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3. The Court finds that the claim of the United States , being based upon a lien arising under Sec. 6321 of the Internal Revenue Code, has priority over the claim of the Michigan Employment Security Commission and all other claims filed herein.

The lien of the United States under the applicable statute arises as of the date of assessment and demand, which dates the parties have stipulated to in the partial stipulation of facts filed herein. The dates when the United States filed its notice of lien have also been stipulated to.

Sec. 6321 of the Internal Revenue Code, under which the United States claims the interpleaded funds, provides a lien shall not be valid

"As against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector." IRC Sec. 3672(a).

It is the position of the Michigan Employment Security Commission that by virtue of Michigan Statutes Annotated Sec. 17.515(e) the Commission acquired a prior perfected lien against the funds in question which arose on the date they were due, a time which was prior to the assessment and demand made by the United States .

Since the Commission does not fall within the category of mortgagee, pledgee, purchaser or judgment creditor, its claim could prevail only if it were perfected prior in time to the claim of the government. U. S. v. City of New Britain, Conn., et al. [54-1 USTC 9191], 347 U. S. 81, (1954); U. S. v. Vermont [63-1 USTC 9472], 317 F. 2d 447, (1963).

It was held in the case of United States v. Security Trust and Savings Bank [50-2 USTC 9492], 340 U. S. 47 (1950), that the characterization of a state lien is a federal question to be determined finally by the federal courts.

Under the law, as developed by federal decisions, to be fully choate a lien must attach to specified property and the amount of the lien and identity of the lienor must be established. See United States v. City of New Britain [54-1 USTC 9191], 347 U. S. 81 (1954) and Commercial Credit Corp. v. Schwartz [55-2 USTC 9589], 130 F. Supp. 524 (1955). See also Great American Indemnity Co. v. U. S. [54-2 USTC 9469], 120 F. Supp. 445 (1954) and compare with U. S. v. Kings County Iron Works, Inc. [55-2 USTC 9536], 224 F. 2d 232 (1955).

In the New Britain case it was held that the state lien had priority since it had attached to specific realty of the debtor, and therefore met the federal choateness requirement.

The lien of the Michigan Employment Security Commission arising under M. S. A. 17.515(e), unlike the state lien involved in the New Britain case, does not attach to specific realty of the debtor, and is not choate in the federal sense.

Therefore the Court finds that the lien of the Michigan Employment Security Commission has no priority over the lien of the United States .

The Court further finds that the lien of the United States has priority over the claim of the Trustee asserted herein. In the case of United States v. Eiland [55-1 USTC 9487], 223 F. 2d 118, (1955), it was held that where the United States, before bankruptcy, serves notice of valid lien on the taxpayer's debtor, the levy effectively appropriates the debt to the United States and the subsequently appointed Trustee is prevented from drawing the debt into the eatate. See also Rosenblum v. United States [62-1 USTC 9384], 300 F. 2d 843 (1962) which stands for the same proposition.

An Order may be entered herein in accordance with the above Opinion.

 

 

[64-1 USTC 9212] United States of America , Plaintiff v. John P. Whatley; Marguerite B. Whatley; Liberty National Life Insurance Company; Praetorian Mutual Life Insurance Company; Citizens Bank & Trust Company, Defendants

U. S. District Court, So. Dist. Ala. , No. Div., Civil Action No. 2455, 12/6/63

[1954 Code Sec. 6331]

Notice of levy: Cash surrender value of life insurance policies: Surrender of policies.--The service of a notice of levy upon insurance companies, on account of outstanding life insurance policies, was ineffective until such time as the policies were legally surrendered. The delinquent taxpayers were directed to surrender the polices for cancellation with the United States Government entitled to payment in the amount of the net cash surrender value of the policies, existing as of the date of the surrender.

Vernol R. Jansen, Jr., United States Attorney, Mobile , Ala. , for plaintiff. John N. Harris, Jr., 1505 Dallas Federal Savings Bldg., Dallas, Tex., for Praetorian Mutual Life Ins. Co.; Joseph G. Gamble, Law Dept. Liberty National Life Ins. Co., Birmingham, Ala., for Liberty National Life Ins. Co.; Archie T. Reeves, Jr., Selma Nat'l Bank Bldg., P. O. Box 457, Selma, Ala., for J. P. Whatley; Sam Earle Hobbs, 100 Church St., Selma, Ala., for Citizens Bank & Trust Co., defendants.

Stipulation

THOMAS, District Judge:

It is hereby stipulated and agreed by and between the United States of America, plaintiff, and John P. Whatley, Marguerite B. Whatley, and the Citizens Bank & Trust Company of Selma, defendants, that the following statements may be received as evidence upon submission of this cause for judgment and, to the extent each is material to a determination of the issues in this case, may be considered by the Court as facts:

1. This is a civil action brought by the United States of America on September 19, 1960 for the collection of income taxes and accrued interest assessed against the defendant, John P. Whatley, and for the enforcement of tax liens asserted against property or rights to property belonging to the taxpayer and held by Liberty National Life Insurance Company and Praetorian Mutual Life Insurance Company to secure the payment of such taxes.

2. On July 8, 1957 , the Commissioner of Internal Revenue assessed against the taxpayer-defendant, John P. Whatley, additional taxes and accrued interest for the year 1956 in the amount of $1,034.77. Statutory notice was given and demand was made on the taxpayer on July 15, 1957. Notice of the assessment and lien was filed for record in the Office of the Judge of Probate of Dallas County, Alabama, on January 9, 1958. Taxpayer's obligation under this assessment has been reduced by payments to a balance of $830.17, which amount, plus statutory interest, remains due and owing from the taxpayer-defendant.

3. On May 23, 1958 the Commissioner of Internal Revenue assessed against the taxpayer-defendant, John P. Whatley, additional taxes and accrued interest for the year 1957 in the amount of $675.65. Statutory notice was given and demand was made on the taxpayer on June 2, 1958; notice of the assessment and lien was filed in the Office of the Judge of Probate of Dallas County, Alabama on December 1, 1958. This entire assessment, plus statutory interest, remains due and owing from the taxpayer-defendant. The United States of America is entitled to a judgment against John P. Whatley in the amount of $1,505.82, plus interest as provided by law.

4. Praetorian Mutual Life Insurance Company (formerly The Praetorians), a Texas corporation licensed to do business in Alabama, on January 10, 1945 issued its life insurance policy #393790 to John P. Whatley insuring his life in the face amount of $2,000. Marguerite B. Whatley, the wife of the insured, was designated as beneficiary thereunder, and the insured reserved the right to change the beneficiary or to demand and receive the cash surrender value of the policy at any time during the life of the policy, upon complying with its terms. Said policy was not in default, but was in full force and effect on March 23, 1960, when a "Notice of Levy" was served upon Praetorian by the District Director of Internal Revenue claiming the tax due under the assessments listed above. On the date of service of the notice, the policy had a cash surrender value of approximately $1,260. The cash surrender value of this policy constitutes property or a right to property which may be reached by levy and is subject to this enforcement action to satisfy liens based on tax assessments.

5. Liberty National Life Insurance Company, an Alabama corporation, on May 1, 1940 issued its policy of life insurance #293236 to John P. Whatley insuring his life in the face amount of $1,000. Marguerite B. Whatley, the wife of the insured, was designated as the beneficiary thereunder and the insured reserved the right to change the beneficiary or to demand and receive the cash surrender value of the policy at any time during the life of the policy upon complying with its terms. Said policy was not in default but was in full force and effect on March 14, 1960, when a "Notice of Levy" was served upon Liberty National Life Insurance Company by the District Director of Internal Revenue, claiming the tax due under the assessments listed above. On the date of service of the notice, the policy had a cash surrender value of approximately $429. The cash surrender value of this policy constitutes property or a right to property which may be reached by levy and is subject to this enforcement action to satisfy liens based on tax assessments.

6. On February 26, 1960, the taxpayer-defendant, John P. Whatley, filed with Praetorian a written assignment of the Praetorian policy transferring ownership to the defendant, Marguerite B. Whatley, wife of the insured and the designated beneficiary of the policy.

On February 26, 1960, the taxpayer-defendant, John P. Whatley, filed with Liberty National Life Insurance a written assignment of the Liberty National policy transferring ownership to the defendant, Citizens Bank & Trust Company of Selma , Alabama , as collateral for a debt of $100.

Each assignment was subsequent to the recording of the assessments for taxes which arose on July 8, 1957 and May 23, 1958, and which were filed for record on January 9, 1958, and December 1, 1958, respectively. All rights of the defendants, Marguerite B. Whatley and Citizens Bank & Trust Company of Selma , Alabama , in these policies are subordinate to the tax liens of the plaintiff, which, to the extent of the amount of said liens, are entitled to priority over the interests of all other parties in these policies.

7. Neither of said insurance policies has been surrendered for their cash value; John P. Whatley has not requested the cash value of either policy and neither has any request been made to either of said insurance companies for the exercise of any right under said policies by any other persons, excepting only the assignments hereinabove described. Neither has either insurance company taken any action with regard to these insurance policies upon or subsequent to the receipt of the notices of levy hereinabove described.

Stipulation of Fact by Liberty National Life Insurance Company and the United States of America

1. This is a civil action brought by the United States of America on September 19, 1960, for the collection of income taxes and accrued interest against the defendant, John P. Whatley, and for the enforcement of tax liens asserted against Liberty National Life Insurance Company and Praetorian Mutual Life Insurance Company to secure the payment of such taxes.

