States Attorney if no notice of appeal is filed within sixty (60) days from this date, or at an earlier date if counsel for the landlords advise in writing that no appeal will be noted.

¹ §5519 is now Va. Code §55-227 (1950).

² §5523 is now Va. Code §55-231 (1950).

³ §5524 is now Va. Code §55-233 (1950).

⁴ Va. Code §5783 is now Va. Code §8-651 (1950).

⁵ §5523 is now Va. Code §55-231 (1950).

⁶ §5523 is now Va. Code §55-231 (1950).

⁷ §5524 is now Va. Code §55-233 (1950).

 

 

[68-1 USTC ¶9281]Columbia Casualty Company, Plaintiff v. Consolidated Shipping Co. et al., Defendants

U. S. District Court, East. Dist. La., New Orleans Div., Civil Action No. 8557, Section "C", 11/30/67

[1954 Code Sec. 6323(b)(8)]

Liens for taxes: Superpriorities: Attorney's lien: Effective date of 1966 Federal Tax Lien Act.--An attorney's lien was entitled to priority over the government's lien where it appeared that this claim for fees was reasonable and the lien attached in connection with a judgment or settlement obtained by him. The provision granting a lien for attorney's fees was one added by the Federal Tax Lien Act of 1966 (P. L. 89-719), made effective from date of enactment of the act with certain exceptions. The government's contention that the Act was not applicable was in error, since a judgment in favor of the government on a claim for taxes was merely a money action and not one in which a lien was enforced.

[1954 Code Sec. 6321 prior to enactment of P. L. 89-719]

Liens for taxes: Validity: When lien arises: Penalty assessments: Bankrupt's funds in hands of court trustee.--There was no necessity for the government to secure a judgment against a trustee holding a bankrupt's funds subject to competing claims in order to secure a valid lien for unpaid taxes; a lien of the United States includes any assessable penalty and is valid either at the time of the assessment or at the time the notice of assessment is properly filed.

[1954 Code Sec. 6323 prior to enactment of P. L. 89-719]

Liens for taxes: Priorities: Judgment creditors: Pledgees: Filing of notice.--A tax lien filed by the United States had priority as against a judgment creditor and a pledgee where the government filed notice before the one became a pledgee and the other secured execution on its judgment. Under state law, no privilege or lien is obtained until execution on the judgment. Since the claims of the United States exhausted the funds in the hands of the court, the relative rank of the claims between the pledgee and the judgment creditor was moot.

Kathleen Ruddell, Assistant United States Attorney, New Orleans, La., for U. S. Edward F. Wegmann, National Bank of Commerce Bldg., New Orleans, La., for Calmes Engineering & Shipyard Co., Inc. John D. Lambert, Jr., Suite 505, Cotton Exchange Bldg., 231 Carondelet St., New Orleans, La., for Northern Illinois Steel Co.

Findings of Fact

RUBIN, District Judge:

1. On November 25, 1958 , Columbia Casualty Company (" Columbia ") filed suit asking for a declaratory judgment that it was not liable on a contract bond issued on May 13, 1958 , to cover construction to be performed by Consolidated Shipping Company for Louisiana Shipbuilding Corporation (" Louisiana "). The complaint also sought to interplead several claimants on the bond, one of the claimants being Calmes Engineering & Shipyard Company, Inc. ("Calmes").

2. On December 1, 1958, Louisiana filed a petition under Chapter XI of the Bankruptcy Act, listing Calmes as a creditor claiming a lien on the assets of Louisiana . The bankruptcy action and the declaratory judgment and interpleader action were ultimately consolidated, and the claims of the present parties are to funds that were found in the consolidated action to be due Calmes.

3. By January, 1959, Edward F. Wegmann, attorney for Calmes, had begun actively prosecuting Calmes' claim against Louisiana . The claim amounted to more than $60,000. He rendered services of an extensive nature over a period of seven years; and, as a result, the sum of $30,467.78 was determined by Louisiana's trustee as the amount to be paid Calmes. This amount was deposited in the registry of the Court so that the Court could decide in what order competing claims to it should be paid.

4. The claimants, and the events by virtue of which they claim priority, are as follows:

A. The United States assessed taxes and penalties against Calmes of $21,568.26 before July 1, 1958. As of the date of filing of the tax liens, the total balance due on these was $16,573.06. ¹

B. Northern Illinois Steel Company ("Northern") obtained a judgment against Calmes, in Civil Action No. 7296 of the docket of this Court, on July 25, 1958, for $21,529.08, plus interest and costs.

C. From August 22, 1958, through February 27, 1959, the United States assessed withholding and employment taxes for periods in 1958 and 1959 against Calmes in the amount of $5,228.39. As of the date of recording of the tax liens, the total balance due on these was $4,605.15 plus lien fees in the amount of $17.00.

D. The United States filed notice of its liens in the Office of the Recorder of Mortgages of Orleans Parish on the dates indicated in the table set out in Footnote 1.

E. On February 15, 1960, Calmes executed a notarized document in which it said that it "does hereby pledge and assign" to Albert A. Villegas ("Villegas") its claim against Louisiana in order to secure the payment to Villegas of an indebtedness of $46,938.19 for advances made during the period September 8, 1958, through February 2, 1959. This document was executed prior to the filing of notice of the Government's assessment of February 27, 1959, in the amount of $200.42. Thus, at the time the document was executed, notice had been filed on assessments in the amount of $20,977.79.

F. The United States served a notice of its lien on the trustee on January 29, 1964.

G. The Government's claim for taxes was reduced to a judgment on March 19, 1964, in Civil Action No. 14246, for the principal amount of $21,178.21, plus interest, statutory additions and costs of court.

H. Northern issued execution against the trustee on its judgment on January 7, 1966.

I. The Government issued execution against the trustee on its judgment on January 28, 1966.

J. Mr. Wegmann intervened for attorney's fees on November 1, 1967.

5. The sum of $5,000.00 would be reasonable compensation for Mr. Wegmann's extensive services.

Conclusions of Law

1. Edward F. Wegmann is entitled to a payment of $5,000.00 out of funds held in the registry of the Court.

26 U. S. C. A. §6321 creates a lien for unpaid taxes, "including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto . . . in favor of the United States upon all property . . . belonging to [the tax debtor]." However, 26 U. S. C. A. §6323(b)(8) provides that the lien obtained by the Government under Section 6321 is not valid "with respect to a judgment or other amount in settlement of a claim . . . as against an attorney who, under local law, holds a lien upon . . . such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement . . .." ² The amendment applies in this case despite the exceptions set forth in Section 114 of Public Law 89-719. The judgment in favor of the Government in Civil Action No. 14246 was not one in which a lien was enforced but was merely a money action to reduce the Government's claim to judgment. Thus, Section 114(b)(1) is inapplicable. ³

Louisiana recognizes that a lawyer whose efforts have created a fund in which others than his client may share is entitled to be paid a reasonable fee out of the fund thus created. In re Interstate Trust & Banking Company, 1958, 235 La. 825, 106 So. 2d 276, 279 (on rehearing); Louisiana State Mineral Board v. Abadie, La. App. 1 Cir., 1964, 164 So. 2d 159, 166. While these cases do not discuss whether or not the lawyer's claim is privileged, the provisions of LSA-R. S. 9:5001 granting "A special privilege . . . to attorneys at law for the amount of their professional fees on all judgments obtained by them, and on the property recovered thereby . . . ." appear to encompass this type of claim. The Court has concluded that $5,000.00 is reasonable compensation for Mr. Wegmann's services in obtaining the fund about which all the parties are now contending. The tax lien asserted by the Government is thus subordinate to the claim of Mr. Wegmann to the extent of $5,000.00. ⁴

2. There was no necessity that the United States secure a judgment against the trustee in order to obtain a valid lien under 26 U. S. C. A. §6321 et seq. for penalties assessed.

While Northern has argued that the penalties assessed did not become an enforceable lien until judgment was secured by the United States , I cannot accept this construction of the statute. Section 6321 expressly provides that the lien of the United States includes any assessable penalty, and Sections 6322 and 6323 make it clear that this lien becomes valid against third parties either at the time of the assessment or--as to a purchaser, mortgagee, pledgee, or judgment creditor ⁵--at the time the notice of assessment is properly filed. The statute does not require a judgment to be obtained before a penalty assessment becomes a valid lien.

My conclusion is buttressed by the fact that it has been generally assumed by the courts that a penalty assessment is a valid lien without regard to whether a judgment is obtained. For instance, in United States v. Phillips, 5 Cir., 1959 [59-1 USTC ¶9457], 267 F. 2d 374, even though the Fifth Circuit held that Section 57, sub. j, of the Bankruptcy Act prohibits the enforcement of penalty assessments where the Government shows no pecuniary loss, the opinion proceeds on the assumption that the Government would have an enforceable lien but for its failure to show pecuniary loss. To the same effect is In re Lykens Hosiery Mills, S. D. N. Y., 1956 [56-2 USTC ¶9632], 141 F. Supp. 895. See also In re Parchem, S. D. N. Y., 1958 [58-2 USTC ¶9836], 166 F. Supp. 724; In re Hankey Baking Company, W. D. Pa., 1954 [54-2 USTC ¶9684], 125 F. Supp. 673; and In re Burch, D. C. Kan., 1948 [50-2 USTC ¶9406], 89 F. Supp. 249. Compare Grimland v. United States, 10 Cir., 1953 [53-2 USTC ¶9537], 206 F. 2d 599, in which the court reached a result contrary to Phillips as far as Section 57, sub. j, is concerned. The same assumption that a valid lien for penalty assessment arises without the necessity of a judgment is also made in other contexts. See, e.g., Miller v. Bank of America , 9 Cir., 1948, 166 F. 2d 415.

Counsel has not cited one case in which a court has even hinted that a penalty assessment does not become a valid lien under Section 6321 et seq. unless the United States has obtained judgment. I therefore conclude that there was no necessity that the United States obtain a judgment in order to have a valid lien for the penalties assessed.

3. The lien of the United States is valid against Villegas and Northern, and must be satisfied prior to their claims to the extent of $20,977.79, plus statutory interest on that amount and lien fees of $17.00.

26 U. S. C. A. §6323 provides, in part, that a lien acquired by the Government under §6321 is not valid against any pledgee or a judgment creditor ⁶ until appropriate notice has been filed. As to liens in the amount of $20,977.79, appropriate notice was filed before Villegas became a pledgee and before Northern secured execution on its judgment. Although Northern contends that "judgment creditor" does not mean a judgment lien creditor, the generally accepted view is to the contrary. The Fifth Circuit has said, "We believe that 'judgment creditor' means a judgment lien creditor." Fore v. United States , 1964 [65-1 USTC ¶9101], 339 F. 2d 70. Accord, Miller v. Bank of America , 9 Cir., 1948, 166 F. 2d 415.

Northern acquired no privilege or lien under Louisiana law until it obtained execution on its judgment. See LSA-C. C. P. Arts. 2291 and 2292. Justice Provosty observed in Swift & Co. v. Leon Cahn & Co., 1922, 151 La. 837, 92 So. 355, 358:

"The bare fact of [a party's] having attached and of the attachment having been maintained entitles him to a privilege . . .; and, outside of that bare fact, 10,000 decrees rendered in [an] attachment suit, or in any other suits to which the competing creditors had not been parties, would be as nothing for entitling him to a privilege." (Emphasis supplied.)

Thus, the United States obtained a valid lien in the amount of $20,977.79 before any privilege or lien was obtained by Villegas or Northern. It therefore is entitled to satisfy its claim to the extent of $20,977.79, plus statutory interest on that amount and lien fees, prior to Villegas or Northern under the doctrine of "the first in time is the first in right." United States v. City of New Britain, 1954 [54-1 USTC ¶9191], 347 U. S. 81, 85.

4. The relative rank of the claims of Villegas and Northern appears to be moot because the funds on hand are exhausted by the prior claims. ⁷

A decree will therefore be entered providing for distribution of the funds in the registry of the Court in the following order: (1) $5,000.00 to Mr. Wegmann; and (2) the balance to the United States of America . This is to repay the sum of $20,977.79 in principal plus lien fees of $17.00, with the remainder applied to interest due the United States .

The question whether interest on the amount due for taxes is secured by a lien only until the date the funds were collected from Louisiana or continues until the date the United States is paid has not escaped notice. Some authorities hold that, as a general rule, after property of an insolvent passes into the hands of a receiver or an assignee in insolvency, interest is not allowed on the claims against the funds. E.g., Thomas v. Western Car Co., 1893, 149 U. S. 95; Vanston Bondholders Protective Committee v. Green, 1946, 329 U. S. 156. "The delay in distribution is the act of the law; it is a necessary incident to the settlement of the estate." Thomas v. Western Car Co., supra, p. 117. Interest on taxes due by a bankrupt ceases on the date of bankruptcy, City of New York v. Saper, 1949 [49-1 USTC ¶9198], 336 U. S. 328, whether or not the tax debt is secured by a lien. In re Industrial Machine & Supply Co., W. D. Pa., 1953, 112 F. Supp. 261.

It can be urged that application of these principles would cause interest on the taxes to cease when the payment was collected from Louisiana , although there is some authority to the contrary. See Pearsall v. Central Oil & Gas Co. of America, W. D. Pa., 1927 [1928 CCH ¶D-8002], 23 F. 2d 716. However, the question of whether interest would accrue after the date on which funds were received from Louisiana 's trustee is moot, because all the funds will be exhausted by the payment to Mr. Wegmann and the payment of the principal due the United States , together with interest to the date the funds were received from Louisiana 's trustee. ⁸ In any event it would not appear that interest against Calmes would cease before that time either because of Louisiana 's bankruptcy or because of the time required to effect collection from Louisiana .

² The provision granting a lien for attorney's fees was one of the provisions added by the Federal Tax Lien Act of 1966, Public Law 89-719. Section 114 of Public Law 89-719 provides that the amendments are applicable from the date of enactment (November 2, 1966) unless otherwise provided. See generally Historical Note, 26 U. S. C. A. §6323, p. 71. The relevant exceptions are set out in Section 114(b).

³ Nor, in light of the size of the fund available to the claimants and of the conclusions that the Court has reached as to priority of claims, will use of the amended provision impair a priority of any person (other than the United States) holding a lien or interest prior to the date of the enactment of the Act. Section 114(b)(2)(A). Likewise, applying the amended section here will not "operate to increase the liability of any . . . person," Section 114(b)(2)(B), or "shorten the time for bringing suit with respect to transactions occurring before the date of enactment of this Act." Section 114(b)(2)(C).