2. On May 1, 1940, Liberty National Life Insurance Company, an Alabama corporation, issued to John P. Whatley its policy of insurance #293236, insuring his life in the face amount of $1,000. Marguerite B. Whatley, the wife of the insured, was designated as beneficiary thereunder, and the insured reserved the right to change the beneficiary or to demand and receive the cash surrender value of the policy at any time during the life of the policy upon complying with its terms. Premiums on this policy were payable for twenty years, and the policy matures on the policy anniversary nearest the insured's 85th birthday, or upon his death prior to such date. A specimen of this policy is attached and forms a part of this stipulation. The last premium due on such policy was paid prior to the Notice of Levy referred to herein.

On February 26, 1960, the said John P. Whatley filed with Liberty National Life Insurance Company a written instrument assigning said policy to the defendant Citizens Bank and Trust Company of Selma , Alabama , as collateral security for a debt of $100. A copy of this assignment is attached and forms a part of this stipulation.

"Notice of Levy" was served by the District Director of Internal Revenue upon Liberty National Life Insurance Company on March 14, 1960. A copy of this notice is attached and forms a part of this stipulation. On the date such "Notice of Levy" was served upon Liberty National, the net cash surrender value of the policy issued by it was $429.

3. Said insurance policy has not been surrendered for its net cash value, nor has its cash value requested by John B. Whatley, or by anyone else, nor has any request been made to Liberty National for the exercise of any other right under such policy (except the assignments herein above described).

4. Liberty National Life Insurance Company took no action with regard to such insurance policy upon or subsequent to receipt of "Notice of Levy".

Stipulation of Fact

1. This is a civil action brought by the United States of America on September 19, 1960, for the collection of income taxes and accrued interest against the defendant, John P. Whatley, and for the enforcement of tax liens asserted against Liberty National Life Insurance Company and Praetorian Mutual Life Insurance Company to secure the payment of such taxes.

2. On January 10, 1945, Praetorian Mutual Life Insurance Company (formerly the Praetorians), a Texas corporation licensed to do business in Alabama, issued its life insurance policy No. 393 790 to John P. Whatley, insuring his life in the face amount of $2,000. A conformed copy of this policy is attached and forms a part of this stipulation. Marguerite B. Whatley, the wife of the insured, was designated as beneficiary thereunder, and the insured reserved the right to change the beneficiary or to demand and receive the cash surrender value of the policy at any time during the life of the policy upon complying with its terms.

On February 26, 1960, the taxpayer-defendant filed with Praetorian a written assignment of the Praetorian policy transferring the ownership of said policy to the defendant, Marguerite B. Whatley. A photostatic copy of this assignment is attached and forms a part of this stipulation.

"Notice of Levy" was served upon Praetorian by the District Director of Internal Revenue on March 23, 1960. A photostatic copy of this notice is attached and forms a part of this stipulation. On the date of the service of this Notice of Levy, the net cash surrender value of the Praetorian policy was approximately $1,260.

3. Said insurance policy described in Paragraph 2 hereof has not been surrendered for its net cash value, nor has its cash value been requested by John P. Whatley, or by anyone else, nor has any request been made for the exercise of any other right under said policy except the Assignment and Notice of Levy described herein.

4. That Praetorian Mutual Life Insurance Company has not taken any action with regard to said insurance policy upon or subsequent to the receipt of said Notice of Levy.

Final Order and Judgment

This cause, having been regularly set for hearing, is submitted on the stipulations of the parties which have been filed in this cause. For its Findings of Fact, the Court adopts the several provisions of said stipulations, insofar as the same are material to the disposition of this cause.

Conclusions of Law

1. This Court has jurisdiction of the parties and of the subject matter of this case.

2. This action to enforce the collection of taxes is not barred by any statutory limitation as to time relating to suits from the enforcement of payment of such taxes.

3. The United States is entitled to a judgment against John P. Whatley in the amount of $1,505.82, plus interest as provided by law.

4. The assignment of the Praetorian policy to Marguerite B. Whatley, and the collateral assignment of the Liberty National policy to the Citizens Bank and Trust Company of Selma, Alabama, may be disregarded to the extent necessary to subject the net cash surrender value of each such policy on the sum of the net cash surrender value of both of these policies.

5. The United States is entitled to be paid the net cash surrender value of each life insurance policy, if any, existing as of the date of the surrender of each respective policy, in accordance with the judgment rendered herein.

6. Upon payment of the net cash surrender value of the policy of the Praetorian Mutual Life Insurance Company, said insurance company will be discharged from any further obligation under its policy to the United States , to the holder of such policy, to the assignee of such policy, or to the beneficiary thereunder, or to any other person.

7. Upon payment of the net cash surrender value of the policy issued by Liberty National Life Insurance Company, such insurance company will be discharged from any further obligation under its policy to the United States , the holder of such policy, to the assignee of such policy, or to the beneficiary thereunder, or to any other person.

8. The law of this case is controlled by the decision of the case styled United States of America v. Louis H. Mitchell et al., decided November 15, 1962 and reported in [62-2 USTC 9802] 210 F. Supp. 810.

Judgment

Consonant with the foregoing findings and conclusions, it is ORDERED, ADJUDGED and DECREED by the Court that the United States of America have and recover of John P. Whatley the sum of $1,505.82, plus interest as provided by law, for which let execution issue.

It is further ORDERED, ADJUDGED and DECREED that John P. Whatley and Marguerite B. Whatley are hereby directed to surrender to the Clerk of this Court that certain policy of insurance No. 393 790, issued by Praetorian Mutual Life Insurance Company, insuring the life of John P. Whatley, for cancellation and upon receipt thereof by said Clerk and upon the delivery of said policy to Praetorian Mutual Life Insurance Company for its cash value of accordance with the terms of the policy, Praetorian Mutual Life Insurance Company is hereby ordered and directed to pay to the Clerk of this Court the net cash surrender value of said policy computed to the date of the receipt of the policy by the Clerk for plaintiff, and in the event the policy is not so delivered to the Clerk within thirty days from the date of this judgment, then on the thirtieth day from the date hereof, this judgment does hereby cancel the policy and the Praetorian Mutual Life Insurance Company is ordered to pay the net cash surrender value thereof to the Clerk computed to that date, and upon the payment of said net cash surrender value of the policy to the Clerk of this Court, then, Praetorian Mutual Life Insurance Company will thereupon be forever discharged of any and all liability or obligation to John P. Whatley and Marguerite B. Whatley, or anyone else on the said policy.

It is further ORDERED, ADJUDGED and DECREED that John P. Whatley and Citizens Bank & Trust Company of Selma, Alabama, are hereby directed to surrender to the Clerk of this Court that certain policy of insurance No. 293 236 issued by Liberty National Life Insurance Company, insuring the life of John P. Whatley, for cancellation and upon receipt thereof by said Clerk and upon the delivery of said policy to Liberty National Life Insurance Company for its cash value in accordance with the terms of the policy, Liberty National Life Insurance Company is hereby ordered and directed to pay to the Clerk of this Court the net cash surrender value of said policy computed to the date of the receipt of the policy by the Clerk for plaintiff, and in the event the policy is not so delivered to the Clerk within thirty days from the date of this judgment, then on the thirtieth day from the date hereof, this judgment does hereby cancel the policy and the Liberty National Life Insurance Company is ordered to pay the net cash surrender value thereof to the Clerk computed to that date, and upon the payment of said net cash surrender value of the policy to the Clerk of this Court, then, Liberty National Life Insurance Company will thereupon be forever discharged of any and all liability of obligation to John P. Whatley and Citizens Bank & Trust Company of Selma, Alabama, or anyone else on the said policy.

Finally, it is ORDERED, ADJUDGED and DECREED by the Court that no cost shall be taxed or assessed herein, but each party shall bear his own cost in this proceeding.

 

 

[64-1 USTC 9179]Great American Insurance Company, a corporation, et al., Plaintiffs v. Department of Revenue, State of Illinois, et al., Defendants, United States of America, Intervenor

U. S. District Court, No. Dist. Ill. , East. Div., No. 62 C 1755, 226 FSupp 512, 10/25/63

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Priority of creditors: Interpleader action: "Circular priority".--The District Court, in an interpleader action, determined the rights of the parties to fire insurance proceeds in a situation involving "circular priority" where the Government's tax lien was superior to an attorneys' lien; the attorneys' lien was superior to the claim of a judgment creditor; and the judgment creditor's claim was superior to the federal tax lien.

Samuel Levin, 231 S. LaSalle St. , Chicago , Ill. , for plaintiffs. Rob ert C. Eardley, Villa La-Maine, Gus Kitsos, 105 S. LaSalle St., Matthew F. Blondell, McKinley & Price, 33 N. LaSalle St., Maurice J. Green, Edward Don & Co., 11 S. LaSalle St., Edward A. Gorenstein, Devon-North Town State Bank, 110 S. Dearborn, Chicago, Ill., for defendants. James P. O'Brien, United States Attorney, Erwin I. Katz, Assistant United States Attorney, Chicago, Ill., for intervenor.

Memorandum

PERRY, District Judge:

Great American Insurance Company and seven other insurance companies filed in the Superior Court of Cook County, Illinois, a complaint for interpleader. The cause was removed to this court on the petition of the United States of America which, on its motion, was dismissed by this court as a party defendant. Subsequently, it filed its complaint intervention.