⁴ For a discussion of some of the problems presented by claims for attorney's fees under pre-1966 law, see Plumb, Federal Tax Collection and Lien Problems, 13 Tax L. Rev. 247, 459, 511-512 (1958). See also, e.g., United States v. Hubbell, 5 Cir., 1963, [63-2 USTC ¶9724] 323 F. 2d 197, 201; United States v. Kamieniecki, D. C. N. H., 1966, [67-1 USTC ¶9133] 261 F. Supp. 683, 690-691; Filipowicz v. Rothensies, E. D. Pa., 1942, [42-1 USTC ¶9300] 43 F. Supp. 619, 624.

⁵ The 1966 amendment substituted "holder of a security interest, mechanic's lienor, or judgment lien creditor" for mortgagee, pledgee, and judgment creditor. Historical Note, 26 U. S. C. A. §6323, p. 70. Because of the possibility that utilization of the amended language might "impair priority enjoyed by [a] person . . . holding a lien or interest prior to the date of enactment of [the] Act," the Court is basing its conclusions on the pre-1966 language. Compare note 3, supra.

⁶ See note 5 supra.

⁷ It appears that as of January 8, 1966, the total of taxes, interest, and lien fees due, the United States by Calmes was $30,760.09.

⁸ See note 7 supra.

 

 

[67-2 USTC ¶9611]United States of America, Plaintiff v. Plez Lewis & Son, Inc., a corporation; Donald P. Gallop, Trustee for Plez Lewis & Sons, Inc.; Lashly & Neun, a partnership; Adair Motel Corporation, a corporation; Northeast Missouri Motel Corporation, a corporation; and Division of Employment Security, State of Missouri, Defendants

U. S. District Court, East. Dist. Mo. , East. Div., No. 66 C 112(3), 272 FSupp 221, 6/27/67

[1954 Code Sec. 6323]

Lien for taxes: Validity of lien: Personal property: Missouri.--The prior service of the notice of levy, as well as the filing of the notices of federal tax lien, rendered the claim of the United States, on a cashier's check in the possession of taxpayer's creditor, superior to any right which could thereafter be acquired in the property either by a creditor, the Division of Employment Security of the State of Missouri, or the taxpayer or its trustee in bankruptcy.

Richard D. FitzGibbon, Jr., United States Attorney, Harold F. Fullwood, Assistant United States Attorney, 402 U. S. Courthouse and Custom House, 1114 Market St., St. Louis, Mo., for plaintiff. Harry S. Gleick, Paul Brown Bldg., St. Louis, Mo., for Donald P. Gallop, Trustee for Plez Lewis & Son, Inc.; Lashly & Neun, 812 Olive St., St. Louis, Mo.; Rufus D. Shannon, Frank Rob ison, 421 E. Dunklin St., Jefferson City, Mo., for Division of Employment Security and State of Missouri; Kent D. Kehr, 1600 Boatmen's Bank Bldg., St. Louis, Mo., for Northeast Missouri Motel Corporation, defendants.

Memorandum Opinion

REGAN, District Judge:

This is an action, tried to the Court, whereby the United States of America seeks to recover the proceeds of a cashier's check in the amount of $31,000 payable to the order of Adair Motel Corporation, as a means of foreclosing its federal tax liens on the indebtedness of Adair to Plez Lewis & Son, Inc., now in bankruptcy. We have jurisdiction under 28 U. S. C. Sections 1340 and 1345 and Sections 7402 and 7403 of the Internal Revenue Code of 1954.

Plez Lewis & Son, Inc. (Plez Lewis) performed work and services for Adair Motel Corporation (Adair) prior to April 14, 1965 , as a result of which Adair became indebted to Plez Lewis for sums allegedly in excess of $45,000. On May 11, 1965 an involuntary petition in bankruptcy was filed against Plez Lewis. Adjudication was on September 2, 1965 . In the interim, in August, 1965, Adair sold its motel. The cashier's check in question, which is in possession of the law firm of Lashly and Neun, attorneys for Adair, represents a part of the purchase price.

We find from all the evidence (including that adduced after the original submission was set aside) that an assessment of withholding tax was made against Plez Lewis on February 9, 1965 in the amount of $127,576.79, plus a penalty of $1,355.76 and interest of $149.78, less a payment of $25,683.55, with a balance due in the sum of $103,398.78. A notice of the assessment was duly personally served on the taxpayer at its office and usual place of business on or about February 9, 1965 , this notice stating the amount of the assessment and demanding payment thereof. An oral demand for payment of the assessment was made at the same time. Plez Lewis, the taxpayer, failed and neglected to pay the amount of the assessment so demanded, and by reason thereof it became a lien in favor of the United States on all property and rights to property belonging to Plez Lewis.

On April 14, 1965, a notice of levy was served upon Adair, notifying it of the existence of a tax lien against Plez Lewis provided for by Section 6321 of the Internal Revenue Code of 1954 in the aggregate amount of $239,369.68, including the February 9, 1965 assessment of $103,398.78 (and statutory additions of $1,300.00). This notice of levy specifically notified Adair that "all property, rights to property, moneys, credits, and bank deposits now in your possession and belonging to this taxpayer (or with respect to which you are obligated) and all sums of money or other obligations owing from you to this taxpayer are hereby levied upon and seized for satisfaction of the aforesaid tax, together with all additions provided by law, and demand is hereby made upon you for the amount necessary to satisfy the liability set forth herein, or for such lesser sum as you may be indebted to him, to be applied as a payment on his tax liability."

On May 3, 1965, notices of the aforesaid federal tax lien against Plez Lewis were filed for record in the offices of the recorders of deeds for Franklin County and St. Louis County , Missouri . A similar notice was filed with the recorder in Adair County on May 4, 1965. These notices recited the assessments of taxes against Plez Lewis, including the assessment made on February 9, 1965.

Section 6321 of the Internal Revenue Code of 1954 provides, in substance, that if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount thereof "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."

The lien imposed by Section 6321 arises at the time the assessment is made, 26 U. S. C. §6322, but is not valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice of the lien has been duly filed for record. The Division of Employment Security, State of Missouri , claiming to be a judgment creditor, asserts that it has a lien which came into existence prior to the filing of the notices of the federal tax lien and to the extent thereof claims a right to the proceeds of the cashier's check superior to the federal tax lien.

The Division of Employment Security filed its certificate of assessment against Plez Lewis in the sum of $2,455.40 with the clerks of the circuit courts of Franklin County and St. Louis County , Missouri , on March 16, 1965 and March 27, 1965 , respectively. A certificate of additional assessments against Plez Lewis in the amount of $14,616.00 was filed in the same counties by the Division of Employment Security on August 6, 1965.

Under Missouri law, Section 288.170, R. S. Mo. the amount of such certificates when filed in the office of the circuit clerk in the county in which the taxpayer "resides, or has his place of business, or any other county in which he has his place of business, or any other county in which he has property, or all of them", has "the force and effect of a judgment of the circuit court." Execution may be issued thereon as in the case of other judgments.

In Missouri , a judgment is a lien upon real property in the county in which the judgment is rendered or in which a transcript thereof has been filed. This lien commences on the day of the rendition of the judgment and continues for a period of three years unless revived. Supreme Court Rules 74.34, 74.35, 74.71 and 74.74. However, no lien on personal property is created until an execution has been issued and levied. Supreme Court Rule 76.17.

An execution was issued on the St. Louis County judgment on March 27, 1965 , returnable May 6, 1965 , and garnishment in aid of the execution was instituted April 7, 1965 against the Crestwood Bank. The Sheriff of St. Louis County made a nulla bona return on the execution, and the Crestwood Bank, which was not indebted to and had no property or effects of Plez Lewis, was discharged. The Division of Employment Security contends that, at least as respects the March 16, and March 27, 1965 "judgments" in Franklin and St. Louis Counties ($2,455.40, plus interest), it has a lien on the cashier's check, superior to any lien of the United States, on the theory that execution was issued and levied on said judgment. We do not agree.

The Sheriff of St. Louis County found no property of Plez Lewis upon which to levy, and there was no property in that County upon which an execution lien could then attach. No other execution was thereafter issued or levied, and neither the indebtedness of Adair (a resident of Adair County) nor the cashier's check, constituting a part of said indebtedness to Plez Lewis, which subsequently came into the possession of Adair's attorneys in the City of St. Louis, became subject to any lien of the Division of Employment Security, State of Missouri. Clearly, the issuance of the execution in St. Louis County and the garnishment against the Crestwood Bank did not operate to create a lien against the indebtedness of Adair or the cashier's check.

There being no lien in favor of the Division of Employment Security, there can be no question concerning priority of liens. The prior service of the notice of levy, as well as the filing of the notices of federal tax lien, renders the claim of the United States superior to any right which could thereafter be acquired in the property either by a creditor or a taxpayer or its trustee in bankruptcy. See Rosenblum v. United States, 1 Cir. [62-1 USTC ¶9384], 300 F. 2d 843; United States v. Eiland, 4 Cir. [55-1 USTC ¶9487], 223 F. 2d 118; and Little Audrey's Transportation Co. v. Beverly Bank, D. C. Ill. [64-2 USTC ¶9787], 236 F. Supp. 352. No party appeared or presented any claim to the check at the hearing of this cause, other than plaintiff and the Division of Employment Security. We find and hold that plaintiff is entitled to the proceeds of the cashier's check in question.

The foregoing memorandum constitutes our findings of fact and conclusions of law. Plaintiff is directed to submit a form of judgment in favor of plaintiff, United States of America, determining that plaintiff has a lien on the cashier's check in the possession of defendant Lashly and Neun and to the fund represented thereby, superior to all liens and claims of all defendants, foreclosing the tax liens of plaintiff against the said cashier's check, and directing and ordering the proceeds thereof be paid over to plaintiff toward the satisfaction of the indebtedness of Plez Lewis and Son, Inc. to the United States of America.

 

 

[67-1 USTC ¶9460]United States of America, Plaintiff v. Harlow S. Person, Individually, Harlow S. Pearson and Bankers Trust Company, as Co-Trustees under the Will of Edward J. Pearson, deceased, The First Pennsylvania Banking & Trust Company, Annabelle Webb Pearson, Helen Ridgeway Pearson, Rob ert L. Ridgeway, and Arden H. Rathkopf, Individually, and as Executor of the Estate of Gertrude S. Pearson, deceased, Defendants

U. S. District Court, So. Dist. N. Y., 60 Civil 690, 5/18/67

[1954 Code Secs. 6213, 6321 and 6323]

Tax liens: Priority: Unperfected claims: Priority among creditors: Tax liens satisfied.--In prior decisions [66-1 USTC ¶9448 and 66-2 USTC ¶9726] the government's motions to enforce tax liens against the taxpayer's income from a testamentary trust were granted. These liens having been satisfied and there being an accumulation of accrued income in the trust account, the court determined that upon the basis of a valid assignment from taxpayer, another defendant was entitled to a summary judgment in the amount prayed for since its claim was superior to those of other creditors.

Rob ert M. Morgenthau, United States Attorney, Alvin H. Meadow, Assistant United States Attorney, New York, N. Y., for plaintiff. William T. Griffin, 44 Wall St., New York, N. Y., for First Pennsylvania Banking & Trust Co.; Thorold J. Deyrup, Berle & Berle, 70 Pine St., New York, N. Y., for Harlow S. Pearson and Helen Ridgeway Pearson; John H. Reilly, Jr., Brown, Hyde & Dickerson, 61 Broadway, New York, N. Y., for Bankers Trust Co.; James McGarry, Dillon & O'Brien, 535 Fifth Ave., New York, N. Y., for Annabelle Webb Pearson; Donald MacDonald, 40 Wall St., New York, N. Y., for Arden H. Rathkopf, defendants.

[Opinion]

LEVET, District Judge:

The First Pennsylvania Banking & Trust Company, the successor to the First National Bank of Philadelphia, Pennsylvania (hereinafter "Penn"), one of the defendants in this suit, upon the basis of a certain assignment from Harlow S. Pearson (hereinafter "PEarson") moves for summary judgment in its favor for the sum of $16,102.11, together with the daily increment of interest at the rate of 14¢ per day from August 25, 1966 until date of payment, together with the sum of $3,500 for counsel fees, and further directing that the defendant Bankers Trust Company pay the said sums from the accumulated income of the testamentary trust fund created under the Last Will and Testament of Edward J. Pearson, deceased, payable to Pearson and/or Helen Ridgeway Pearson.

The only parties opposing Penn's motion are defendants Arden K. Rathkopf, as Executor of the Estate of Gertrude S. Pearson, deceased, and Annabelle Webb Pearson, a former wife of Pearson.

The following facts appear to be undisputed:

1. Penn loaned Pearson $50,000 on December 1, 1954.

2. A loan agreement and two promissory notes, all dated December 1, 1954, were delivered in Philadelphia , Pennsylvania , at the office of Penn. One of said notes is for $37,000 and by its terms was secured by the assignment of Pearson's interest in the trust under the will of his father, Edward J. Pearson, deceased. The second note is for $13,000 and by its terms was secured by assignment of a life insurance policy on the life of Pearson (No. 1,625,368, Mutual Benefit Life Insurance Company of Newark , New Jersey ).

3. Then, by an assignment, dated November 29, 1954, the total loan of $50,000 was secured by all of Pearson's right, title and interest in the trust under the will of his deceased father, Edward J. Pearson. The terms of the trust and the nature of Pearson's interest therein are set forth in the opinion of the Supreme Court of Errors of Connecticut inBankers Trust Co. v. Pearson, dated August 13, 1953, 140 Conn. 332, 99 A. 2d 224.

4. The $50,000 proceeds of the loan were disbursed by Penn as directed by Pearson.

5. Under said trust, a portion of the income was payable to Pearson. The original trustees of the trust were Gertrude S. Pearson (widow of Edward J. Pearson) and the Bankers Trust Company. Upon the death of Gertrude S. Pearson, she was succeeded by Pearson, who is now co-trustee with the Bankers Trust Company.

6. Bankers Trust Company qualified as executor of the Last Will and Testament of Edward J. Pearson in the Court of Probate for the District of New Haven in the County of New Haven , on or about December 17, 1928. Bankers Trust Company also qualified as trustee under said will. (See Bankers Trust Co. v. Pearson, supra)

7. On November 30, 1954, the co-trustee, Bankers Trust Company, recognized the assignment and for a time thereafter forwarded Pearson's income to Penn.

8. On February 17, 1960, the United States of America, as plaintiff, instituted the primary suit herein for judgment against Pearson for the sum of $51,803.04 plus interest, for adjudication that plaintiff had a valid and subsisting lien upon the trust interest or income of said Pearson prior to the rights of any defendants, for a deficiency judgment against Pearson, if any remained after said payments, and for other relief. In the third amended complaint, filed November 22, 1965, the plaintiff increased its demand to $125,061.23 plus interest.

9. After the institution of this tax suit, Bankers Trust Company made no further payments to Penn except that, by stipulation of all parties hereto and by an order of this court dated December 27, 1965, $38,000 was paid on account to Penn and credited against accrued principal.

10. The remaining amount due to Penn on principal is $847.50; on interest, $15,254.61 plus 14¢ per day interest from August 25, 1966 on the principal balance ($847.50 x 6/100 x 1/360 = 14¢).

11. On January 5, 1966, the United States was paid the sum of $84,400.14 for federal income tax of Pearson for the years 1949 through 1958 and interest amounting to $176.70 thereon. Under an order of this court dated March 14, 1967, the government was paid $70,820.22 plus interest from December 31, 1966. The government does not object to this motion and there is now approximately $67,875 of accrued income in the trust account at Bankers Trust Company.

12. Rathkopf's claim is based upon a judgment in the amount of $63,560.13 which he, as the Executor of the Estate of Gertrude S. Pearson, obtained on November 10, 1959 in the Surrogate's Court of New York County by reason of a judgment against Pearson based on surcharges against said Pearson as Executor of the Estate of Gertrude S. Pearson. Pearson had been removed as Executor and co-trustee as a result of proceedings instituted in the Surrogate's Court by Rathkopf in 1957 and 1958. (See answer and cross-claim of Rathkopf)

13. In general, the claims of Annabelle Webb Pearson against Pearson are as follows:

1. A judgment against Pearson, District Court of the Virgin Islands , $16,300 plus further allowances;

2. An action pending in the Supreme Court, New York County , against Pearson and Bankers Trust Company as co-trustees under the Last Will and Testamend of Edward J. Pearson, deceased;

3. A claim against Pearson for support (apparently never reduced to judgment and pending), being only asserted as a "counterclaim" in this court;

4. A claim for support under a Nevada judgment.

14. The claims of Annabelle Webb Pearson were set forth in her answer, filed December 27, 1965, to the third amended complaint. Under an order of this court, she filed an amended answer and cross-complaint on April 25, 1967. A comparison of this amended answer with her original answer, filed December 27, 1965, with respect to her claims, is as follows:

Original Answer (filed 12/27/65)

(a) "First Affirmative Defense, First Counterclaim Against Plaintiff, and First Cross Claim Against All Other Defendants," paragraphs 5 through 9.

(b) "Second Affirmative Defense, Second Counterclaim Against Plaintiff, and Second Cross Claim Against All Other Defendants," paragraphs 10 through 13.

(c) "Third Affirmative Defense, Third Counterclaim Against Plaintiff, and Third Cross Claim Against All Other Defendants," paragraphs 14 through 17.

(d) "Fourth Affirmative Defense, Fourth Counterclaim Against Plaintiff and Fourth Cross Claim Against All Other Defendants," paragraphs 18 through 20.

(e) "Fifth Affirmative Defense, Fifth Counterclaim Against Plaintiff, and Fifth Cross Claim Against All Other Defendants," paragraphs 21 through 24.

Equivalent in Amended Answer (filed 4/25/67)

(a) "First Cross Claim Against All Other Defendants," paragraphs 5 through 9 (with the exception of added jurisdictional allegations).

(b) "First Affirmative Defense, First Counterclaim Against Plaintiff, and Second Cross Claim Against All Other Defendants," paragraphs 10 through 13.

(c) "Second Affirmative Defense, Second Counterclaim Against Plaintiff, and Third Cross Claim Against All Other Defendants," paragraphs 14 through 17.

(d) "Third Affirmative Defense, Third Counterclaim Against Plaintiff, and Fourth Cross Claim Against All Other Defendants," paragraphs 18 through 20.

(e) "Fourth Affirmative Defense, Fourth Counterclaim Against Plaintiff, and Fifth Cross Claim Against All Other Defendants," paragraphs 21 through 24.

15. Pearson is a resident of Nevada ; Penn is a corporation doing business in Pennsylvania ; Annabelle Webb Pearson is a resident of Connecticut . Hence, diversity jurisdiction exists as between Bankers Trust Company and the aforesaid co-defendants.

Discussion

The objections of Rathkopf and of Annabelle Webb Pearson may be summarized as follows:

1. That the assignment to Penn was invalid under the laws of New York , which he claims to be controlling;

2. Penn has no priority in the allowance of an attorney's fee;

3. Penn should first resort to a life insurance policy of Pearson which was also assigned to Penn as security for Pearson's loan;

4. Annabelle Webb Pearson contends that Penn's claim is subject to the lien of her 1954 judgment of the United States District Court of the Virgin Islands .

Rathkopf also claims that Penn is improperly asking for interest on interest. However, this is clearly unsupported by facts.

I. The Trust Fund Under the Will of Edward J. Pearson Must Be Governed and Construed by the Laws of the State of Connecticut

The decedent, Edward J. Pearson, resided in Connecticut at the time of his death; the will was probated there; his widow, Gertrude S. Pearson, one of the executors, then resided in Connecticut; Bankers Trust Company, although its office was in New York, qualified and took office as executor and trustee in the Probate Court of New Haven, where the trust was established. Under these facts the assignability of the income of the trust must be determined in accordance with the law of Connecticut . First Nat'l Bank v. National Broadway Bank, 156 N. Y. 459, 472 (1898); Wheat v. First Nat'l City Bank, 41 Misc. 2d 723 (Sup. Ct. 1963); Schrader v. Smith, 10 Misc. 2d 475 (Sup. Ct. 1958). See also Blair v. Commissioner [37-1 USTC ¶9083], 300 U. S. 5, 9 (1937).

In Wheat v. First Nat'l City Bank, supra, Justice Hofstadter wrote:

"The assignability of the income of the testamentary trust is likewise to be determined in accordance with the law of Connecticut, whether the question is regarded as an incident of admin istration (see Restatement, Conflict of Laws, §243, Comment d) or whether the law of the State where the trust is established is ruled to be applicable (Sarver v. Towne, 285 N. Y. 264, 269; 2 Beale, Conflict of Laws, §297.2).

"It is stated for the petitioner and not denied by the respondent that Connecticut has no statute equivalent to section 15 of the Personal Property Law. Effect may be given here to the law of Connecticut in this respect without violating the public policy of this State (First Nat. Bank v. National Broadway Bank, 156 N. Y. 459, 473-474)." 41 Misc. 2d at 725.

It is noteworthy that, by paragraph Eleventh of the will of Edward J. Pearson, ¹ only when Bankers Trust Company became the sole trustee was it to be governed by the law of the state (New York) in which it had its principal office or place of business in respect to investments. No provision appears for the application of New York law for any other purpose.

As demonstrated in two of the cases above mentioned,First Nat'l Bank v. National Broadway Bank and Wheat v. First Nat'l City Bank, Connecticut retains the common law rule which, as stated by Scott, is as follows:

"Both in England and in the United States today it is clear that the beneficiary of a trust, if he is not under a legal incapacity, can transfer his interest under the trust, unless his interest is made inalienable by the terms of the trust or by statute. * * *" 2 Scott, Trusts §132, at 983-84 (2d ed. 1956).

See also Berry v. Hartford Nat'l Bank & Trust Co., 125 Conn. 615, 7 A. 2d 847 (1939); Foley v. Hastings, 107 Conn. 9, 139 Atl. 305 (1927).

It may be added that the assignment was made and delivered in Pennsylvania which, like Connecticut , retains the common law rule. See McCurdy v. Bellafonte Trust Co., 292 Pa. 407, 411, 141 Atl. 247 (1928); Ewalt v. Davenhill, 257 Pa. 385, 101 Atl. 756 (1917); In re Mchaffey's Estate, 139 Pa. 276, 20 Atl. 1056 (1891).

No authority has been submitted by Rathkopf or Annabelle Webb Pearson to sustain a holding that the mere appointment of a trustee from a state foreign to that in which the will was probated subjects the admin istration of the trust to the laws of the domicil of such a trustee.

The assignment to Penn by Pearson is entirely valid.

II. Neither the Claims of Rathkopf nor Annabelle Webb Pearson are Prior or Superior to that of Penn

The claims of Rathkopf are more fully set out in an opinion of this court in this action, dated October 28, 1966[66-2 USTC ¶9726], dealing with a motion by the United States against Rathkopf. As enunciated in said opinion, none of the claims of Rathkopf became valid, choate, enforcible liens prior to that of the United States . None became prior or superior to that of Penn obtained in 1954. The recent amendment of Rathkopf's answer and cross-complaint does not alter this conclusion.

The claims of Annabell Webb Pearson are set forth in paragraph 14 of the facts hereinabove set forth.

(a) The first claim, as entitled in the Amended Answer, is headed, "First Cross Claim Against All Other Defendants." For the reasons set forth in my earlier opinion in this case,United States v. Pearson [66-2 USTC ¶9726], 258 F. Supp. 686, 690-91 (S. D. N. Y. 1966), under the heading, "First Affirmative Defense and Counterclaim," this claim was not a valid lien at the time of my decision, to wit, May 27, 1966. Since May 27, 1966, it appears by paragraph 8 of defendant Annabelle Webb Pearson's amended answer, filed April 25, 1967--

(1) That a certified copy of judgment in the Virgin Islands was filed with the Clerk of this Court on October 17, 1966;

(2) That a transcript of said judgment from the Clerk of this Court was filed and docketed in the office of the Clerk of the County of New York ;

(3) That on December 2nd and 6th, 1966, executions were issued to the Sheriff, New York County Division; and

(4) Copies of said executions were thereafter served by said Sheriff upon defendant Bankers Trust Company in the State of New York .

Whatever may be the effect of these recent acts above enumerated, they had no effect prior to December 2nd or December 6th, 1966, when defendant Annabelle Webb Pearson allegedly issued execution. See Paragraph 8 of amended answer. As stated in United States v. Pearson, supra at 691:

"Furthermore, under CPLR §5202, no lien on personal property in New York is obtained until execution has been delivered to the sheriff. Clearly, no execution is alleged or was delivered here."

Hence, this claim is not prior to or superior to that of Penn.

(b) The second claim, as entitled in the amended answer, is headed, "First Affirmative Defense, First Counterclaim Against Plaintiff, and Second Cross Claim Against All Other Defendants." For the reasons enunciated in my opinion in United States v. Pearson, supra at 691-92, under the heading, "Second Affirmative Defense and Counterclaim," this claim was not a valid lien and again does not give defendant Annabelle Webb Pearson any standing here to oppose Penn's claim or the assignment.

(c) The third claim, as entitled in the amended answer, is headed "Second Affirmative Defense, Second Counterclaim Against Plaintiff, and Third Cross Claim Against All Other Defendants." For the reasons detailed in my opinion inUnited States v. Pearson, supra at 692, under the heading, "Third Affirmative Defense and Counterclaim," this claim was not and is not a valid lien and does not give defendant Annabelle Webb Pearson standing here to oppose Penn's claim or the assignment.

(d) The fourth claim, as entitled in the amended answer, is headed "Third Affirmative Defense, Third Counterclaim Against Plaintiff, and Fourth Cross Claim Against All Other Defendants." For the reasons stated in my opinion in United States v. Pearson, supra at 692, under the heading, "Fourth Affirmative Defense and Counterclaim," this claim also was not and is not a valid lien and, hence, does not entitle defendant Annabelle Webb Pearson to standing here to oppose Penn's claim or the assignment.

(e) The fifth claim, or, rather, defense, as entitled in the amended answer, is headed "Fourth Affirmative Defense, Fourth Counterclaim Against Plaintiff, and Fifth Cross Claim Against All Other Defendants." As stated in my opinion inUnited States v. Pearson, supra at 692, under the heading, "Fifth Affirmative Defense and Counterclaim," this constitutes no defense to the claim of the United States , and for the same reasons it constitutes no defense to the enforcement of Penn's assignment.

Hence, neither objectant is in a position to question the priority of Penn's lien.

III. Limitations on Attachment of Trust Funds

When New York law is applicable, by reason of Section 15 of the Personal Property Law as it existed during the prior proceedings herein and as it now exists, the right of Pearson to receive income under the testamentary trust "cannot be transferred by assignment or otherwise." (Emphasis supplied) In re Bechtoldt, 148 Misc. 8, 12 ( Sur. Ct. 1933); In re United States Mortgage & Trust Co., 130 Misc. 635, 637 ( Sur. Ct. 1927). Although, as heretofore determined, the validity of the voluntary assignment by Pearson must be controlled by the law of Connecticut as a substantive matter, the attempt of Rathkopf and Annabelle Webb Pearson to reach Pearson's income by judgment, attachment or suit, unlike that of Penn, must be determined as a procedural matter by the law of the State of New York. Sections 792 and 793 of the New York Civil Practice Act, when read together, were construed to exclude from the reach of supplementary proceedings all income from a trust fund held for the judgment debtor when the fund was created by another, Kaplan v. Peyser, 273 N. Y. 147, 151 (1937), although Section 792 recognized `the right of the creditor in a proper action to have the amount necessary for the support of the debtor ascertained, and to compel the application of the surplus.' (Williams v. Thron, 70 N. Y. 270, 275)." 273 N. Y. at 150. However, such an action has not been brought here by the objectants.

Section 5205 of the Civil Practice Law and Rules of the State of New York , subdivisions (d) and (e)(1), constitutes the present applicable statute of this state. These subdivisions read as follows:

"§5205. Personal property exempt from application to the satisfaction of money judgments.

* * *

"(d) Trust exemption. Any property while held in trust for a judgment debtor where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of a money judgment.

"(e) Income exemptions. The following personal property is exempt from application to the satisfaction of a money judgment, except such part as a court determines to be unnecessary for the reasonable requirements of the judgment debtor and his dependents:

"1. ninety per cent of the income or other payments from a trust the principal of which is exempt under subdivision (d);

* * *

Judge Hofstadter wrote in Wheat v. First Nat'l City Bank, supra:

"* * * [B]oth the Civil Practice Act and the Civil Practice Law and Rules limit attachable property to that which may be reached by execution and both exempt 90% of trust income from execution. Since the provisions are thus substantially the same, it is immaterial whether we apply the Civil Practice Act or the Civil Practice Law and Rules to determine the immediate issue.