It appears that on May 27, 1958 , a fire damaged the premises occupied by defendant Villa La-Maine, Inc., insured by plaintiff companies.

On May 25, 1959, Villa La-Maine, Inc. instituted suit in the United States District Court for the Northern District of Illinois, Eastern Division, against all of the plaintiffs except The Western Fire Insurance Company, and on May 26, 1959 started suit against that company in the Municipal Court of Chicago, Illinois, seeking in each of the suits to recover for losses occasioned by the fire.

Each of the suits was dismissed by order of court--the suit in the United States District Court for lack of jurisdiction on June 26, 1961 and the suit in the Municipal Court on June 29, 1961 .

It was agreed that plaintiff companies would pay Villa La-Maine, Inc. the sum of $6,500.00 in consideration of its foregoing its right to appeal the order of dismissal entered by the United States District Court and in further consideration of the compromise settlement of all claims which said Villa La-Maine, Inc. had against the plaintiff companies under the insurance policies issued by them. No appeal was taken.

The plaintiff insurance companies filed this complaint for interpleader asking the court to decide the rights of claimants to the $6,500.00 fund. Pursuant to an order entered by this court on April 30, 1963, the $6,500.00 has been deposited with the Clerk of this court.

The United States of America, Devon-North Town State Bank, Eardley & Ward, Gus Kitsos, Edward Don & Company, Inc., and Matthew Blondell have proved their claims. Other parties to this interpleader suit were defaulted by order of this court entered on August 13, 1963.

The following sets forth the sequence of events to which reference must be had in a determination of the priority of the claims involved here:

1958

May 27--Fire occurred on premises of Villa La-Maine, Inc.

June 2--Villa La-Maine, Inc. assigned to Matthew F. Blondell the proceeds due it for fire loss under policy issued by Royal Insurance Company. Matthew F. Blondell agreed to assist in adjustment of the loss and for services was to receive 10% of amount recovered.

June 3--Devon-North Town State Bank perfected a judgment against Villa La-Maine, Inc. in the amount of $3,188.09 together with interest at the rate of 5% per annum and court costs.

June 6--The United States of America made assessment of taxes due from Villa La-Mine, Inc. in amount of $1,116.48.

June 19--Eardley & Ward served on insurance companies notice of attorneys' lien for 25% of any amount recovered.

1959

Mar. 20--In a suit in the Municipal Court of Chicago, Ill., Edward Don & Company, Inc. obtained judgment against Villa La-Maine, Inc. for $331.00, and execution issued on March 25, 1959.

Mar. 30--Notice of federal tax lien against Villa La-Maine, Inc. was filed by the United States of America in the office of the Recorder of Deeds, Cook County , Illinois .

May 25--Villa La-Maine, Inc. started suit in United States District Court for the Northern District of Illinois, Eastern Division, No. 59 C 832, against all of plaintiff companies herein except The Western Fire Insurance Company.

May 26--Villa La-Maine, Inc. started suit in Municipal Court of Chicago, No. 59 M 2710, against The Western Fire Insurance Company.

1960

June 28--Assignment to Gus Kitsos by Villa La-Maine, Inc. of policy issued to it by The Western Fire Insurance Company and of all sums to be recovered thereunder.

1961

June 26--Case No. 59 C 832 dismissed by order of U. S. District Court for want of jurisdiction.

June 29--Municipal Court suit No. 59 M 2710 dismissed by order of court. Claim of Villa La-Maine, Inc. against insurance companies settled for $6,500.00.

The tax lien of the Government was created by Section 6321 of 26 U. S. C. A. which provides--

"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."

Section 6323 of 26 U. S. C. A. reads, in part--

"(a) Invalidity of lien without notice.--Except 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 . . ."

The Government concedes that its claim is inferior to that of the Devon-North Town State Bank, a judgment creditor since the Bank's judgment was perfected before the Government's lien was filed.

"The federal rule is that liens are 'perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established.'" (U. S. v. Pioneer American Ins. Co., 374 U. S. 84, 89, citing U. S. v. New Britain [54-1 USTC 9191], 347 U. S. 81.)

Each of the assignments made by Villa La-Maine, Inc. to Matthew Blondell and Gus Ritsos was for an uncertain amount of money which was not and could not be ascertained until June, 1961, when the claim of Villa La-Maine, Inc. against the insurance companies was settled for $6,500.00. Each of those claims, based on such assignments, inchoate until a time which was subsequent to the date on which the federal tax lien arose. The lien of the United States is therefore superior to the claims of Matthew Blondell and Gus Ritsos.

The judgment of Edward Don & Company, Inc., perfected on March 25, 1959, has priority over the Government's tax lien which was not filed until March 30, 1959. (26 USCA 6323)

The tax lien of the United States is superior to the attorneys' lien of Eardley & Ward which was for an uncertain amount--25% of whatever amount might be recovered--and was therefore inchoate until the settlement date in June, 1961, a date subsequent to the time when the federal tax lien arose.

The attorneys' lien of Eardley & Ward, however, arose on June 19, 1958, the date on which notice was served in writing (Ill. Rev. Stats., c. 13, 14) and it is therefore prior to the judgment of Edward Don and Company, Inc. which was not perfected until March 25, 1959.

As the Government points out in its able brief, we have here a situation known as "circular priority" as to the claims of (a) the United States, (b) Edward Don & Company, Inc., and (c) Eardley & Ward. The Government's tax lien is superior to the attorneys' lien; the attorneys' lien is superior to the claim of the judgment creditor; and the claim of the judgment creditor is superior to the federal tax lien.

This court is of the view that the problem presented by the tripartite priority will best be resolved, as suggested by the Government, in the following manner:

From the fund on deposit, amounting

to .....................................         $6,500.00

Pay to the 

Devon-North
 
Town



State Bank, based on its judgment

plus interest and costs, the

sum of .................................          4,011.19

Leaving a balance of ...................         $2,488.81

From this balance, take out and

set aside the amount of the

Edward Don & Co., Inc. judgment

and costs ..............................            364.00

                                                 $2,124.81

Pay to the 

United States

 of



America

 the amount new due

on tax lien ............................          1,451.93

Balance ................................          $ 672.88

Balance, brought forward ...............          $ 672.88

Add to this balance the amount,

above set aside, of the Edward

Don & Co., Inc. judgment and

costs amounting to .....................            364.00

Balance of fund on deposit

with the Clerk which would

be available for distribution

among remaining claimants ..............         $1,036.88

 

Of the remaining claimants to the fund, Eardley & Ward must be given priority on their claim of $1,625.00 (25% of $6,500.00). Obviously, and regrettably, payment to them of the $1,036.88 so available for distribution would exhaust the fund on deposit, leaving nothing for the other claimants.

This memorandum shall stand as findings of fact and conclusions of law.

 

 

[63-1 USTC 9484]In the Matter of Babcock Printing Press Company, Bankrupt

U. S. District Court, No. Dist. Ohio , East. Div., In Bankruptcy No. 77931, 10/26/62

[1954 Code Sec. 6902(a)]

Transferee liability: Burden of proof.--Where a transfer of funds to a bankrupt was found to be a loan, the referee's finding that the bankrupt was not liable as transferee was sustained. His finding that there was not a voluntary transfer which left the transferor insolvent was not clearly erroneous, since the transferor would have a receivable due it from the bankrupt.

 
[1954 Code Secs. 6321 and 6323]

Lien for taxes: Accounts receivable: Notice of lien: Trustee in bankruptcy: Filing of claim.--A tax lien need not be made of record in order to be valid as against a trustee in bankruptcy. Since the Government would have a valid lien against a debt owed to the delinquent taxpayer by a debtor in bankruptcy, the cause was remanded to the referee in bankruptcy for further proof on the questions of the Government's filing of a claim in the bankruptcy proceedings and its assessment of the tax..

Merle McCurdy, United States States Attorney, 400 Federal Bldg., Cleveland 14, Ohio, for the District Director of Internal Revenue. John Kennedy Lynch, 907 East Ohio Bldg., Cleveland , Ohio , for the trustee. Johnson, Whitmer and Sayre, First National Tower Bldg., Akron , Ohio , for petitioning creditors. Maurice W. Wendling, 618 Renkert Bldg., Canton , Ohio , for the alleged bankrupt.

Memorandum

GREEN, District Judge:

This is a petition for review of a decision of the Referee in Bankruptcy denying a claim of the Director of Internal Revenue, in the amount of approximately $40,000.

The director's claim is based on a transfer from Lake City Malleable, Inc., on or about October 2, 1956, to the bankrupt of the amount of $40,000. While this transaction is a simple one, it is entwined in and beclouded by a series of complex financial transactions involving many corporations admittedly controlled by one Sydney L. Albert and several others which, on the evidence adduced, were not part of the Albert empire.

The director asserts two alternative theories:

1. That the transfer from Lake City to the bankrupt was without consideration and subjects the bankrupt to transferee liability under the 1954 Internal Revenue Code, 6902(a).

2. That if it be found that the transfer was a valid loan, then the director has a lien upon the moneys due Lake City and is entitled to have the claim allowed as a general claim.