"The narrow question to be decided is whether the income from these two trusts is subject to attachment and, if so, to what extent. Though the trusts may in many respects be controlled by the law of Connecticut , so far as the right to attachment is concerned, we are required to apply the law of New York . Attachment is a matter of remedy, and questions affecting it must therefore be ruled by the law of the forum (Morris Plan Ind. Bank of N. Y. v. Gunning, 295 N. Y. 324, 331-332; 3 Beale, Conflict of Laws, pp. 1604-1605; Restatement, Conflict of Laws, §§ 590, 600; see Chicago, Rock Is. etc. Ry. v. Sturm, 174 U. S. 710, 717-718).

"Morris Plan (295 N. Y. 324, supra) presented a closely analogous situation. Gunning, a resident of Pennsylvania , worked in that State and his wages were payable there. Morris Plan recovered a judgment against Gunning in Pennsylvania ; it brought suit on this judgment in New York and obtained a warrant of attachment under which a levy was made on his wages earned and payable in Pennsylvania . Though the law of the latter State has for many years forbidden any garnishment or attachment of wages, the court nevertheless held Gunning's Pennsylvania wages subject to attachment in New York . The attachment and garnishment statutes must be read together (p. 331) and, when so read, no more than 10% of the wages were subject to attachment. It follows that only 10% of the income of the two Wheat trusts may be levied upon under the petitioner's attachment. Pray v. Boissevain (27 Misc. 2d 703) is to like effect. The respondent will, therefore, be directed to pay over 10% of the income on hand and hereafter accruing. This disposition is without prejudice to the petitioner's right to reach any part of the income of the trusts in excess of 10% by other action or proceeding, as she may be advised." 41 Misc. 2d at 726-27.

See also Keeney v. Morse, 71 App. Div. 104 (1st Dept. 1902 ), affirming 34 Misc. 114 (Sup. Ct. 1901).

IV. The Collateral

Penn took an assignment of the life insurance policy as collateral for the $13,000 note but it also received at the same time an assignment of the trust income interest for both the $13,000 note and the $37,000 note, as above stated. Under these circumstances, I see no reason why the creditor must be barred from asserting its claim against the trust income or be required to exhaust its rights first against the life insurance policy.

The doctrine of marshaling assets is an equitable doctrine--not an absolute right--applicable only when the ends of justice require, and is normally discretionary with the court. Here, there is no party who is prejudiced by recourse to the trust income. In fact, it appears that the life insurance policy assigned was clearly intended to buttress the position of the creditor if Pearson died and his income ceased before payment of the loan. The assignment provides for recourse to the trust income as security for the entire loan. I, therefore, find no reason to preclude Penn from access to the trust income in preference to recourse in whole or in part to the policy. Obviously, upon payment from the trust income, Penn will be required to relinquish its right in the policy.

V. Penn is Entitled to Reasonable Attorneys' Fees and they are Protected Under the Assignment

The notes provide as follows with respect to attorneys' fees:

"The undersigned hereby authorize and empower the holder hereof on default in the payment, when due under the terms hereof, of this or any other obligation of them, or any of them, to the holder hereof, without previous demand upon or notice of any of them, to collect the amount due hereunder, or to sell, assign, transfer and deliver in whole or in part, at any broker's board, or at public or private sale, in the City of Philadelphia or elsewhere, any or all of the property above referred to, with the right of becoming the purchaser and absolute owner thereof, free of all trusts and claims and any equity of redemption, applying the proceeds of such sale or collection to any and all indebtedness of any of them to the holder, together with interest and all costs, including attorneys' fees, and returning the overplus, if any, to the persons legally entitled thereto; but the undersigned will still remain liable to the holder for any unsatisfied balance of said obligations, with interest thereon." (Italics supplied.)

On argument, counsel for Rathkopf conceded that he had no objection to the amount of the attorneys' fees but only to the granting of them. (SM 25, 26) Counsel for Annabelle Webb Pearson took the same position. (SM 28) There is no dispute as to the amount, if legally permissible.

A valid provision in a note for attorneys' fees is as much an obligation of the contract as any part of it. 11 C. J. S., Bills and Notes §726, at 266-67 (1938). Such fees become an effective part of the main debt. Id. at 267. Provisions in notes for payment of attorneys have been held valid in New York . 10 C. J. S., Bills and Notes §108, at 565, 566 (1938); General Lumber Corp. v. Landa, 13 App. Div. 2d 804 (2nd Dept. 1961 ); Manufacturers Trust Co. v. Hollinger, 141 N. Y. S. 2d 795 (Sup. Ct. 1955); First Nat'l Bank & Trust Co. v. Conzo, 169 Misc. 268 (Sup. Ct. 1938); Commercial Inv. Trust v. Eskew, 126 Misc. 114 (Sup. Ct. 1925); Heating & Plumbing Fin. Corp. v. 4274 Third Ave. Corp., 147 Misc. 700 (N. Y. City Ct. 1932). Likewise, under Pennsylvania law a provision for attorneys' fees in any bond, mortgage or note is valid,Schmidt & Friday's Appeal, 82 Pa. 524 (1876);McAllister's Appeal, 59 Pa. 204 (1869); Foulke v. Hatfield Fair Grounds Bazaar, Inc., 196 Pa. Super. 155, 173 A. 2d 703 (1961), and the amount becomes part of the principal debt owing to the creditor, "to be preferred or postponed as the principle debt is preferred or postponed." Harper v. Consolidated Rubber Co., 284 Pa. 444, 131 Atl. 356, 357 (1925). Cf. Leomporra v. American Baking Co., 198 Pa. Super. 545, 178 A. 2d 806 (1962). The court, of course, has the power to determine the reasonableness of the amount provided for attorneys' fees. Consumers Time Credit, Inc. v. Remark Corp., 259 F. Supp. 135 (E. D. Pa. 1966);McAllister's Appeal, supra; Foulke v. Hatfield Fair Grounds Bazaar, Inc., supra.

Here the notes were made at Philadelphia , Pennsylvania and were payable to and at The First National Bank of Philadelphia , Pennsylvania . There is no provision in the assignment or in the notes specifying by what law the notes or the assignment should be governed. Generally, the validity, construction and effect of a note is governed by the law of the state where it is executed and payable. United States v. Guaranty Trust Co., 293 U. S. 340, 346-47 (1934); Tenant v. Tenant, 110 Pa. 478, 1 Atl. 532 (1885). If it is executed in one state and made payable in another, the law of the state where it is payable controls, Beadall v. Moore, 199 App. Div. 531 (1st Dept. 1922); Farmers Trust Co. v. Bradshaw, 137 Misc. 203 (N. Y. City Ct. 1930); see Hyde v. Goodnow, 3 N. Y. 266 (1850), and in the absence of other evidence the place of execution is presumed to be the place where payment is to be made. Beadall v. Moore, supra. Hence, there can be no doubt that the law of Pennsylvania governs the rights of the parties arising from the notes here in issue, including the provision for attorneys' fees. Under Pennsylvania law that provision is valid and, since it is part of the note, Penn has priority under its assignment to recover for such fees.

Where no amount of attorneys' fees is fixed, plaintiff has the burden of proving the reasonable value of the attorneys' services unless defendant does not deny that the amount claimed is reasonable. 11 C. J. S., Bills and Notes §653, at 47 (1938); McConnell v. Fried, 176 N. Y. S. 521 (App. T. 1919). I believe that an award of $3,500 is fully warranted on the basis of the affidavit of William T. Griffin, sworn to and filed May 12, 1967.

VI. The Limitations of New York State Law Do Not Preclude Payment to Penn

The assignment is valid; no right of Rathkopf or Annabelle Webb Pearson superseded it. The assignment was voluntary. Pearson at that time had a right to the accumulated income and a right to dispose of it or hypothecate the interest he had or might later be entitled to receive. He receive good consideration--the loan.

The accumulated income in the trust account with Bankers Trust Company as of April 25, 1967, subject to adjustment in accounting for the year ending June 2, 1967, was $67,875.31. (Ct. Ex. 2)

The claim of Penn, if allowed in full, now amounts to $19,638.93.

(Principal ............................            $ 847.50

Int. to Aug. 25, 1966 .................           15,254.61

Int. from Aug. 25, 1966 to May 15,

1967, 263 days at 14¢ per day .........               36.82

Attorneys' fees .......................            3,500.00

TOTAL .................................         $19,638.93)

Penn's claim, as already indicated, is not subject to any New York or other statutory limitations.

The claim of Annabelle Webb Pearson on the Virgin Islands judgment is $16,360 and may bear interest at 6% from December 26, 1954 . This would now amount, allowed in full, to approximately $14,132.60 in interest or a total claim of approximately $40,492. Thus, the present balance permits payment of both claims. Annabelle Webb Pearson's claim, however, is subject to whatever statutory limitations may be imposed under the laws of the State of New York .

There is no genuine issue of any material fact, and Penn is entitled to judgment for the amount claimed in the motion papers, including $3,500 for attorneys' fees, and costs, as a matter of law. (See Fact No. 10)

I further determine that there is no just reason for delay and I expressly direct entry of judgment in accordance herewith.

Settle judgment upon notice to all parties hereto.

¹ This paragraph was as follows:

"Eleventh: I hereby authorized and empower my said executors and trustees hereinafter named, in their discretion, to hold, invest and reinvest the principal and any income of my estate in their hands for distribution, without limitation or restriction in respect of the laws of any state relating to investments by trustees, except that upon the decease of my said wife and son, leaving the corporation hereinafter named, or its successor in the trust, sole trustee, said surviving trustee shall thereafter be subject to the laws of the state in which it has its principal office or place of business, with respect to investments by trustees."

 

 

[66-2 USTC ¶9726]United States of America, Plaintiff v. Harlow S. Pearson, Individually, Harlow S. Pearson and Bankers Trust Company, as Co-Trustees Under the Will of Edward J. Pearson, deceased, The First Pennsylvania Banking & Trust Company, Annabelle Webb Pearson, Helen Ridgeway Pearson, Rob ert L. Ridgeway, and Arden H. Rathkopf, Individually, and as Executor of the Estate of Gertrude S. Pearson, deceased, Defendants

U. S. District Court, So. Dist. N. Y., 60 Civ. 690, 258 FSupp 686, 10/31/66

[1954 Code Secs. 6213, 6321 and 6323]

Tax liens: Priority: Judgment creditor: Unperfected claims.--In granting the Government's motion for summary judgment against the taxpayer's judgment creditor in an action to enforce tax liens against the taxpayer's income from a testamentary trust, the court found: (1) a third party lacks standing to contest a tax assessment; (2) government liens were superior to older but unperfected choate liens of a judgment creditor on Connecticut property; and (3) the reinstatement of a judgment creditor's lien on New York property was in violation of an interlocutory stay of execution, from which no appeal had been taken, and, therefore, void.

Rob ert M. Morgenthau, United States Attorney, Alvin H. Meadow, Assistant United States Attorney, New York, N. Y., for plaintiff. Donald MacDonald, 40 Wall St., New York, N. Y., for A. H. Rathkopf; Thorold J. Deyrup, William Pozensky, Berle & Berle, 70 Pine St., New York, N. Y., for H. S. Pearson and H. R. Pearson; John H. Reily, Jr., Browne, Hyde & Dickerson, 61 Broadway, New York, N. Y., for Bankers Trust Co.; James McGarry, Dillon & O'Brien, 535 Fifth Ave., New York, N. Y., for A. W. Pearson, defendant.

[Opinion]

LEVET, District Judge:

The plaintiff, United States of America, moves for an order striking the answer of the defendant Arden H. Rathkopf individually and as Executor of the Estate of Gertrude S. Pearson, deceased, on the ground that it fails to state a claim upon which relief can be granted, and further granting summary judgment in favor of the United States as to this defendant.

The defendant Rathkopf, in a cross-motion, moves for an order granting summary judgment to the said defendant Executor as against the plaintiff, and further for permission to validate certain levies or executions dated May 19, 1965, nunc pro tunc, as of May 10, 1964.

The pleadings involved are the third amended complaint of the plaintiff and the answer and cross-complaint made by the defendant Rathkopf. The complaint seeks to enforce tax liens against specific funds of another defendant, Harlow S. Pearson (hereinafter " Harlow "). These funds are held by defendant Bankers Trust Company as cotrustee of a testamentary trust, established by the Will of Edward S. Pearson, Harlow's father, of which Harlow is the present income beneficiary. The complaint alleges the creation and filing of tax liens arising from assessments against Harlow for the years 1949 through 1964. The assessments for the years 1949 through 1958 have been paid in full and are not in question now. The government now seeks to enforce the assessments for the years 1959 through 1964. These assessments were made on May 21, 1965 and totalled $66,572.72, including penalties and interest to that date.

Notice of tax liens were filed thereafter in the office of the New York County Register on August 3, 1965, pursuant to 26 USC §6321 et seq. and New York Lien Law §240. Notices of tax liens were also filed with the Clerk of the United States District Court for Connecticut on August 11, 1965; with the Town Clerk of the Town of New Haven, Connecticut on August 11, 1965; and with the Recorder of Clark County, Nevada on August 20, 1965. The complaint seeks an in personam judgment against Harlow for the taxes due and an in rem judgment against the fund held by the Bankers Trust Company, that is, the accrued and accumulated income of the testamentary trust of which the defendant Harlow is the income beneficiary.

The merits of the claims presented by this motion and cross-motion must be examined in the light of the sole issue before this court at this time: Does not defendant Rathkopf, by virtue of his claims against Harlow, have a lien upon the fund now held by the Bankers Trust Company which is prior to the tax lien the government seeks to enforce?

This court in an opinion herein dated May 27, 1966, granting a government motion for summary judgment against Annabelle Webb Pearson, another defendant in this action, held that there is no merit in allowing a party to continue as a defendant as against the United States when that party does not have a claim prior to that of the United States. See United States of America v. Pearson, et al., 60 Civ. 690, [66-1 USTC ¶9448] -- F. Supp. --, Levet, J.

Before the question of priority of liens is examined, a preliminary question must be examined. The defendant Rathkopf challenges the validity of assessments for taxes against Harlow . As has been determined in the prior opinion in this case, the defendant, as a third party lacks standing to contest the assessments, and so that affirmative defense should be stricken.

The question of priority of liens basically involves the following judgments in favor of the defendant:

1. A judgment in favor of defendant Rathkopf as Executor against Harlow , docketed in the Surrogate's Court of New York County on November 10, 1959, in the sum of $63,560.33. In January of 1960, a transcript of this judgment was docketed in the Supreme Court, New York County .

2. A judgment in favor of the defendant Rathkopf as Executor against Harlow , docketed in the Superior Court of New Haven County, Connecticut in July 1960. This judgment resulted from an action in the Connecticut courts on the above-mentioned New York judgment. The judgment in the Connecticut attachment action, entered against Harlow, was affirmed in April of 1961 on appeal to the Court of Errors, 148 Conn. 260, 170 A. 2d 135.

3. A judgment in favor of the defendant Rathkopf as Executor against Helen Ridgeway Pearson, begun in March 1960 and docketed in the Superior Court, New Haven County, Connecticut. This action was based on an endorsement by Helen Ridgeway Pearson and Harlow of a promissory note given to Gertrude S. Pearson, the mother of Harlow , and now deceased.

I will first deal with the two Connecticut judgments. Under 26 USC §6323, the lien imposed by Section 6321 is not valid as against any judgment-creditor until notice has been filed in accordance with the provisions of Section 6323. Notice of the liens was given in August of 1965. But the only judgment-creditors who are protected under Section 6323 are those who have previously perfected a choate lien upon the assets against which the United States seeks to enforce its lien. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84. The defendant specifically states in his answer, dated December 28, 1965 (paragraphs 17 and 18 of p. 6), that the liens of his Connecticut judgments have not been perfected because of a stay issued by this court.

That brings us to the most important question, the effect of the judgment recovered in the Surrogate's Court of New York County in November 1959 and docketed in the Supreme Court of New York County in January 1960.

On January 22, February 8 and March 29, 1960, garnishee executions upon the judgment were issued to the Sheriff of the City of New York pursuant to Sections 684 and 687 of the Civil Practice Act (then in effect). After presentation to the Bankers Trust Company they were returned unsatisfied. On two separate occasions, in May 1960 and May 1962, the defendant's application, pursuant to Section 687(a)(7) of the Civil Practice Act, ¹ for a two-year extension of time to sue in aid of execution was granted. The last extension expired in May 1964. No further extension was obtained in May 1964, the garnishee execution lapsed and became unenforceable.

On June 29, 1961, Judge Cashin of this court handed down an opinion enjoining the defendant Rathkopf "from prosecuting the Connecticut State court action or any other action involving this res until this case is concluded." An order was entered on this opinion on February 13, 1962. The last part of the order provided:

"IT IS FURTHER ORDERED that the defendant Arden H. Rathkopf be and hereby is enjoined from commencing or prosecuting any other action or judicial proceeding relating to the interest of Harlow S. Pearson in the trust established under the Will of Edward J. Pearson."

The order was not appealed.

It would thus appear that the ex parte application in May 1962 for the order extending the time to sue in New York was in violation of the terms of the stay.

In June 1962, the defendant moved to vacate the stay or, in the alternative, to modify the stay "so as to allow the Executor to proceed as he may be advised to full and complete 'perfection' of the lien of his judgment, stopping however at a point short of receiving or requiring collection or payment thereof in whole or in part, without the further order of this court." This motion was denied on August 8, 1962 and the stay remained in force. No appeal was taken.

On May 19, 1965, the defendant moved to reinstate his liens after a lapse of a year by delivery of an income execution to the sheriff, pursuant to Sections 5205 and 5231 of the Civil Practice Law and Rules. On July 12, 1965, the Supreme Court, New York County , extended the time of the defendant to sue in aid of such latter execution for two years. Again, these ex parte applications to the New York courts were violative of the order entered on the stay granted by this court and entered on February 13, 1962.

The defendant's lien of May 19, 1965, if choate and valid, has a priority over that of the government. Whether such priority is limited to 10% of the income of the trust need not be examined now.

The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question. United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950). The obtaining of the lien was part of a course of conduct ignoring the stay entered against the defendant. If, as time went on, the defendant deemed himself aggrieved by the stay and the denial of the motion to vacate or modify the stay, his proper course was either to make another motion to modify or vacate, or to take an appeal.

The stay, granted by Judge Cashin, was an interlocutory order. Absent an appeal, a district court has complete power over its interlocutory orders, John Simmons Co. v. Grier Bros., 258 U. S. 82 (1922); 7 Moore 's Federal Practice ¶60.16[4]. The defendant, as I have said, did move once to vacate and modify and he could have moved again if he felt that the circumstances warranted it.

The defendant had the alternative of appealing to the Court of Appeals on the question of the stay in this court, pursuant to 28 USC §1292(a)(1), which provides:

"(a) The courts of appeals shall have jurisdiction of appeals from:

"(1) Interlocutory orders of the district courts of the United States * * * or of the judges thereof, granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions, except where a direct review may be had in the Supreme Court." ²

See also 6 Moore 's Federal Practice ¶54.06[3] and ¶54.07.

There is nothing in the record before me to indicate that the defendant has taken an appeal from the order denying his motion to vacate or modify. The time allowed for such an appeal expired thirty days after the entry of the order on August 8, 1962. 28 USC §2107.

Accordingly, since the reinstatement of the defendant's lien on May 19, 1965 was in violation of a stay then in effect, and from which no appeal had been taken in due course, the issuance of the income execution will be deemed void by this court as against the United States and the motion to validate these levies on executions, dated May 19, 1965, nunc pro tunc as of May 10, 1964, is denied.

Conclusion

Since the only issue on this motion for summary judgment by the plaintiff and cross-motion by the defendant is the priority of liens vis-a-vis these two parties, and it affirmatively appearing that there are no genuine issues of material fact as between the plaintiff and Rathkopf, the plaintiff's motion for summary judgment is granted and Rathkopf's defenses and counterclaims dismissed. The defendant may still attempt to litigate in any court which has jurisdiction any meritorious and proper claims he may have as to the balance of the fund or against any other defendant after disposal of the government's liens.

Defendant's motion for summary judgment is denied.

Settle order on notice.

¹ Section 687(a)(7) provides in part:

"If within one hundred twenty days after the receipt of the execution by the officer, the levy has not been discharged by payment to the officer as herein provided and an action as herein authorized has not been commenced, any levy made pursuant to this section shall thereafter be void * * * unless the time to commence such action shall be extended beyond the period of one hundred twenty days by order of the court for good cause shown. Such an order may be granted upon ex parte application of the judgment creditor. * * *"

² The Second Circuit has recently said that, although a district court's denial of a motion for summary judgment encompassing a prayer for a permanent injunction is not appealable under Section 1292(a)(1), there is "a good reason to hold Section 1292(a)(1) empowers the courts of appeals to review, as a class, without delay, all orders granting or denying preliminary injunction." Chappell & Co. Inc. v. Frankel, Docket No. 29781, 2nd Cir., decided October 13, 1966.

 

 

[66-2 USTC ¶9644]Fidelity and Deposit Company of Maryland , a Corporation, Plaintiff v. A. to Z Equipment Corp., et al., Defendants

U. S. District Court, East. Dist. N. Y., No. 64 C 854, 258 FSupp 862, 6/20/66

[1954 Code Sec. 6321]

Tax liens: Priority: Materialman's lien: U. S. property.--Since property of the United States is generally not subject to state lien laws, a federal income tax lien took precedence over a materialman's lien to an award granted to a subcontractor in a bankruptcy proceedings against the prime contractor for the repair of a United States vessel.

Maurice & McNamee, 149 Broadway, New York , N. Y., for plaintiff. Daniel McNamara, 65 Flatbush Ave., Brooklyn, N. Y., for Cardinal Engine & Boiler Works Inc.; Goldman & Shapiro, 53 N. Park Ave., Rockville Centre, N. Y., for Columbian Bronze Corp.; Greenwald, Kovner & Goldsmith, 170 Broadway, New York, N. Y., for American Hydromath Corp.; Philip Leavitt, 170 Broadway, New York, N. Y., for Karbo Bronze Foundries; Edward S. Friendland, 25 W. 43rd St., New York, N. Y., for Penn Surgical Supplies; Muldoon & Horgan, 111 Broadway, New York, N. Y., for Rushmore Steel; Sidney Goldstein, 111-8th Ave., New York, N. Y., for The Port of N. Y. Authority; Hart, Hume & Engleman, 10 E. 40th St., New York, N. Y., for Thos. Grogan's Son Inc., Banks Ship Rigging Corp., Del-Air Marine Corp.; Gordon Marshall, Madison Ave., New York, N. Y., for N. J. Galvanizing & Tinning Works, Inc.; C. Leo Calarco, 74 Grove St., New York, N. Y., for B. F. G. Marine Supply; Rosen, Lewis, Brickner & Gross, 66 Court St., Brooklyn, N. Y., for Stevens Marine, Henze Instrument, Leslie Co., F. M. C. Corp., La Favorite Rubber Mfg., J. Cowhey & Sons, Continental Engineering Corp., Corpus Engineering Corp.; Seymour Goldstein, 16 Court St., Brooklyn, N. Y., for Cantasano Bros., Frank R. Caponi, John Edwards Co., Inc., Erie Basin Carting Co., Inc., Theo T. Hendrickson Co., Maritime Chemical & Repair, N. Y. Canvas & Rope Co; Henry Braverman, 261 Broadway, New York, N. Y., for Marine Works Inc., Arcy Mfg. Co., Inc.; Rosen, Lewis, Brickner & Gross, 66 Court St., Brooklyn, N. Y., for Aeroquip Corp.; Krause, Hirsch, Gross & Heilpern, 521-5th Ave., New York, N. Y., for Brooklyn Elec. Supply Co., Inc.; Weil, Gotshal & Manges, 60 E. 42nd St., New York, N. Y., for Utility Brass & Copper; Chester Rob inson, 1 Wall St., New York, N. Y., for Heat Exchange Service Corp.; 462 Seaboard Elec. Co., 462 Third Ave., Brooklyn, N. Y., for pro se; Carlo S. Corsuti, 26 Court St., Brooklyn, N. Y., for Cirillo Bros. Petroleum Products; Mervin C. Pollak, 733-3rd Ave., New York, N. Y., for Penn Protective Service; Howard Schulman, 50 Broadway, New York, N. Y., for Harry Owens-Local 1716; S. K. & M. B. Goldstein, 130 Clinton St., Brooklyn, N. Y., for Colony Metal Corp., Columbia St. Hardware Corp., Ferris Iron & Machine Works, Legault Ind. Inc.; Bigham, Englar, Jones & Houston, 99 John St., New York, N. Y., for Bailey Refrig. Co.; Philip Kranzbaum, 545 5th Ave., New York, N. Y., for Marine Engine Spec. Corp.; Kirlin, Campbell & Keating, 120 Broadway, New York, N. Y., for Chilean Line Inc., Pittston Stevedoring Corp.; Kalman & Starr, 55 Liberty St., New York, N. Y., for Cavalier Marine & Welding; Schwartz, Troiano & Grant, 271 Church St., New York, N. Y., for Acme Engraving Co.; Cohn & Glickstein, 717th Ave., New York, N. Y., for T/D Union Local 807; Jacob Morrow, 16 Court St., Brooklyn, N. Y., for Victory Elec. Corp.; Jacob F. Gottesman, 295 Madison Ave., New York, N. Y., for Hamsley Inc., David Smith Steel Co.; Krause, Hirsch, Gross & Heilpern, 521 5th Ave., New York, N. Y., for Brooklyn Elec. Supply Co.; Seymour Goldstein, 16 Court St., Brooklyn, N. Y., for 462 Seaboard Elec. Co.; Gordon, Feinblatt & Rothman, 1400 American Bldg., Baltimore, Md., for Boston Metals Co.; Hyman Stein, 160-16 Jamaica Ave., Jamaica, N. Y., for A to Z Equipment Co.; Kalman V. Gallop, 170 Broadway, New York, N. Y., for Empire Electric Co.; Morris Permit, 170 Broadway, New York, N. Y., for Craftsmen Welders, Inc.; Joseph Henig, 3351 Park Ave., Wantagh, N. Y., for Aabey Plating & Polishing Co.; Rosen, Lewis, Brickner & Gross, 66 Court St., Brooklyn, N. Y. for Rostand Co.; Zelby & Burstein, 160 Broadway, New York, N. Y., for Golten Marine Co., Inc.; Abraham O. Chasser, 16 Court St., Brooklyn, N. Y., for Hunterspoint Steel; Foley & Martin, 80 Pine St., New York, N. Y., for Hughes Bros. Inc., M. P. Howlett, Inc.; Kagan & Gallent, 75-35 31st Ave., Jackson Heights, N. Y., for Cranes, Inc.; Dannenberg, Hazen & Lake, 25 W. 43rd St., New York, N. Y., for Sylvan Equipment Rental Corp.; Rosen, Lewis, Brickner & Gross, 66 Court St., Brooklyn, N. Y., for Blaw-Knox Co.; Schwartz, Troiano & Grant, 271 Church St. New York, N. Y., for E & S Ordnance Repair; Frederick & Goglio, 1440 Broadway, New York, N. Y., for Kelmer Contracting Corp.; Greenwald, Kovner & Goldsmith, 170 Broadway, New York, N. Y., for American Hydromath Co.; Weil, Gotshal & Mamges, 60 E. 42nd St., New York, N. Y., for Utility Brass & Copper, for defendants.

Memorandum

[Counsel Fees & Surety]

BRUCHHAUSEN, District Judge:

The plaintiff instituted this action for interpleader. The plaintiff now moves for confirmation of the report of Theodore D. Ostrow, Esq., Special Master appointed by the Court. As additional relief, the plaintiff seeks an award of $12,500 counsel fees, also costs and disbursements, payable out of the fund.

The plaintiff, as surety, issued a bond, pursuant to 40 U. S. C. 270(a) in the penal sum of $122,479.50 in behalf of Main Ship Repair Corp., as principal, in favor of the United States of America, as obligee. It accompanied a contract for the repair of a vessel, entered into between the said principal and obligee. Subsequently, the principal was adjudicated a bankruptcy. There were 114 unpaid subcontractors. The Special Master conducted hearing on the claims of the defendants and made findings and conclusions of law.

Several of the claimants entered objections to the Special Master's recommendation that the plaintiff be awarded reasonable attorneys fees, costs and disbursements.

The law on this subject is well settled. In the absence of extraordinary circumstances an interpleading plaintiff will not be entitled to payment of such allowances from the fund. The ordinary costs of the plaintiff in transacting its business may not be taxed to the parties insured. Travelers Indemnity Company v. Israel , 2 Cir., 1965, 354 F. 2d 488, and cases cited therein.

The plaintiff's request for its counsel fees, costs and disbursements is denied excepting that there is allowed the sum of $1991.50, payable out of the fund to reimburse it for the minutes of the hearings.

The Special Master's compensation is fixed at the sum of Ten Thousand Dollars, payable out of the fund.