[Transferee Liability]

It is stated by counsel for the director that the elements generally considered necessary to impose liability on a transferee of property are:

1. The transfer must be made during or after the period for which the liability in question has accrued;

2. The transferor must have been liable;

3. All reasonable efforts must have been made to collect the tax liability from the taxpayer before the proceeding against the transferee is commenced;

4. There must have been a voluntary transfer of assets having value to the transferee from the transferor or from some preceding transferee;

5. This transfer of assets must have left the transferor insolvent; and

6. The proceeding against the transferee must have been begun within the period specified in the statute of limitations applicable thereto.

It is plain that each of the foregoing questions is one of fact.

The referee found against the director and in favor of the trustee on the factual questions embodied in issues four and five.

The Court has reviewed the complex record and is unable to reach the conclusion that the referee's findings are clearly erroneous. Consequently, the referee's determination on the director's theory based on transferee liability must be sustained. In re Snyder, 112 F. Supp. 897 (D. C. N. D. Ohio, 1953).

In determining the issue of transferee liability in favor of the trustee, the referee found that the moneys changed hands as a loan. As a result of the the loan, Lake City would have a receivable due it from the bankrupt.

[Tax Lien on Account Receivable]

The director's alternative theory is that the government has a lien on this receivable, and consequently is entitled to be considered as a general creditor, for purposes of a distribution.

Section 6321 of the 1954 Internal Revenue Code provides a legal basis for the lien which the director claims.

Sec. 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.

Such a lien need not be made of record under 6323 of the Code to be valid against a trustee in bankruptcy. Simonson v. Granquist [61-1 USTC 9227], 287 F. 2d 489 (CA 9, 1961); In re Fidelity Tube Corp. [60-1 USTC 9446], 278 F. 2d 776 (CA 3, 1960) cert. den. 364 U. S. 828 (1960); In re Taylorcraft Aviation Corp. [48-1 USTC 9288], 168 F. 2d 808 (CA 6, 1948).

In considering the director's alternative theory the referee in finding of fact No. 17 states as follows:

That the Government's alternative argument, that if the $40,000.00 was a bona fide loan to Lake City Malleable, Inc., then the Government would automatically be entitled to the $40,000.00 because of its income tax lien against Lake City Malleable, Inc. is without merit. There is no proof that the lien was filed against the assets of Lake City Malleable, Inc. and no claim has been filed by Lake City Malleable, Inc., or by the Government acting as lien-holder against Lake City Malleable, Inc.

The referee further stated in his memorandum as follows:

The alternative argument of the Government that it is entitled to have its claim to the $40,000.00 of the bankrupt granted on the theory that it is a general creditor holding a lien against Lake City Malleable, Inc. is unsupported by the facts. There is no proof of a lien against Lake City Malleable, Inc. and there is no proof that Lake City Malleable, Inc. filed a claim against the bankrupt [or that the Government filed a claim] as a lien-holder against Lake City Malleable, Inc. Therefore, this alternative argument of the Government has no validity.

The referee further stated in his memorandum as follows:

"* * * it is not shown that this taxpayer [ Lake City ] was a creditor of the estate at the time the proceedings in this bankruptcy case was filed."

A review of the record discloses no assertion by anyone that the money which the referee found to have been a loan was ever repaid. The fact that Lake City did not file a claim on its own behalf does not establish the fact that the loan was repaid. The only conclusion which can be drawn consistent with the record is that as of the date of bankruptcy there was a debt due Lake City from the bankrupt. Counsel for the trustee admitted that fact during opening statements before the referee stating that this fact was set forth in the stipulation of the parties. The director would be entitled to collect any moneys due the taxpayer if it had a valid lien. Glass City Bank v. United States [45-2 USTC 9449], 326 U. S. 265 (1945), and made a proper claim therefor.

[Claim Filed by Government]

The referee also found that no claim had been filed by the Government as a lienholder. The record discloses that the director filed an original claim on December 14, 1959 and a supplemental claim on or about June 22, 1960 . While these claims do not reflect the legal theories presented in this action, they do set forth a general claim on behalf of the Government. It was urged in this Court that these claims are subject to liberal amendment, which rule the Court believes to be correct. Fidelity & Deposit Co. of Maryland v. Fitzgerald, 272 F. 2d 121 (CA 10, 1960). The Court is of the opinion that the referee should pass upon this question initially.

The trustee asserts that the Government failed to prove assessment of the tax liability, in order to give rise to its statutory lien. There is some confusion in the record on this issue. In fact, the opening statements are not clear as to whether this issue was to be tried before the referee. It has not been denied that the assessment was made, simply that it was not proved.

In light of the fact that there is some question regarding whether the lien theory was to be the subject of trial and proof, the Court believes that the Government should be given an opportunity to submit proof on the issue.

The cause will be remanded to the referee for further consideration of the government's lien theory in light of this Court's ruling on the questions of filing of notice of the lien and the existence of a debt at the time of bankruptcy. Counsel for the director may present the question of the right of amendment to the referee for his consideration. Further evidence may be taken on the issue of assessment of the tax liability of Lake City Malleable, Inc.

Petition for review is granted. Referee's findings affirmed in part and reversed in part. Cause remanded to the referee for further proceedings.

 

 

[62-2 USTC 9765]Triangle Supply Company v. Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company, and Fletcher Oil & Gas Drilling Corporation, Garnished, et al.

Texas 104th District Court, Taylor County, Tex., No. 9547-B, 7/14/62

[1954 Code Sec. 6323]

Lien for taxes: Priority: Judgment creditors: Assignment of accounts receivable: Attorneys' fees.--Garnishment liens and mechanic's and materialman's liens were imperfect and inchoate until judgments were obtained. Therefore, Government's liens filed before creditors' judgments had been perfected were superior. However, one assignment of accounts receivable properly filed with the office of the county clerk of the assignor's residence ( Wichita County , Texas ) had priority over Government's liens filed for record after the assignment. Attorneys' fees and court costs were allowed against amount of Government's liens and those of other creditors.

McMahon, Smart, Sprain, Wilson & Camp, Box 1440 , Abilene , Tex. , for plaintiff. Ross H. Scott, 1229 Mercantile Securities Bldg., Dallas 1, Tex., for Garnishee, Fletcher Oil & Gas Drilling Corp.; Rodgers & Stephens, Box 74, Graham, Tex., for Claimant; Byron Scarborough, 1800 First National Bldg., Ft. Worth 2, Tex., for Mid-Continent Supply Co.; H. W. Sanders, 1100 First-Wichita National Bldg., Wichita Falls, Tex., for Impleaded Garnishee, Time Equipment & Supply Co.; Sam Lane, Assistant Attorney General, Supreme Court Bldg., Austin, Tex., for Intervenor, the State of Texas; Nelson, Montgomery, Rob ertson & Sellers, 818 Hamilton Bldg., Wichita Falls, Tex., for Parker Square State Bank; Humphrey, Humphrey & Gibson, 910 City National Bank Bldg., Wichita Falls, Tex., for City National Bank in Wichita Falls; Rob ert E. Bowers, Highers Bldg., Breckenridge, Tex., for Kelley Supply Co.; Andrews & Andrews, Box 1176, Stamford, Tex., for Garnishor, L. H. Strand; Bryant, Glenn & Thomas, Box 282, Abilene, Tex., for Garnishor's Carter Engine & Equipment Co.; Raleigh Brown, 1218 N. 4th St., Abilene, Tex., ad litem for Gene T. Steadham; Barefoot Sanders, United States Attorney, Ft. Worth, Tex., Gary Cole, Jr., Assistant United States Attorney, 206 United States Courthouse, Ft. Worth, Tex., for defendants.

Findings of Fact and Conclusions of Law

THOMAS, District Judge:

In response to the requests of City National Bank in Wichita Falls and Time Equipment & Supply Company, and in accordance with Rule No. 269 of the Rules of Civil Procedure, I hereby make and file the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. Fletcher Oil & Gas Drilling Corporation, Garnishee, is indebted to Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company, and/or the assignees of the said Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company, in the amount of One Hundred Sixty-Four Thousand Six Hundred Ninety and 99/100 ($164,690.99) Dollars.

That Fifty Four Thousand Six Hundred Twenty-Four and 77/100 ($54,624.77) Dollars of said sum has been paid into the registry of this Court and is available for distribution.

2. The above entitled and numbered cause was filed by Triangle Supply Company in this Court as a garnishment proceeding, wherein it caused a Writ of Garnishment to be served on Fletcher Oil & Gas Drilling Corporation on April 5, 1961, by reason of a claimed indebtedness against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company.

That on June 14, 1961, Triangle Supply Company secured a Judgment in cause No. 2585-A in the 42nd District Court of Taylor County, Texas against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company for $710.82, by reason of the indebtedness alleged in said Garnishment proceeding.

3. That Fletcher Oil & Gas Drilling Corporation filed an amended pleading herein, being in the nature of an answer to said garnishment and interpleading and making the following parties herein, viz.; Carter Engine & Equipment Company, Kelley Supply Company, United States of America, City National Bank in Wichita Falls, Parker Square State Bank of Wichita Falls, Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company, Mid-Continent Supply Company, Tucker & Stephens Bulldozers, Inc., Time Equipment & Supply Company.

The State of Texas filed herein a Plea of Intervention claiming delinquent unemployment taxes against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company in the amount of $613.35.

Mid-Continent Supply Company answered herein but made no appearance at the trial and offered no testimony.