[Materialman Lien v. Tax Lien]

The Special Master allowed the assignee

of claimant No. 101, Seaboard Electric

Co.
,

the sum of ...............................                          $12,215.75

Less Allowance to claimant

No. 73, 

Murray

 Benjamin

Electric Co. of ..........................         $4797.38

and

Less 

U. S.

 tax lien of ...................          6300.42          11,097.80

Net ......................................                          $ 1,117.95

 

The claimant (73), Murray Benjamin Electric Co., objects to the ruling of the Special Master, relegating it to a separate action for recovery of the balance of its claim for materials furnished to the defendant, Seaboard Electric Company, Inc, (101). It also objects to the ruling that out of the pro rata share of the allowed claim of Seaboard, the tax claim of the Government be accorded priority and that any balance be paid to Seaboard's assignee. In short the objectant, a materialman of Seaboard seeks priority over the Government's tax lien.

It is settled law that property of the United States is generally not subject to State lien laws, Continental Casualty Company v. United States, 305 F. 2d 794; certiorari denied 371 U. S. 922. The Miller Act 40 U. S. C. 270(b) gives a property right to a claimant to sue which right may be attached. Lee v. Mack, 182 N. Y. S. 2d 391. See also Section 6321 of the Internal Revenue Code of 1954. The authorities cited by the objector are inapplicable. Its objections are overruled.

[Other Claims]

Seymour Goldstein, Esq., attorney for Seaboard claims a 331/3 percent attorney's lien. He should be paid one-third of the amount payable to Seaboard's assignee out of the fund, without prejudice to any further claim he may have against Seaboard or its assignee.

Claim No. 12 of Bethlehem Steel Company for $800 was disallowed by the Special Master.

The claimant submitted evidence of a purchase order received from the contractor, Main Ship Repair Corporation, also of an entry in the contractor's accounts payable ledger, reflecting receipt of claimant's invoice.

The Special Master rejected the claim upon the ground that the claimant produced no evidence of delivery of the material.

The claimant objected to the disallowance, contending that no issue was raised as to delivery and that the documentary proof submitted shifted the burden of proof of non-delivery of the contractor.

Claim No. 34 of Dunham-Bush for $250 was likewise disallowed by the Special Master upon the grounds of no proof of delivery, value, agreed price nor of an order for the merchandise other than the invoice.

The claimant asserts that it submitted sufficient evidence to support the claim, i. e., the claimant's invoice, reflecting delivery of the goods to the contractor, and the contractor's accounts payable ledger, containing an entry, indicating the posting of the aforesaid invoice.

The objections of claimants, Bethlehem Steel Company and Dunham-Bush are overruled.

The Special Master's report is confirmed excepting as hereinabove indicated.

Submit judgment.

 

 

[66-2 USTC ¶9625] United States of America v. John Clinton; Margaret Clinton; State of New York Tax Commission; et al., Defendants

U. S. District Court, So. Dist. N. Y., Civ. 121-374, 260 FSupp 84, 8/24/66

[1954 Code Sec. 6323]

Liens: Priority: State tax lien: Attorney's inchoate lien.--A federal income tax lien, having been filed prior to the New York State Tax Commission's lien for state taxes and also prior to the inchoate lien of the taxpayer's attorney for services rendered in connection with a criminal matter, had a superior right to a fund seized by the City of New York as proceeds allegedly arising from the illegal activities of the taxpayer. The Court found that the trial evidence established that the money in the fund was not the proceeds of illegal activities and, therefore, was not forfeited to the City of New York . The fund was held to be the property of the taxpayer and subject to the federal tax lien.

Rob ert M. Morganthau, United States Attorney, New York , N. Y., for plaintiff. Eugene A. Leiman, 155 Leonard St., New York, N. Y., John A. McAvinue Jr., 253 Broadway, New York, N. Y., Louis J. Lefkowitz, Attorney General, Albany, N. Y., Peter Campbell Brown, Municipal Bldg., New York, N. Y., Matthew H. Brandenburg, 160 Broadway, New York, N. Y., for defendants.

[Nature of Action]

CANNELLA, District Judge:

This action was instituted on June 24, 1957 to foreclose a lien for unpaid taxes, due and owing from John and Margaret Clinton, against a fund in the amount of $23,545.17 held by the Police Property Clerk of the City of New York . The plaintiff claims the sum of $11,825.47 plus interest and penalties out of the fund. Judgment is hereby rendered for the plaintiff against all the defendants and it is ordered that defendant Rosetti, the Police Property Clerk, pay over to the United States Government out of the fund in question, an amount sufficient to pay the principal, interest and penalties due on account of the plaintiff's lien. It is further ordered that any sum remaining out of the fund after satisfaction of the plaintiff's lien is to be paid over to the defendant, State of New York Tax Commission , which has a claim for unpaid taxes against defendant John Clinton.

This court has jurisdiction in this case by virtue of 26 U. S. C. §7403, which provides for the bringing of a civil action to enforce a lien or to subject property to the payment of taxes due.

This case was tried non-jury by the court on January 20, 1966 .

[Fund Seized by Police]

The court finds from the evidence adduced and the undisputed facts that on February 26, 1957 , the defendant John Clinton was arrested by the New York City Police. Pursuant to a search warrant the police recovered monies, bank books and records leading to safe deposit boxes, whether in Clinton's name or someone elses, and as a result seized $313.00 from the person of John Clinton; $950.00 from the home of Rocco Monfredo; $14,500.00 from a safety box in the Long Island City Savings Bank in the name of John and Margaret Murray; and $8100.00 from a safety box in the Chase Manhattan Bank, in the name of Frank Vitarelli. The total fund of $23,863.00 was deposited with defendant Thomas E. Rosetti, Police Property Clerk, on March 11, 1957.

On March 24, 1957, John Clinton was indicted for violation of Section 580 of the New York Penal Law and Sections 340 and 357 of the Banking Laws of New York. On April 25, 1957, he pleaded guilty to two counts of the indictment, both of which were misdemeanors.

[Federal Lien Filed]

On March 28, 1957, an assessment for unpaid taxes was made by the District Director of Internal Revenue against John and Margaret Clinton. Notice of lien was duly filed with the Registrar of the City of New York, New York County, on March 29, 1957. A notice of levy was served upon the Police Property Clerk on March 29, 1957. On May 17, 1965, on the basis of the above mentioned assessment, a judgment was entered in the amount of $11,825.47, plus interest and penalties in the Tax Court. ¹ The amount represents the taxes owing and due to the plaintiff from defendants John and Margaret Clinton.

[Other Liens Filed]

The New York State Tax Commission assessed unpaid taxes against defendant John Clinton in the amount of $55,190.50, plus interest and filed a warrant for such state taxes with the Clerk of the County of New York on April 1, 1957. The Commission thus also claims a lien on the fund in the possession of the Police Property Clerk.

On April 8, 1957, Matthew H. Brandenburg, who was retained as counsel by the Clintons , served notice of attorney's lien on the Police Property Clerk.

[Title to Seized Fund]

The Police Property Clerk refused to honor the levy served on him by the plaintiff. It was the Property Clerk's position that the money composing the fund was used in illegal activities and thus defendant John Clinton has no property in such fund, under New York law. He also claims that under Section 435-40 of the Administrative Code of the City of New York , title to the fund properly vests in the Police Property Clerk. It is the Property Clerk's further contention that the search warrant under which the fund was seized was validly issued and the seizure was lawful in every way.

The plaintiff takes the position that the Property Clerk has no claim to said funds since his claim must rest on Section 435-40 of the Administrative Code of the City of New York, which is allegedly unconstitutional as a deprivation of the right to property without due process of law under the Fifth and Fourteenth Amendments to the United States Constitution. The plaintiff further contends that the fund properly belongs to defendant John Clinton and is not the proceeds of illegal activity on the part of John Clinton.

The position of defendants John and Margaret Clinton is that the search warrant was improperly issued and executed and the Police Property Clerk has no claim to the fund in question since it was obtained through illegal search and seizure in violation of the Fourth and Fourteenth Amendments to the United States Constitution. They further contend, as does the plaintiff that the fund is theirs and not the proceeds of illegal activity, and that Section 435-40 of the Administrative Code of the City of New York is unconstitutional.

A pivotal issue in this case is whether or not the fund held by the Police Property Clerk belongs to defendant John Clinton. For the plaintiff's federal tax lien to attach, it is necessary that the funds belong to defendant John Clinton. ² 26 U. S. C. §6331(a).

[Taxpayer as Owner]

As to the $313.00 taken from the person of defendant John Clinton, there arises a presumption that this money belongs to him. The burden is on the Police Property Clerk to rebut that presumption. United States v. Leuci [58-1USTC ¶9480], 160 F. Supp. 715 (E. D. N. Y. 1958);Norris v. Camp, 144 F. 2d 1 (10th Cir. 1944). The Police Property Clerk introduced no evidence during the trial which rebutted the presumption. Therefore, as to the $313.00, this court finds that it belongs to defendant John Clinton.

As to the money taken from Rocco Monfredo and from the safety deposit boxes in names other than that of defendant John Clinton, the plaintiff has the burden of proof by the fair preponderance of the credible evidence that the money belonged to John Clinton. This court finds that, through the testimony elicited at the trial from the witnesses and from other evidence introduced during the trial, the plaintiff has sustained its burden. For example, the plaintiff established that the bankbooks and other indicia of ownership were in the possession of John Clinton. The court also believes that the testimony given by defendants John and Margaret Clinton as to the ownership of the fund, is true.

Therefore it is the finding of this court that the entire fund in the possession of the Police Property Clerk is owned by John Clinton.

The Police Property Clerk argued that even if defendant John Clinton owned the money at one time, he now has no property right in it.

Questions of title to property and rights to property are governed by state law, whereas questions as to the creation and enforcement of federal tax liens are controlled by federal statutes. United States v. Leuci, supra. See also the opinion of Bryan, J., on the motion for summary judgment in the instant case ( Clinton [64-2 USTC ¶9617]) which was rendered on October 23, 1963; United States v. Ortiz[56-1 USTC ¶9387], 140 F. Supp. 355 (S. D. N. Y. 1956). It is clearly the law of New York that a wrongdoer obtains no interest in property illegally obtained.Hofferman v. Simmons, 290 N. Y. 449, 49 N. E. 2d 523 (1943). See also United States v. Ortiz, supra; United States v. Pagan [55-2 USTC ¶9600], 140 F. Supp. 711 (S. D. N. Y. 1955).

Section 435-40(b) of the Administrative Code of the City of New York, in essence, provides that all property or money suspected of having been unlawfully obtained or of being the proceeds of crime or suspected of having been used for the commission of a crime or in furtherance of a crime, shall be given into the custody of and kept by the Police Property Clerk. Section 435-40(f) provides that a claimant of such fund in the possession of the Police Property Clerk "shall establish that he has a lawful title or property right in such property or money and lawfully obtained possession thereof and that such property or money was held and used in a lawful manner." This court finds that although there was some justification underlying the suspicion at the time the money was seized, that the money was unlawfully obtained, the evidence adduced during the course of the trial establishes to this court's satisfaction that defendant John Clinton has a lawful property right in such fund and that such fund is not the proceeds of illegal activities.

Therefore the Police Property Clerk has no right to detain the fund.

[Priority of Liens]

Having determined this, it is now necessary to consider the validity and priorities of the liens claimed by the plaintiff and defendants Brandenburg and the State of New York Tax Commission . This court finds that plaintiff and defendant State of New York Tax Commission have valid and subsisting liens. ³ It should be noted at this point that the Tax Commission concedes that the plaintiff's lien is superior to its own.

Although it is doubtful if defendant Brandenburg has a valid attorney's charging lien at all under state law, as will be discussed later, this court assumes it to be valid for the purposes of the following discussion on the priority of a federal tax lien. "The priority of a federal tax lien provided by 26 U. S. C. §6321 as against liens created under state law is governed by the common-law rule--'the first in time is the first in right.'" United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 87 (1963). See United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954). The characterization by states of their liens, while good for all state purposes, does not necessarily bind the federal courts. United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1955); United States v. Pay-o-Matic [58-2 USTC 9533], 162 F. Supp. 154 (S. D. N. Y.), aff'd sub nom. United States v. Goldstein [58-1 USTC ¶9478], 256 F. 2d 581 (2d Cir.), cert. denied, 358 U. S. 830 (1958).

It must be kept in mind, however, that a choate state-created lien will take priority over later federal tax liens. United States v. New Britain , supra. Inchoate liens, of course, will not. United States v. Liverpool & London Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955). See United States v. Pioneer American Ins. Co., supra. The federal test is that liens are "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain , supra at 84. United States v. Pioneer American Ins. Co., supra at 89.

There is no doubt that under the idea first in right, first in time, the plaintiff's lien would be prior to that of defendant Brandenburg, since plaintiff filed notice of lien on March 29, 1957, while defendant Brandenburg did not do so until April 8, 1957.

[Attorney's Lien Was Inchoate]

However, it is also necessary to consider the question of whether the defendant Brandenburg 's charging lien was choate at the time that the plaintiff filed notice of lien on March 29, 1957. Even assuming that the identity of the lienholder and the property subject to the lien was definite at the time the plaintiff filed its notice of lien, this court finds, (despite the fact defendant Brandenburg mentioned the retainer sum of $7,500.00 in his answer) that the amount of the lien for attorney's fees was undetermined and indefinite when notice of the federal tax lien was filed on March 29, 1957. The charging lien of defendant Brandenburg was inchoate on March 29, 1957, since the fair value of his services could not be determined as of that date and therefore the plaintiff's lien has priority over that of defendant Brandenburg .

[No Charging Lien]

The last matter for the court to discuss is whether defendant Brandenburg or defendant State of New York Tax Commission has a superior interest in the fund remaining after satisfaction of the plaintiff's lien. Defendant Brandenburg claims that under the New York Judiciary Law §475 a charging lien in his favor arose as soon as he began to render services for the defendant John Clinton. Judiciary Law §475 reads in part:

From the commencement of an action, special or other proceeding in any court . . . or the service of an answer containing counterclaim, the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come . . ..

In the present case defendant Brandenburg 's claim arises from services rendered in relation to a criminal matter in which he represented John Clinton who eventually pleaded guilty.

It is clear to this court that under the facts present, defendant would not be entitled to any charging lien on the basis of Judiciary Law §475. There was, of course, no cause of action, claim or counterclaim of his client to which a lien could attach. Also, the fund in question in this case was obviously not the result of Brandenburg 's efforts in the criminal matter on behalf of a defendant.

An attorney who represents a defendant cannot have a charging lien in the absence of a counterclaim. National Exhibition Co. v. Crane, 167 N. Y. 505, 60 N. E. 768 (1901); Manusse v. Mattia, 10 N. Y. S. 2d 495 (Sup. Ct. 1939). In the Manusse case, an attorney who represented a defendant in criminal proceedings moved for a lien seemingly for his services in the criminal proceeding. The court held that he could not have a charging lien under the facts present in the case.

Thus, under New York law, defendant Brandenburg is not entitled to a charging lien at all in the present case. This being so defendant Brandenburg has no right whatsoever in the fund held by the Police Property Clerk and therefore the Tax Commission has a right to that portion of the fund remaining after satisfaction of plaintiff's lien.

Even assuming that defendant Brandenburg had a right to such a lien, it could not arise pursuant to Judiciary Law §475 under which the lien would arise upon commencement of an action or service of an answer containing a counterclaim. This being true, if Brandenburg did have a lien, it would not arise until the filing of notice of lien which occurred after the filing of the State of New York Tax Commission which would therefore give the Commission priority.

In any event, the plaintiff is entitled to $11,825.47 plus interest and penalties out of the fund held by the Police Property Clerk and defendant State of New York Tax Commission is entitled to anything remaining after satisfaction of the plaintiff's lien.

In view of the above decision, it is not necessary for this court to determine whether or not Section 435-40 of the Administrative Code of the City of New York is constitutional, nor to determine whether or not the search warrant was properly issued and whether consequent search and seizure was illegal.

Submit order.

¹ Defendants John and Margaret Clinton consented to the entry of judgment on account of unpaid taxes for the years 1949 through 1955 inclusive, in the amount of $11,825.47.

² The lien for federal taxes is imposed by 26 U. S. C. §6321.

³ The lien for state taxes arises under Section 380 of the New York State Tax Law.

 

 

[66-1 USTC ¶9256]United States of America, Plaintiff v. Harold Webster Coleman, also known as Webb Coleman, doing business as Webb Coleman Designs; Farrel T. Miles; Tom Douglas; Kenchel Corporation, a corporation; Romer, O'Connor & Co., Inc., a corporation; and Security First National Bank, a corporation, Defendants

U. S. District Court, So. Dist. Calif., Central Div., No. 63-1569-HW Civil, 12/6/65

[1954 Code Secs. 6321, 6322 and 6323(a)]

Lien for taxes: State attachment lien: United States liens filed prior to state court judgment: California law: Priority.--Federal tax liens were superior to an attachment lien filed by an attaching creditor in a state court proceeding where the Government's liens, although recorded before and after the date of the attachment, were recorded prior to the date that the attaching creditor obtained judgment.

Manuel L. Real, United States Attorney, Loyal E. Keir, James S. Bay, Assistant United States Attorneys, 808 U. S. Courthouse, 312 N. Spring St., Los Angeles, Calif., for plaintiff. Ryan and Traxler, 8th Floor Union Bank Bldg., 9460 Wilshire Blvd., Beverly Hills, Calif., for Kenchel Corp.; Russell A. Freeman, 215 W. Sixth St., Los Angeles, Calif., for Security First Nat'l Bank, defendants.

Findings of Fact and Conclusions of Law

WESTOVER, District Judge:

The above-entitled case came on for hearing on plaintiff's Motion for Summary Judgment on December 6, 1965 , before the Honorable Harry C. Westover, United States District Judge, presiding, and the Court having considered the pleadings filed herein, the briefs and the arguments of the parties, NOW, THEREFORE, decides as follows:

Findings of Fact

I. The plaintiff, United States of America , is a corporate sovereign and body politic.

II. The defendants, Kenchel Corporation and Security First National Bank, are corporations organized and existing under and by virtue of the laws of the State of California, and at all times pertinent hereto had their principal places of business in the Southern District of California.

III. The within action was authorized and directed by the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury of the United States of America, and was brought under the direction of the Attorney General of the United States of America.

IV. On the dates shown below, a delegate of the Secretary of the Treasury assessed against the defendant and taxpayer, Harold Webster Coleman, Federal Internal Revenue taxes of the types, for the taxable periods and in the amounts shown below; further, shortly thereafter, notice of each tax assessed was given to the said taxpayer and demand was made upon him for the payment of each tax so assessed; further, said taxpayer, after said notice and demand, paid, if any, only those amounts shown in the table below and no more, and remains indebted to the United States of America for the balance; further, on the dates specified below, Notices of Tax Lien were filed in the office of the County Recorder of Los Angeles County, California, and there show the lien numbers set forth below; further, there remains due, owing and unpaid to the United States of America on each lien the sum shown in the last column, which represents the balance of the assessed tax plus subsequently accruing penalties and interest through October 31, 1963; and further interest accumulates from said date at the rate of $1.99 per day, until paid, and lien filing fees of $20.00 have been incurred:

V. On or about October 31, 1959, the defendant Security First National Bank had in its possession, at its Wilshire and Bedford Branch in Beverly Hills , California , deposits in the amount of $6,384.13, which deposits were held in an account in the name of defendant Harold Webster Coleman. As of the present time, the defendant Security First National Bank is holding in said account the sum of $5,984.13, to which sum it claims no interest but is holding it subject to the determination by this Court as to entitlement to said sum.

VI. On or about October 13, 1959, the plaintiff caused to be served upon said defendant Security First National Bank a Notice of Levy in the amount of $5,584.40, notifying said defendant of the outstanding tax liability of defendant Harold Webster Coleman and further notifying said defendant Security National Bank that all property or rights to property, monies, credits and bank deposits in its possession and belonging to the defendant Harold Webster Coleman were being levied upon and seized for the satisfaction of the aforementioned tax liability, or for such lesser sum as said defendant Security might be indebted to defendant Harold Webster Coleman to be applied as payment to his tax liability. Similarly, on April 6, 1961, a second Notice of Levy in the amount of $8,211.28 was served on the defendant Security First National Bank. Final Demand for payment was served on defendant Security First National Bank on October 31, 1961.

VII. On September 3, 1959, defendant Kenchel Corporation filed an action in the Superior Court of the State of California in and for the County of Los Angeles against defendant Harold Webster Coleman, praying for a judgment against defendant Coleman in the amount of $5,276.14 principal, together with interest thereon from and after October 15, 1958, and costs of suit and such other further relief as the Court might award. On September 3, 1959, Summons was issued in the said action and on said date a writ of attachment pursuant to Section 540 of the California Code of Civil Procedure was issued in favor of Kenchel Corporation. On September 4, 1959, said writ of attachment was served upon the defendant Security First National Bank at its Wilshire and Bedford Branch in Beverly Hills , California .

VIII. On July 3, 1961 , Kenchel Corporation received a judgment against said defendant Coleman in the total amount of $6,351.52, which judgment was duly entered on July 5, 1961 . On July 31, 1961 , Kenchel Corporation secured the issuance of a writ of execution in the amount of $6,351.52, which writ of execution was served upon Security First National Bank on October 10, 1962 .

IX. On August 10, 1964, the Clerk of the within Court entered herein judgment in favor of the plaintiff against defendant Coleman in the amount of $16,373.93, being the total of principal and interest as prayed for in the Complaint herein plus interest to August 6, 1964, at the rate of 6 per cent per annum, together with the costs incurred in this action in the sum of $51.80.

X. Any conclusion of law deemed as, or properly constituting, a finding of fact is hereby adopted as a finding of fact.

Conclusions of Law

1. This Court has jurisdiction over the subject matter herein and the parties hereto. Title 26, United States Code, Sections 7402 and 7403 and Title 28, United States Code, Sections 1340 and 1345.

2. Defendant Harold Webster Coleman is indebted to the United States of America in an amount which exceeds $5,984.13.

3. Defendant Security First National Bank has in its possession the sum of $5,984.13, which sum it holds subject to the order of this Court as to the distribution of said amount to the United States of America or to Kenchel Corporation. Under the provisions of Sections 6321, 6322 and 6323(a) of the Internal Revenue Code of 1954 (Title 26, United States Code, Sections 6321, 6322 and 6323(a)), the plaintiff United States of America has a valid and existing lien against said property, which lien is prior to and paramount to any claim asserted by defendant Kenchel Corporation. United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950); Miller v. Bank of America National Trust & Savings Ass'n [48-1 USTC ¶9185], 166 F. 2d 415, 418-419 (9th Cir. 1948).

4. The plaintiff United States of America is entitled to have its motion granted and received from the defendant Security First National Bank the sum of $5,984.13.

 

 

[66-1 USTC ¶9143]United States of America, Plaintiff v. Comptroller of the City of New York, State Tax Commission, the City of New York, New York City Housing Authority, John Rivera, Samuel Goldstein & Sons, Esqs., and Morris A. Sidikman, Esq., Defendants

U. S. District Court, So. Dist. N. Y., 63 Civ. 2883, 248 FSupp 939, 11/26/65

[1954 Code Sec. 6323(a)]

Lien for taxes: Priorities: Filing.--A Federal lien for taxes had priority over a State lien where the State lien was not perfected until almost two years after the Federal lien was filed.

Rob ert M. Morgenthau, United States Attorney, New York , N. Y., for plaintiff. Harry Levy, 299 Broadway, New York, N. Y., Louis Lefkowitz, 80 Center St., New York, N. Y., Samuel Goldstein, 217 Broadway, New York, N. Y., Leo Larkin, Municipal Bldg., New York, N. Y., for defendants.

Memorandum

MACMAHON, District Judge:

The United States , the State of New York , and the City of New York assert claims against a fund of $8,631.18 held by the Comptroller of the City of New York for distribution pursuant to the order of this court. The fund represents the remaining proceeds of a condemnation award for real property formerly belonging to the Mutual Holding Corporation, a now defunct entity. The United States moves for summary judgment, and the State and City join in the motion asking this court to determine order of priority of liens. Certain private citizens have made claims against the fund, but we disregard them; one private claimant has defaulted, and, in any event, the fund is insufficient to satisfy all prior governmental liens.

The United States claims $348.27 plus interest for taxes assessed July 31, 1956, and $256.98 plus interest for taxes assessed August 31, 1956. These liens were properly filed on December 11, 1956. The United States also claims $2,599.67, plus interest from September 14, 1955, as the balance due on a judgment of that date. The judgment arose from the defunct corporation's dishonoring a note that had been insured under Title 1 of the National Housing Act, 12 U. S. C. §§ 1702-06(d) (1964). Pursuant to the insurance, the FHA paid the judgment which was then assigned to the United States on March 28, 1957; the United States filed a transcript of judgment on October 4, 1957.

The State of New York asserts claims for corporate franchise taxes that the defunct corporation failed to pay for the years 1955-58. The State claims $1,676.02 plus interest and $211.50 penalty of the 1955 taxes. A warrant for these taxes was filed September 22, 1958. The State also asserts claims for taxes, plus interest and penalties, for the years 1956-58, as follows:

Year                                  Tax           Penalty

1956 ....         $3,880.32 Plus Interest         $1,305.50

1957 ....             25.00 Plus Interest             10.25

1958 ....             25.00 Plus Interest              7.25

The State filed a warrant January 18, 1961 for the 1956, 1957, and 1958 taxes, interest, and penalties.

The City of New York asserts claims for real estate taxes, water charges, and sewer rent, with interest, for the years 1955-59. The New York City Housing Authority claims $98.05 for rental payments for use and occupancy of the condemned premises by the defunct corporation after title vested in the City on October 16, 1959. The unpaid City real estate taxes, water charges, and sewer rent assessed against the property while owned by the defunct corporation are:

Real Estate Taxes

Fiscal Year 1955-56

1st Half (7/1-12/31/55) ....         $259.05

2nd Half (1/1-6/30/56) .....          315.20

Fiscal Year 1956-57

1st Half (7/1-12/31/56) ....          326.40

2nd Half (1/1-6/30/57) .....          326.40

Fiscal Year 1958-59

2nd Half (1/1-6/30/59) .....         $338.40

1959 Water Charges .........           82.00

1959 Sewer Rent ............           27.33

 

Where federal liens are involved, priority of liens is determined by federal law, which follows the common law rule of first in time, first in right, except where specifically varied by statute. Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 233, 236 (1963); United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 85 (1954); United States v. Christesen, 218 F. Supp. 722, 729 (D. Mont. 1963); Jamaica Sav. Bank v. Morgan, 226 F. Supp. 668, 669-70 (E. D. N. Y. 1962).

The State and City claim that the first in time rule does not apply to the federal judgment lien. They assert that the judgment is subordinated to their later tax liens by §7(b) of the National Housing Act, 55 Stat. 365 (1941), 12 U. S. C. §1706(b) (1964). Section 7(b) provides:

"Nothing in this subchapter shall be construed to exempt any real property acquired and held by the Commissioner in connection with the payment of insurance heretofore or hereafter granted under this subchapter from taxation by any State of political subdivision thereof, to the same extent, according to its value, as other real property is taxed."

The State, however, is clearly not entitled to any benefit from that section because §7(b) applies only to taxes on real property. The State asserts claims for corporate franchise taxes imposed as a tax for the privilege extended by the State of permitting the exercise of a corporate franchise. N. Y. Tax Law §209(1); People ex rel. Bass v. Tax Comm'r, 232 N. Y. 42, 133 N. E. 122 (1921), aff'd, 266 U. S. 271 (1924); Brady v. State Tax Comm'n, 176 Misc. 1053, 29 N. Y. S. 2d 88 (Sup. Ct. 1941), aff'd, 263 App. Div. 955, 33 N. Y. S. 2d 384 (2d Dep't), aff'd, 289 N. Y. 585, 43 N. E. 2d 719 (1942). This is so, even though the tax is partly measured by the value of the corporation's real property and becomes a lien upon the corporation's real property, for that cannot transform a franchise tax into a tax on real property.

It is unnecessary to decide whether §7(b) subordinates the federal judgment lien to the City tax claims because we find below that the fund is sufficient to satisfy in full all City tax claims and all federal claims, making the order of priority between them academic.

The federal tax liens were fully perfected when filed on December 11, 1956 . Int. Rev. Code of 1954; §6323(a); N. Y. Lien Law §240(1); United States v. Kings County Iron Works [55-2 USTC ¶9536], 224 F. 2d 232, 237 (2d Cir. 1955). The federal judgment lien was perfected October 4, 1957 when the transcript of judgment was filed. The State tax claims, however, were inchoate and therefore not perfected until warrants were filed, because until then the identity of the lienor, the property subject to the lien, and the amount of the lien were not established. United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351, 354-56 (1964); United States v. City of New Britain, supra at 84; State Tax Comm'n v. Union Gen. Corp., 208 Misc. 133, 135, 144 N. Y. S. 2d 75, 77 (Sup. Ct. 1955). Since the earliest State warrant was not filed until September 22, 1958, all three federal claims were first in time and, therefore, have priority over the State tax claims. Ibid.