4. Carter Engine & Equipment Company filed suit (being No. 9369-B in this Court) against Wise & Steadham Drilling Company in which it caused a Writ of Garnishment to be served on Fletcher Oil & Gas Drilling Corp. on January 31, 1961, and on May 11, 1961, secured a Judgment in said cause against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company in the amount of $8,245.45 the said cause No. 9369-B was thereafter by order of this Court consolidated with this cause No. 9547-B.

5. T. C. Kelley, Thad Kelley and Joan K. Larson, d/b/a Kelley Supply Company filed suit in the District Court of Stephens County, Texas against Wise & Steadham Drilling Company, in which it caused a Writ of Garnishment to be served on Fletcher Oil & Gas Drilling Corporation on March 24, 1961, and on July 14, 1961 secured a Judgment against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company in the amount of $1,942.35. That by agreement of the parties said garnishment proceeding was transferred to this Court and filed herein as cause No. 9613-B, which cause was thereafter by order of this Court consolidated with this cause No. 9547-B.

6. L. H. Strand secured a Judgment against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company in cause No. 9757 in the District Court of Jones County, Texas on September 22, 1961 and caused a Writ of Garnishment of Judgment to be served on Fletcher Oil & Gas Drilling Corporation on October 6, 1961; and said cause was subsequently transferred from the District Court of Jones County, Texas to this Court.

7. The United States of America gave proper notice of levies for taxes against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company as follows:

On March 20, 1961, in the amount of $11,854.54.

On June 2, 1961, in the amount of $10,410.18.

On July 10, 1961, in the amount of $4,851.39.

8. That between the dates of October 17, 1960 and January 18, 1961, Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company assigned proceeds due by Fletcher Oil & Gas Drilling Corporation to the said Wise & Steadham Drilling Corporation in the amount of $97,564.02 to City National Bank in Wichita Falls, Texas.

That City National Bank in Wichita Falls , Texas complied with Article 260-1 of Vernon 's Annotated Civil Statutes of Texas by filing a Notice of assignment of said Accounts Receivable from Wise & Steadham Drilling Company with the County Clerk of Wichita County , Texas , on February 16, 1961.

9. That between the dates of November 4, 1960, and March 15, 1961, Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company assigned proceeds due them by Fletcher Oil & Gas Drilling Corporation in the amount of $53,154.90 to Parker Square State Bank in Wichita Falls, Texas.

That Parker Square State Bank failed to file any notice of assignment of said Accounts Receivable under the provisions of Article 260-1 of Vernon 's Annotated Civil Statutes of Texas.

10. On January 17, 1961, Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company told Time Equipment & Supply Company that they would assign to it the amount of $13,972.07 due Wise & Steadham Drilling Company by Fletcher Oil & Gas Drilling Corporation for drilling Bankhead #1 Well in Palo Pinto County, Texas, on January 18, 1961, Time Equipment & Supply Company, by written instrument, assigned to the City National Bank in Wichita Falls the said proceeds of the drilling of said Bankhead #1, and on July 4, 1961, Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company executed a written assignment of that same invoice and in the same amount to City National Bank in Wichita Falls, Texas.

That Time Equipment & Supply Company and the City National Bank in Wichita Falls failed to file any notice of such assignment of Accounts Receivable under the provisions of Article 260-1 revised Civil Statutes of Texas.

11. Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company is indebted to Tucker & Stephens Bulldozers, Inc., in the amount of $2,230.00, and of said sum Tucker & Stephens Bulldozers, Inc. have filed Mechanics Liens, as provided by law, as follows:

(1) Lien filed June 13, 1961, against the well known as the " Walker " in the amount of $262.50 for services and materials furnished on January 3, 1961;

(2) Lien filed June 14, 1961, against the well known as the "Barton" in the amount of $50.00 for services and materials furnished on February 7, 1961; and

(3) Lien filed June 14, 1961, against the well known as the "Bankhead #1" in the amount of $1,036.25 for services and materials furnished on February 7, 1961.

12. All of the above described claims against Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company are valid, just, due and unpaid, and the assignments by Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company are valid and sufficient assignments, supported by valuable considerations of Fletcher Oil & Gas Drilling Corporation to City National Bank in Wichita Falls and Parker Square State Bank.

13. Kenneth J. Wise and Gene T. Steadham, d/b/a Wise & Steadham Drilling Company are indebted to the State of Texas for taxes and penalties due under the terms of Texas Unemployment Compensation Act in the amount of $613.35.

14. That, of the total amount due by Fletcher Oil & Gas Drilling Corporation to Wise & Steadham Drilling Company, the invoices assigned to City National Bank in Wichita Falls 59.24065% of the total; the invoices assigned to Parker Square State Bank represent 32.27554% of the total; and the invoice assigned to Time Equipment & Supply Company represent 8.48381%.

15. That, from the funds paid into the registry of the Court, after deduction of Court costs (including a fee of $250.00 allowed Raleigh Brown, attorney ad litem for Gene T. Steadham, cited by publication, and a fee of $2,000.00 allowed by the Court to Ross Scott, as attorney for Fletcher Oil & Gas Drilling Corporation, and $200.00 general Court costs in this cause) there is a balance in the sum of Fifty Two Thousand One Hundred Seventy-Four and 77/100 ($52,174.77) Dollars. Of said balance, there is attributable to the invoices assigned City National Bank in Wichita Falls the sum of Thirty Thousand Nine Hundred Eight and 67/100 ($30,908.67) Dollars; there is attributable to the invoices assigned Parker Square State Bank the sum of Sixteen Thousand Eight Hundred Thirty-Nine and 69/100 ($16,839.69) Dollars; and that there is attributable to the invoice assigned Time & Equipment Company the sum of Four Thousand Four Hundred Twenty-Six and 41/100 ($4,426.41) Dollars.

Conclusions of Law

1. Under the provisions of Article 260-1 Revised Civil Statutes of Texas, it is required that, in order for an assignee of Accounts Receivable to protect his assignments, as against creditors of the Assignor, and against the claims of persons whose rights become vested by legal process (including garnishment liens, mechanics and materialman's liens and tax liens of the United States Government) that "Notice of Assignment" of such Accounts Receivable must be filed with the office of the County Clerk of the County of the Assignors residence.

Furthermore, where the Assignee of Accounts Receivable does not protect his assignment of Accounts Receivable by filing such (Notice of assignments, as required by said Article 260-1, such assignment is imperfect and inchoate under Federal Law; and tax liens of the United States Government, arising subsequent to the involved assignment, are superior to the assignment of Accounts Receivable, which are inchoate because of the failure of the Assignee to file Notice of such prior assignments, as required by said Article 260-1 R. S. of Texas.

2. The Federal Law prevails in the determination of whether prior liens (including assignments, garnishment liens, mechanics and materialman's liens and assignments of Accounts Receivable) are imperfect and inchoate.

3. Federal tax liens are superior to existing imperfect and inchoate liens, even if such liens are prior in time to subsequent arising Federal tax liens.

Insofar as Federal tax liens are concerned, prior garnishment liens and mechanics and materialman's liens are imperfect and inchoate until Judgments are obtained. Therefore, with respect to prior arising federal tax liens, subsequent lien creditors are entitled to priority over such tax liens, if they obtained Judgment liens before notice with respect to such tax liens is filed. With respect to subsequent arising federal tax liens, a prior Judgment lien is a choate lien and entitled to priority over federal tax liens.

3a. None of the liens involved in this proceeding (whether garnishment liens, mechanics or materialman's liens or tax or assignment liens) asserted by the parties to this proceeding, are for indebtedness accruing to a contractor for labor performed or materials or services furnished on any public or private construction.

Therefore, "Accounts Receivable" within the provisions of said Article 260-1 R. S. of Texas is applicable to the indebtedness due by Fletcher Oil & Gas Drilling Corporation to Wise & Steadham Drilling Company and involved in this proceeding (including that portion paid into the registry of this Court).

4. A lien for materials, services, and/or labor under the statutes providing for mechanics and materialman's liens (Article 5473 et seq. R. S. of Texas ) relates back and becomes effective as of the date the respective items of materials, services, and/or labor were furnished.

This doctrine of relating back, however, does not apply with respect to federal tax liens.

I further conclude, as a matter of law:

5. That the assignment lien of the City National Bank of Wichita Falls is superior to that of all other lien holders and claimants, as to the funds attributable to its assignments, except that of Carter Engine & Equipment Company and except that of Tucker & Stephens Bulldozers as to the Walker, Barton and Bankhead leases.

6. The lien of Carter Engine & Equipment Company is superior to the tax liens of the United States Government, except as to the Government's lien for $11,854.54 on levy made March 20, 1961; and

The lien of Carter Engine & Equipment Company is superior to those of City National Bank in Wichita Falls, Triangle Supply Company, L. H. Strand, Parker Square State Bank, Kelley Supply Company, and Tucker & Stephens Bulldozers as to the Barton and Bankhead leases, and to the claims of the State of Texas, Mid-Continent Supply Company and Time Equipment & Supply Company;

Carter Engine & Equipment Company is inferior to that of Tucker & Stephens Bulldozers insofar as Allice Walker Estate #1-A lease is concerned.

7. The tax lien of the United States Government in the amount of $11,854.54 on levy made on March 20, 1961, is superior to the lien of Carter Engine & Equipment Company; however, the other tax liens of the United States Government, involved herein, are inferior to the garnishment lien of Carter Engine & Equipment Company; and

The United States Government's tax liens are superior to the lien of Triangle Supply Company, except as to the Government's lien for $4,851.39, for which notice of levy was made on July 10, 1961; and

The tax liens of the United States Government are superior to those of Time Equipment & Supply Company, L. H. Strand, Kelley Supply Company, Tucker & Stephens Bulldozers, Inc., and Parker Square the State of Texas and Mid-Continent Supply the State of Texas and Mid-Continent Supply Company, which company offered no proof in support of its claim.

8. The lien of Kelley Supply Company is superior to the liens of Triangle Supply Company, Time Equipment & Supply Company, L. H. Strand, the claim of Parker Square State Bank, and superior to any claims of the State of Texas and Mid-Continent Supply Company.

The lien of Kelley Supply Company is inferior to those of the United States Government, Carter Engine & Equipment Company, City National Bank, and Tucker & Stephens Bulldozers, as to the Walker , Barton, and Bankhead leases.

9. The lien of Triangle Supply Company is superior to the tax lien of the United States Government in the amount of $4,851.59 for which notice of levy was filed on July 10, 1961, but inferior to the other tax liens of the United States Government; and

The lien of Triangle Supply Company is superior to that of L. H. Strand to the claims of Parker Square State Bank, The State of Texas, Mid-Continent Supply Company and Time Equipment Company; and

The lien of Triangle Supply Company is inferior to the liens of Carter Engine & Equipment Company, City National Bank, Kelley Supply Company, and Tucker & Stephens Bulldozers, as to the Walker, Barton, and Bankhead leases.

10. The lien of L. H. Strand is superior to the claims of Parker Square State Bank, the State of Texas, Mid-Continent Supply Company and Time Equipment & Supply Company; and

L. H. Strand's lien is inferior to those of the United States Government, Carter Engine & Equipment Company, Triangle Supply Company, Kelley Supply Company, City National Bank, and Tucker & Stephens Bulldozers as to the Walker , Barton, Bankhead leases.

11. The lien of Tucker & Stephens Bulldozers, Inc., is superior to that of Carter Engine & Equipment Company as to the Allice Walker Lease, but otherwise inferior to the lien of Carter Engine & Equipment Company; and

The lien of Tucker & Stephens Bulldozers, Inc., is superior to the liens of Triangle Supply Company, L. H. Strand, Kelley Supply Company, City National Bank, and the claims of Parker Square State Bank, the State of Texas, Time Equipment & Supply Company and Mid-Continent Supply Company; and

Its lien is inferior to those of the United States Government and to Carter Engine & Equipment Company (except as to the Walker lease).

Tucker & Stephens is entitled to Judgment against Wise & Steadham Drilling Company for the amount of its debt insofar as the Allice Walker, C. E. Allen, W. L. Ringo, R. M. Barton and Bankhead leases are concerned.

12. The claim of Parker Square State Bank is superior to those of Time Equipment & Supply Company (insofar as the funds attributable to its assignments are concerned, and to the State of Texas and the Mid-Continent Supply Company, said company having offered no proof.); and

The claim of Parker Square State Bank is inferior to the liens of the United States Government, Carter Engine & Equipment Company, L. H. Strand, Kelley Supply Company, the City National Bank, and Tucker & Stephens Bulldozers, as to the Walker , Barton, and Bankhead leases.

13. Insofar as the funds in controversy attributable to the invoice of Time Equipment & Supply Company are concerned, the liens of the United States Government, Carter Engine & Equipment Company, Triangle Supply Company, City National Bank, Kelley Supply Company, L. H. Strand, Tucker and Stephens Bulldozers (as to the Walker, Barton, Bankhead leases) and the Parker Square State Bank's claim are entitled to priority) in this connection, I have concluded that the oral transaction between Wise & Steadham Drilling Company and Time Equipment Company was not a sale, but an oral assignment, and, as herein above found, there was no compliance by giving notice as required by Article 260-1, either by Time Equipment & Supply Company or City National Bank in Wichita Falls, insofar as the Bankhead lease transaction is concerned.)

14. The State of Texas has a claim against Wise & Steadham Drilling Company in the amount of $613.35 for contributions (taxes and penalties due under the terms of Texas Unemployment Compensation Act), being Article 5221-B R. C. S.; but the State of Texas has no legal claim against the monies involved in this suit therefor.

15. That Mid-Continent Supply Company, having offered no proof in this cause, is not entitled to any recovery in this garnishment proceeding.

16. That the Court costs incurred in this cause, including a fee of $2,000.00, which the Court has found to be reasonable and allowed Ross H. Scott as attorney for Fletcher Oil & Gas Drilling Corporation, Garnishee, and including a fee of $250.00, which the Court has found to be reasonable and allowed Raleigh Brown as attorney appointed by the Court to represent Gene T. Steadham, cited by publication, and including $200.00 general Court costs incurred in this cause to date of Judgment, should be first paid by the Clerk of this Court out of the monies deposited in the registry of this Court in this cause, before the payments of any of said monies to any of the parties to the proceeding in accordance with the Judgment of the Court.

 

 

[62-2 USTC 9670] United States of America , Plaintiff v. Webster Record Corporation, Bankers Trust Company, and The Borden Chemical Company, Defendants

U. S. District Court, So. Dist. N. Y., 60 Civ. 5098, 208 FSupp 412, 7/26/62

[1954 Code Sec. 6323]

Lien for taxes: Filing of notice: Situs of property v. situs of owner: Priority: Judgment creditor.--Tax lien notices against federal land bank deposits in a New York bank were properly filed in Massachusetts, the state of legal situs of the owner of the deposits. Personal property has its situs at the domicile of its owner. Federal tax lien on the deposits arose prior to and were superior to the claims of the judgment creditor.

Rob ert M. Morgenthau, United States Attorney, New York , N. Y. (Eugene R. Anderson, Assistant United States Attorney, of Counsel), for plaintiff. Jacob F. Gottesman, 292 Madison Ave. , New York , N. Y. for The Borden Chemical Co.

Opinion

BRYAN, District Judge:

The United States sues to enforce liens filed against defendant Webster Record Corporation (Webster) for withholding and excise taxes assessed by the Commissioner of Internal Revenue between 1957 and 1960. At the time suit was commenced the balance remaining unpaid totalled $84,050.70, exclusive of interest.

Bankers Trust Company (Bankers) and The Borden Chemical Company (Borden) are also named as parties defendant. Bankers holds a deposit of $8,634.20 in its Queens ' Branch for the account of Webster and is a stakeholder of these funds. Borden is a judgment creditor of Webster, which claims the amount on deposit with Bankers under a judgment creditor's lien which it asserts has priority over the Government's tax liens.

There are cross-motions for summary judgment under Rule 56, F. R. C. P., by the United States and by Borden.

The undisputed facts as they appear from the pleadings and affidavits are as follows:

Webster is a Massachusetts corporation doing business in New York . Between 1957 and 1960 the Commissioner of Internal Revenue assessed a total of $84,050.70 for withholding and excise taxes due and owing from Webster. Liens totalling these amounts were filed by the Commissioner between June, 1958 and August, 1960 in both Dudley and Worcester , Massachusetts .

Borden is a New York corporation with its principal place of business in New York County . On July 5, 1960 it secured a judgment in the New York Supreme Court, New York County , against Webster in the amount of $11,320.50 for an unpaid balance due for merchandise sold and delivered, plus interest. Borden then initiated supplementary proceedings in the New York courts and obtained an order restraining Bankers from paying out the amount on deposit in Webster's account. Borden then moved to compel Bankers to turn over the deposit to it in partial satisfaction of its judgment. The Government was at no time a party to the original action by Borden against Webster, nor did it appear in the supplementary proceedings instituted after entry of judgment.

On October 4, 1960, while Borden's turnover motion was still pending in the state court, the Commissioner served a demand on Bankers for the surrender to the Government of the Webster funds on deposit. Borden then served a copy of its motion papers for a turnover on the Government. The Government commenced its action in this court to foreclose its lien as against the deposit.

The Government then secured an order of this court restraining Bankers from paying the deposit to Borden and to enjoin Borden from taking any further steps with respect to the fund until this action is finally determined.

On its motion for summary judgment the Government asserts that tax liens in the amount of at least $37,686.58 had been filed against Webster prior to the entry of judgment in favor of Borden in the New York State court action. It contends that these liens were filed properly under 26 U. S. C. 6323, 1 and therefore it is entitled to be paid the deposit held by Bankers in partial satisfaction of Webster's tax indebtedness.

On its cross-motion for summary judgment Borden takes the position that the Government's liens were improperly filed under 6323 and therefore are invalid as against Borden as a judgment creditor of Webster. Borden claims that under 6323(1) the tax lien must be filed in the appropriate office designated by the law of the state where the property subject to the lien is located. It urges that the deposit in the Queens Branch of Bankers is located in New York where the bank is. Therefore it argues that New York law must apply and that under New York law the Government's tax lien, in order to have priority, had to be filed in the office of the City Register of the county in which the bank where the funds were on deposit was situated. Borden necessarily takes the position that the threshold problem of determining where property of a delinquent taxpayer is located for the purposes of 6323(1) is governed by state law.

The Government, on the other hand, contends that federal law and not state law must be applied to determine the situs of the property against which a tax lien is asserted and that under federal law bank deposits are treated as intangible personal property having their situs at the domicile of the owner. It asserts that the domicile of Webster is Massachusetts where it is incorporated and that therefore its liens were perfected when filed in Massachusetts in compliance with filing requirements of that state and have priority over the subsequent judgment lien of Borden.