The City claims for real estate taxes, water charges, and sewer rent have statutory priority over the State claims. N. Y. Tax Law §213(2). On the other hand, the lien of the New York City Housing Authority could not have arisen until some time after the transfer of title to the City in October 1959, and it is therefore subordinate to the State warrant filed September 22, 1958 and the other City and federal claims.

The federal claims and the City claims for real estate taxes, water charges, and sewer rent have priority over the other claims. With interest, they total approximately $7,800.00, and the fund held by the Comptroller is therefore sufficient to satisfy them in full. The balance of the fund, amounting to approximately $900.00, is insufficient to satisfy the State claim of over $2,000.00 represented by the 1958 warrant, which is next in order of priority. It is, therefore, unnecessary to decide further priorities.

Accordingly, the Comptroller of the City of New York is ordered to distribute the fund of $8,631.18 as follows: first, he is to pay in full and with interest the federal tax and judgment liens, and the City real estate taxes, water charges, and sewer rent liens. The Comptroller will pay the remainder of the fund to the State in partial satisfaction of its claim under the September 22, 1958 warrant.

Settle order on notice within ten (10) days.

 

 

[65-2 USTC ¶9660] United States of America , Plaintiff v. Dorothy M. Shearer, d/b/a Warren Avenue Lunch; and Alexandria Joseph, Defendants

U. S. District Court, Dist. Mass., Civil Action No. 64-153-J, 243 FSupp 433, 6/15/65

[1954 Code Secs. 6321-6323]

Tax liens: Priority: Judgment creditor: Attorney's lien.--Federal tax liens filed between September 30, 1960 and July 5, 1962 had priority against funds from the sale of a liquor license. The lien of the delinquent taxpayer's attorney was subordinate to the tax liens since it was not choate when the tax liens attached to the property. The lien of a judgment creditor was also subordinate since the tax liens were recorded prior to the time the judgment was recovered.

W. Arthur Garrity, Jr., United States Attorney, William Duffy, Jr., William F. Looney, Jr., Stanislaw R. J. Suchecki, Assistant United States Attorneys, 1107 Federal Bldg., Boston , Mass. , for plaintiff. William C. Franzese, 20 Pemberton Sq., Boston, Mass., Nathan Richman, 106 Main St., Brockton, Mass., for defendant.

Opinion

JUNIAN, District Judge:

This is a suit by the United States to enforce tax liens on funds that resulted from the sale of a liquor license.

The taxpayer defendant is Dorothy M. Shearer, doing business as Warren Avenue Lunch. The defendant Alexandria Joseph is a judgment creditor of Shearer. Shearer's attorney, Nathan Richman, intervened to establish and enforce an attorney's lien.

The United States and the defendant Joseph have moved for summary judgment.

From the pleadings, requests for admissions of fact, and a stipulation the following facts appear:

1. The defendant Shearer is indebted to the United States in the amount of $1,821.50, plus interest, for taxes due and owing.

2. The District Director of Internal Revenue made assessments for federal excise and withholding taxes against the defendant Shearer.

3. Notices of and demand for the payment of the tax assessments were made on the defendant Shearer. Shearer failed to make payment on the assessments.

4. Notices of the federal tax liens were filed with the City Clerk of Brockton, Massachusetts, and the Registry of Deeds, Plymouth County , Plymouth , Massachusetts , between September 30, 1960, and July 5, 1962.

5. On May 21, 1955, the defendant Joseph transferred the business called the Warren Avenue Lunch, including the alcoholic beverage license, to Dorothy M. Shearer for a note in the amount of $12,500. The note was secured by a chattel mortgage covering the tangible personal property on the premises at 264 Warren Avenue , Brockton , Massachusetts .

6. The mortgage was properly recorded on May 25, 1955. It was foreclosed by Joseph and the property covered by the mortgage was sold pursuant to a power of sale on October 31, 1962.

7. As a result of the sale and prior payments there remained a balance of $8,618.14 due on the note.

8. In February, 1963, the defendant Shearer entered into an agreement with Herbert and Rhoda Leonard for the sale and transfer of the liquor license for $4,100 and other consideration. The $4,100 was to be held by Leonard's attorney pending final approval of the transfer of the license.

9. The Alcoholic Beverages Control Commission approved the transfer of the license on March 21, 1963.

10. On March 22, 1963, Joseph brought a suit in a state court to establish Shearer's indebtedness on the note and to reach and apply the $4,100 due to Shearer from Shearer's vendees. The state court restrained the Leonards and their attorney from transferring the fund. ¹

11. On June 17, 1963, the state court issued an order of notice to add the United States as a party defendant.

12. On June 26, 1963, the United States entered a special appearance in the state court contesting jurisdiction. ² The petition to join the United States was never allowed.

13. On August 2, 1963, the state court made its findings.

14. On September 30, 1963, the United States attempted to intervene. On February 26, 1964, the final decree was entered without any action taken on the United States ' motion to intervene. ³

15. On February 26, 1964, Joseph recovered a judgment against Shearer for $8,618.14. The Leonards were ordered to pay the $4,100 sale price of the license to Joseph.

16. On March 5, 1964, a temporary restraining order was issued in this court restraining Joseph from disposing of the $4,100. This was replaced on March 9, 1964, by a stipulation in which Joseph agreed not to dispose of $2,500 of the $4,100.

17. Shearer's attorney, Richman, was allowed to intervene, as he claimed a lien on the funds that were to be the subject of this Court's order. The intervening attorney relies on Mass. Gen. Laws c. 221, §50, and on the terms of the purchase and sale agreement. ⁴

Conclusions of Law

1. The statutes involved in this suit are:

26 U. S. C. §6321. "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property whether real or personal belonging to such person."

26 U. S. C. §6322. "Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed is satisfied or becomes unenforceable by reason of lapse of time."

26 U. S. C. §6323.

"(a) Invalidity of lien without notice. as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; . . ."

2. Much has been made of the fact that the source of the fund in question was a liquor license, which license may or may not be property within the terms of 26 U. S. C. §6321. See 77 Harv. L. Rev. 1485 (1964). The real issue here is who is entitled to priority in the fund created by the sale.

3. When the Alcoholic Beverages Control Commission approved the transfer of the license from Shearer to the Leonards, Shearer had a right to property subject "to valid liens thereon in the order of priority . . .." United States v. Blackett, 9 Cir., 1955, [55-1 USTC ¶9278] 220 F. 2d 21, 23.

4. The federal tax lien applies to property or rights to property of the taxpayer at any time during the period of the lien. Glass City Bank v. United States, 1945, [45-2 USTC ¶9449] 326 U. S. 265.

5. The guiding principle to be observed on conflicting liens is "the first in time is the first in right." United States v. City of New Britain, 1954, [54-1 USTC ¶9191] 347 U. S. 81.

6. The claimed lien of the attorney does not have priority over the government's lien for taxes. The attorney's lien is claimed against a fund that was not due to Shearer until March 21, 1963. It had nothing to which it could attach until that date, which is after the perfecting of the federal tax liens. The attorney's lien on the fund was dependent on Shearer's right to it. When Shearer's right arose, it arose with a tax lien, perfected even as to protected classes as enumerated in 26 U. S. C. §6323. At that time the attorney's lien was not choate. The amount of the lien was not determined. See Mass. Gen. Laws c. 221, §§ 50, 50B. Not being choate as described in United States v. Pioneer American Insurance Co., 1963, [63-2 USTC ¶9826] 374 U. S. 84, it cannot take priority over the federal tax lien.

7. Attorney Richman, the intervenor, is not entitled to any of the fund as against the defendant Joseph. His claim for an attorney's lien for fees and expenses was in issue in the state court where a decision adverse to his claim was rendered. He chose not to appeal. The doctrine of res judicata now bars his claim.

Attorney Richman's petition is therefore ordered dismissed.

8. Joseph's claim is not that of a mortgagee. Her status is that of a judgment creditor. Her claim to the fund is based on her recovery of a judgment for the balance due on the note.

9. Any equitable lien that attached to the fund at the time of the state court restraining order was not a choate lien and could not cut off the tax liens. United States v. Acri, 1955, [55-1 USTC ¶9138] 348 U. S. 211.

10. In her status as a judgment creditor, a protected class, ⁵ Joseph can prevail only if she was such at the time the tax liens were recorded. The tax liens were recorded prior to the time she achieved the status of a judgment creditor, February 26, 1964 . Therefore, the government's lien has priority. United States v. Security Trust and Savings Bank, 1950, [50-2 USTC ¶9492] 340 U. S. 47.

11. Judgment will be entered for the United States in the sum of $1,821.50, plus interest.

¹ On March 28, 1963, a Notice of Levy addressed to the Leonards and their attorney was served on their attorney. There was a final demand on March 29, 1963.

² It does not appear whether it was denied or just not acted on.

³ From this the Court concludes that the United States was not a party to the proceedings.

⁴ In the intervenor's petition there appears the following:

"7. That in addition to his own time, expense and services, your petitioner has incurred the joint obligation with his client Dorothy Shearer the defendant herein, for a brokerage commission to the broker who procured the purchaser of the defendant Shearer's business.

"8. That according to the terms and conditions of the purchase and sale agreement of the Shearer business, all adjustments and expenses of the sale were to be deducted prior to arriving at the net proceeds to the defendant Shearer."

⁵ 26 U. S. C. §6323.

 

 

[65-2 USTC ¶9496]United States of America, Plaintiff v. Lester T. Sawyer; Alice C. Sawyer; Diadem, Inc.; Diadem Surgicals, Inc.; Fitchburg Federal Savings & Loan Association; Worcester County National Bank as Successor to the Worcester County Trust Co.; Franklin O. Greene d/b/a Greene Radio and Electric Co.; Town of Princeton, Massachusetts; City of Leominster, Massachusetts; Wachusett Finance Corp.; Wain-Roy Corp.; Monarch Life Insurance Co.; Whirla-Whip, Inc.; William L. Hauger; and Richard Comerford, Defendants

U. S. District Court, Dist. Mass., Civil Action No. 63-504-F, 243 FSupp 462, 6/2/65

[1954 Code Secs. 7403 and 7605(b)]

Examination of books: Repeated examinations: Validity of assessment: Estoppel: Tax Court determination.--A Tax Court decision determining tax deficiencies which the Government sought to collect in enforcement proceedings was res judicata as to the validity of the assessment. The taxpayers were estopped to attack the validity on the ground that the assessment resulted from repeated examination of their books and records in violation of Code Sec. 7605(b).

[1954 Code Secs. 6321-6323]

Lien for taxes: Priorities: Value of properties subject to levy.--In a suit by the Government to foreclose tax liens, the taxpayers requested that the liens be discharged because the value of the properties was insufficient to satisfy the prior claim of a mortgagee. The court was not persuaded by the evidence of values presented by the taxpayers and found that the Government's liens were not so clearly worthless as to deny it the right to have the properties sold. A local tax lien, which was subordinate to the federal tax lien but, under local law, hed priority over the mortgagee's lien, was held to be payable out of the portion of the sales proceeds which would otherwise be paid to the mortgagee.

W. Arthur Garrity, Jr., United States Attorney, Frances C. Kissell and William F. Looney, Jr., Assistant United States Attorneys, Boston, Mass., and Thomas R. Manning, Dept. of Justice, Washington, D. C. 20530, for the government. Kenneth C. Tiffin, Tiffin & Tiffin, 125 High St., Boston, Mass., for A. C. Sawyer; L. T. Sawyer, Box 366, Leominster, Mass., pro se ant for Diadem, Inc.; James A. Crotty, Richard G. Crotty, Vaughan, Esty, Crotty & Mason, 332 Main St., Worcester, Mass., for Worcester County Nat'l Bank; Willard I. Shattuck, Jr., 401 Main St., Fitchburg, Mass., for Whirla-Whip, Inc.; Edwin E. Kaarela, 56 Elm St., Fitchburg, Mass., for Fitchburg Federal Savings & Loan Ass'n.; James F. Coburn, Jr., 20 Main St., Leominster, Mass., for W. L. Hauger; Richard Comerford, 20 Main St., Leominster, Mass., pro se and for Wachusett Finance Corp.; Rickard, O'Connell, DeMallie & Lougee, 340 Main St., Worcester, Mass., for Town of Princeton;

Opinion

FORD, District Judge:

This is an action by the United States to foreclose certain tax liens on the properties of Lester T. Sawyer, Alice C. Sawyer, and Diadem, Inc. Certain other parties have been joined as defendants because they claim interests in these properties. Most of the relevant facts have been stipulated and the court adopts as its findings the statements of fact set forth in the stipulations on file.

There remain for decision questions arising from defendants' contention that there has been no valid assessment of the taxes claimed by the United States, and that as to some of these properties the lien of the United States should be discharged because in view of the value of the properties and the amount of the prior claims nothing could be realized by the United States from a foreclosure sale. Certain parties also ask rulings as to the priority of certain claims in the distribution of the proceeds from any foreclosure sale which may be ordered.

[Additional Inspections of Books]

Defendants argue that from 1954 to 1958 their books were inspected on six separate occasions by three different agents of the Internal Revenue Service, that there was no notification by the Secretary that additional inspection was necessary, that these repeated inspections violated 26 U. S. C. A. §7605(b) and consequently the deficiency assessments resulting from these inspections should be held invalid. Even assuming, which is not clear from the evidence, that these visits of the agents constituted separate inspections rather than a continuation of a single investigation, and assuming also (which is also unsettled, compare Reineman v. U. S. [62-1 USTC ¶9386], 301 F. 2d 267 with Philip Mangone Co., Inc. v. U. S. [1931 CCH ¶9690], 54 F. 2d 168) that the remedy for violation of §7605(b) is to hold the resulting assessment invalid, defendants' argument must fail for a more basic reason. The tax deficiencies which government seeks to collect in this proceeding have been determined in proceedings between these taxpayers and the United States in the Tax Court. Taxpayers in those proceedings could hae raised this challenge to the validity of the assessments involved. The decision of the Tax Court is res judicata and defendants cannot here litigate the validity of the assessment of the taxes which the Tax Court has found to be due. Commissioner of Internal Revenue v. Sunnen [48-1 USTC ¶9230], 333 U. S. 591, Erickson v. United States [62-2 USTC ¶9806], 309 F. 2d 760.

There is due to the Worcester County National Bank a total of $87,154.71, consisting of obligations of Lester and Alice Sawyer in the amount of $76,154.71 and of obligations of Diadem, Inc. in the amount of $11,000. Certain real estate owned by the Sawyers is mortgaged to the bank to secure their obligations and 100 shares of the common stock of Wachusett Finance Corporation owned by Lester T. Sawyer is pledged to the bank to secure the obligations of Diadem, Inc. These properties are also subject to tax liens but the interest of the bank is prior to that of the United States .