The initial question to be resolved on these motions is what law is to be applied to determine where "the property subject to the [tax] lien is situated." As already noted, Borden takes the position that state law determines the situs of the property, that therefore New York law must be applied and that under that law a bank deposit has its situs where the bank is located.

This is a bootstrap argument and is unsound.

No good reason is advanced by Borden why New York rather than Massachusetts law should be applied to determine the situs of this property other than that New York law supports Borden's position. The adoption of Borden's position would result in reasoning in a complete circle. If state law is to be applied by the federal courts to determine the situs of property which may be situated in more than one state, then which state law is to be chosen? The answer, of course, is the law of the state where the property has its situs which was the initial inquiry which is therefore left unanswered!

The answer to the question is that federal law determines the situs of property for purposes of 6323. See United States v. Ullman [60-1 USTC 9143], 179 F. Supp. 373, 375 (E. D. Pa. 1959). Questions which directly affect the nature, effect and enforcement of federal tax liens are federal questions. If not specifically dealt with by statute they are governed by general federal law. Though such liens may intrude upon relationships traditionally governed by state law, it becomes necessary in the interest of sound admin istration of federal tax law to apply or formulate a "uniform nationwide federal rule." See United States v. Brosnan [60-2 USTC 9516], 363 U. S. 237 (1960). The application of such a rule is required here.

The cases cited by Borden, e.g., Aquillno v. United States [60-2 USTC 9538], 363 U. S. 509 (1960), and United States v. Durham Lumber Co. [60-2 USTC 9539], 363 U. S. 522 (1960), do not in any manner detract from this conclusion nor do they support Borden's claims. They stand merely for the proposition that the law of the state where the property is situated determines to what extent the taxpayer had rights to property to which a tax lien can attach. This proposition cannot be applied without first determining the situs of the property, a question which, as has been pointed out, can only be resolved by resort to federal law.

The general federal rule is that personal property has its situs at the domicile of its owner. See, e.g., Tappan v. Merchants' National Bank, 86 U. S. 490 (1873); Baldwin v. Missouri, 281 U. S. 586 (1930); Grand Prairie State Bank v. United States [53-2 USTC 9481], 206 F. 2d 217 (5 Cir. 1953); United States v. Royce Shoe Co. [55-2 USTC 9770], 137 F. Supp. 786 (D. N. H. 1956); Weir v. Corbett [58-1 USTC 9208], 158 F. Supp. 198 (W. D. Wash. 1957); United States v. Jane B. Corporation [58-2 USTC 9924], 167 F. Supp. 352 (D. Mass. 1958); United States v. Ullman, supra. A bank account is personal property within the scope of this rule. Baldwin v. Missouri, supra. Therefore, the proper place for the filing of the Government's tax lien was the domicile of defendant Webster in conformity with the law of the state where it is domiciled.

A corporation has its domicile in the state in which it is incorporated and its residence at the place designated in its articles of incorporation as its principal place of business. Cream of Wheat Co. v. Grand Forks , 253 U. S. 325 (1920); Fairbanks Steam Shovel Co. v. Wills, 240 U. S. 642 (1916); Gutterman v. Rice, 121 F. 2d 251 (1 Cir. 1941), cert. den. 314 U. S. 680; In re Pilgrim Plumbing Supply Corp., 123 F. Supp. 823 (S. D. N. Y. 1953); In re Riverdale Production, Inc., 107 F. Supp. 87 (S. D. N. Y. 1952).

There is no dispute here that Webster is a Massachusetts corporation and therefore its domicile is in that state. The situs of Webster's personal property, including the bank deposit claimed here by the Government and Borden, must be deemed to be located in Massachusetts .

In order to perfect its liens against Webster's property the Government was required by 26 U. S. C. 6323 to file them in the office designated by Massachusetts law, (G. L. Ch. 36, 24), which provides that federal tax liens shall not be valid against third persons

"unless such lien is recorded, in the case of real property, in the district where the real estate is located, and in the case of personal property in the office of the clerk of the city or town in which the person against whom a lien is filed resides or has his usual place of business."

This section has been construed as requiring the Government to file its lien against personal property of a corporation at that place within the state which is officially designated in the articles of organization as its principal place of business. United States v. Jane B. Corp., supra. See, also, Gutterman v. Rice, supra.

In the case at bar the tax liens upon which the Government asserts its claim were filed in both Dudley and Worcester , Massachusetts . Though the Government has presented a great deal of material to indicate that Webster did business in Dudley, there is no evidence whatsoever as to what place is designated in the articles of organization of Webster as its principal place of business. Without such evidence it is impossible to determine whether the tax liens were filed in conformity with the Massachusetts statute as construed in United States v. Jane B. Corp., supra.

Borden's cross-motion for summary judgment is therefore in all respects denied. The Government's, motion for summary judgment must also be denied because of its failure to establish the easily ascertainable and essential fact as to the principal place of business designated in Webster's articles of organization. Such denial, however, is without prejudice to a renewal of the Government's motion if this defect in proof is supplied.

It is so ordered.

1 6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

(a) Invalidity of lien without notice.

Except 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.

 

 

[62-2 USTC 9642] United States of America , Plaintiff v. Oakland Truck Sales, Inc., A. H. Neaman Company, Commonwealth of Pennsylvania , Hartford Fire Insurance Company, and the Connecticut Bank and Trust Company, Defendants

U. S. District Court, West. Dist. Penn., Civil Action No. 61-429, 207 FSupp 175, 7/23/62

Priority of lien: Federal income tax lien v. insurance adjuster's lien.--The lien of an insurance adjuster against the proceeds of an insurance settlement was inferior to a Federal tax lien where the tax lien was filed before the property subject to the tax lien was partially destroyed by fire. The fact that the Commissioner's agents were on notice that the adjuster was rendering services and consented thereto does not estop the Commissioner's claim absent a showing that the agents acted within their authority.

J. S. Ammerman, U. S. Attorney, 633 New Federal Bldg., Pittsburgh 19, Pa., for plaintiff. White & Jones, 707 Grant Bldg., Pittsburgh 19, Pa., for Hartford Fire Insurance Co. and Connecticut Bank and Trust Co. J. A. Metz, Jr., 3600 Grant Bldg., and J. Schwartz, 1231 Frick Bldg., both of Pittsburgh 19, Pa., for A. H. Neaman Co. M. D. Turets, 1703 Law & Finance Bldg., Pittsburgh 19, Pa., and F. G. Antoun, Deputy Attorney General, Commonwealth of Pa., Harrisburg, Pa., for the Commonwealth of Pennsylvania.

Opinion

GOURLEY, Chief Judge:

In this proceeding it is not in dispute that the Government had its tax lien filed against Oakland and that subsequent to the filing, a fire occurred, destroying part of the realty and personalty which was subject to the lien.

Three days after the fire, the insured, Oakland , executed an assignment to Neaman to adjust the fire loss, concerning which adjustment the following facts are evident:

(a) The fund now before the court for distribution would not have been as substantial had it not been for the services of Neaman.

(b) The 5% compensation provided for the adjuster under its contract was reasonable.

(c) Under the agreement between the adjuster and the insured, the adjuster was to look for its compensation solely to the moneys collected.

(d) The Government had knowledge of the work being done by the adjuster while the same was transpiring.

The sole question for determination is whether the Government lien is prior and superior to the lien of Defendant Neaman.

The relative priority of the lien of the United States for unpaid taxes is always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this court. United States v. Acri [55-1 USTC 9138], 348 U. S. 211.

In the application of equitable relief I would be most prone to grant Neaman Company priority in recognition of the important role it played in assisting in bringing about the amount of the fund. I have always felt that the rendition of services always merits just and adequate compensation.

Nevertheless, statutory lien concepts are not determined by equities but must be governed by the interpretation of the federal statutes as construed by the federal courts.

The liens of the United States are all embracing, and it is only in circumstances where a claimant to a fund can fall into the classifications enumerated in Section 6323 of the Internal Revenue Code before the lien of the United States can be defeated. 26 USCA 6323; United States v. Gilbert Associates, Inc. [53-1 USTC 9291], 345 U. S. 361.

In this connection, it cannot be shown that Neaman Company is a mortgagee, judgment creditor, purchaser or pledgee.

The liens of the United States were filed on January 15, 1958 , in Beaver County , and on March 15, 1958 , in Allegheny County , Pennsylvania . The fire occurred on November 11, 1958 , and the agreement between Neaman and the Oakland Truck Sales was entered into on November 14, 1958 .

Thus, notice of the federal tax liens had been filed prior to any contract entered into between Oakland and Neaman. At the time the liens were entered, Neaman's claim was non-existent and the ultimate amount was contingent on the outcome of the amount derived from the insurance carrier, so that even at that stage of the proceeding it was but a "caveat of a more perfect lien to come." U. S. v. Scovil [55-1 USTC 9137], 348 U. S. 218. See U. S. v. Pay-O-Matic Corp. [58-2 USTC 9533], 162 F. Supp. 154, affirmed [58-1 USTC 9478] 256 F. 2d 581, cert. den. 358 U. S. 830.

As to the fact that government agents were on notice of the services being rendered and consented thereto, any agreement entered by any agent of the Government does not bind or estop the Government since the Government is not bound by such agent's acts or declarations unless it can be shown that they acted within their authority. Kelly v. U. S. , 91 F. Supp. 305, cert. den. 340 U. S. 850.

I must, therefore, conclude that the claim of A. H. Neaman Company is subordinate to the federal tax lien. U. S. v. City of New Britain [54-1 USTC 9191], 347 U. S. 81.

An appropriate Order is entered.

 

 

[62-2 USTC 9642] United States of America , Plaintiff v. Oakland Truck Sales, Inc., A. H. Neaman Company, Commonwealth of Pennsylvania , Hartford Fire Insurance Company, and the Connecticut Bank and Trust Company, Defendants

U. S. District Court, West. Dist. Penn., Civil Action No. 61-429, 207 FSupp 175, 7/23/62

Priority of lien: Federal income tax lien v. insurance adjuster's lien.--The lien of an insurance adjuster against the proceeds of an insurance settlement was inferior to a Federal tax lien where the tax lien was filed before the property subject to the tax lien was partially destroyed by fire. The fact that the Commissioner's agents were on notice that the adjuster was rendering services and consented thereto does not estop the Commissioner's claim absent a showing that the agents acted within their authority.

J. S. Ammerman, U. S. Attorney, 633 New Federal Bldg., Pittsburgh 19, Pa., for plaintiff. White & Jones, 707 Grant Bldg., Pittsburgh 19, Pa., for Hartford Fire Insurance Co. and Connecticut Bank and Trust Co. J. A. Metz, Jr., 3600 Grant Bldg., and J. Schwartz, 1231 Frick Bldg., both of Pittsburgh 19, Pa., for A. H. Neaman Co. M. D. Turets, 1703 Law & Finance Bldg., Pittsburgh 19, Pa., and F. G. Antoun, Deputy Attorney General, Commonwealth of Pa., Harrisburg, Pa., for the Commonwealth of Pennsylvania.

Opinion

GOURLEY, Chief Judge:

In this proceeding it is not in dispute that the Government had its tax lien filed against Oakland and that subsequent to the filing, a fire occurred, destroying part of the realty and personalty which was subject to the lien.

Three days after the fire, the insured, Oakland , executed an assignment to Neaman to adjust the fire loss, concerning which adjustment the following facts are evident:

(a) The fund now before the court for distribution would not have been as substantial had it not been for the services of Neaman.

(b) The 5% compensation provided for the adjuster under its contract was reasonable.

(c) Under the agreement between the adjuster and the insured, the adjuster was to look for its compensation solely to the moneys collected.

(d) The Government had knowledge of the work being done by the adjuster while the same was transpiring.

The sole question for determination is whether the Government lien is prior and superior to the lien of Defendant Neaman.

The relative priority of the lien of the United States for unpaid taxes is always a federal question to be determined finally by the federal courts. The state's characterization of its liens, while good for all state purposes, does not necessarily bind this court. United States v. Acri [55-1 USTC 9138], 348 U. S. 211.

In the application of equitable relief I would be most prone to grant Neaman Company priority in recognition of the important role it played in assisting in bringing about the amount of the fund. I have always felt that the rendition of services always merits just and adequate compensation.

Nevertheless, statutory lien concepts are not determined by equities but must be governed by the interpretation of the federal statutes as construed by the federal courts.

The liens of the United States are all embracing, and it is only in circumstances where a claimant to a fund can fall into the classifications enumerated in Section 6323 of the Internal Revenue Code before the lien of the United States can be defeated. 26 USCA 6323; United States v. Gilbert Associates, Inc. [53-1 USTC 9291], 345 U. S. 361.

In this connection, it cannot be shown that Neaman Company is a mortgagee, judgment creditor, purchaser or pledgee.

The liens of the United States were filed on January 15, 1958 , in Beaver County , and on March 15, 1958 , in Allegheny County , Pennsylvania . The fire occurred on November 11, 1958 , and the agreement between Neaman and the Oakland Truck Sales was entered into on November 14, 1958 .

Thus, notice of the federal tax liens had been filed prior to any contract entered into between Oakland and Neaman. At the time the liens were entered, Neaman's claim was non-existent and the ultimate amount was contingent on the outcome of the amount derived from the insurance carrier, so that even at that stage of the proceeding it was but a "caveat of a more perfect lien to come." U. S. v. Scovil [55-1 USTC 9137], 348 U. S. 218. See U. S. v. Pay-O-Matic Corp. [58-2 USTC 9533], 162 F. Supp. 154, affirmed [58-1 USTC 9478] 256 F. 2d 581, cert. den. 358 U. S. 830.

As to the fact that government agents were on notice of the services being rendered and consented thereto, any agreement entered by any agent of the Government does not bind or estop the Government since the Government is not bound by such agent's acts or declarations unless it can be shown that they acted within their authority. Kelly v. U. S. , 91 F. Supp. 305, cert. den. 340 U. S. 850.

I must, therefore, conclude that the claim of A. H. Neaman Company is subordinate to the federal tax lien. U. S. v. City of New Britain [54-1 USTC 9191], 347 U. S. 81.

An appropriate Order is entered.

 

 

[62-1 USTC 9490] United States of America , Plaintiff v. Meda Lorton, et al., Defendants

U. S. District Court, East. Dist. Ill., Civil No. 1767-D, 206 FSupp 351, 12/14/61

[1954 Code Sec. 6323]

Priority of liens: Choate v. inchoate: Mortgagees' costs of foreclosing.--The federal tax lien had priority over a lien for attorneys' fees incurred by an insurance company in foreclosing on a mortgage, admittedly superior to the federal tax lien, even though the mortgage provided that such costs "shall become a part of the mortgage debt and a lien upon said premises." This lien was inchoate until the amount of such attorneys' fees became definite, which was after the filing of the tax lien. Similarly, a loan association's lien for attorney's fees was subordinate even though its mortgages, admittedly superior to the tax lien, provided for a definite amount of attorneys' fees, $500, in addition to "reasonable costs and charges" of foreclosing.

John O'Rourke, Assistant United States Attorney, Federal Bldg., Danville, Ill., for plaintiff. Standard Life Insurance Co., Central Standard Life Insurance Co., Ralph Swanson, 306 Adams Bldg., Danville, Ill., Cowden Bldg. & Loan Ass'n, Meda Lorton, Woodrow Lorton, J. J. Baker, Shelbyville, Ill., for defendant.

Opinion

PLATT, District Judge:

The United States of America filed this action under 7402 and 7403 of the Internal Revenue Code of 1954, seeking judgment for its tax liabilities for unpaid income tax and to foreclose its lien arising out of said liabilities. The Central Standard Life Insurance Company and Cowden Building and Loan Association having mortgages on the taxpayer's properties were made parties defendants. The properties have now been sold in accordance with the decree of sale.

[Insurance Company's Costs]

The Attorney for the defendant, Central Standard Life Insurance Company, has filed a motion for allowance of his attorney fees in the amount of $700.00, to be taxed as a part of the costs of this suit, or in the alternative as a part of the debt, interest and costs due on the Insurance Company's mortgage. This mortgage provided:

"If the mortgagee or holder of any of said notes by reason of being the mortgagee or entitled to the rights of the mortgagee herein, be a party to any suit, litigation or legal proceeding relating to the premises herein, or any part thereof . . . or in case of foreclosure of this mortgage . . . all costs of such proceedings, including all reasonable attorney's and solicitor's fees so incurred by the mortgagee or holder of any of said notes . . . shall become a part of the mortgage indebtedness and a lien upon said premises and may be included in any judgment or decree rendered."

The findings of fact discloses that on December 1, 1960, the Insurance Company was entitled to $7,266.60, plus interest accruing from that date, at the rate of 7%, per annum. The findings of fact further found that Ralph J. Swanson, as attorney for said Insurance Company "[was] entitled to a fair and reasonable attorney fee for services rendered in this cause under the terms of the mortgage above referred to and that such fair and reasonable attorney fee is $700.00." At the sale of the premises the property covered by this mortgage was sold by the Marshal for the sum of $19,000.00.

[Loan Association's Costs]

The attorney for the defendant, Cowden Building and Loan Association, has also filed a similar motion for the allowance of $500.00 attorney fee. The Cowden Building and Loan Association had two mortgages on two properties which were sold by the United States Marshal in accordance with the terms of the order of sale. One of the properties sold for the sum of $3,110.00. The findings of fact, as to this mortgage, discloses that there was due for principal and interest on December 1, 1960, the sum of $2,373.29, plus interest on the principal balance at the rate of 7%, per annum. The findings further disclose that said John J. Baker, Attorney for Cowden Building and Loan Association was "entitled to a fair and reasonable attorney fee for services rendered in this cause under the terms of the mortgages above referred to and that such fair and reasonable attorney fee is $500.00." This amount included, under the terms of the mortgage, other real estate also mortgaged to the Cowden Building and Loan Association on which there was due on December 1, 1960, according to the findings of fact $1,291.15, which included principal and interest, and that interest accrued on the principal balance from that date at the rate of 7%, per annum. This property was sold by the United States Marshal for the sum of $1,510.00.

The first mortgage mentioned provided as follows:

"And in case any suit or proceedings at law, or in equity, wherein the mortgagee shall be made a party by reason of its relation to or interest in the debt secured hereby, the said mortgagee shall be allowed and paid its reasonable costs and charges and THREE HUNDRED--Dollars attorney's or solicitor's fees in such suit . . . and the same shall be a further charge and lien upon said premises and become a part of the judgment or decree therein. And it is stipulated and agreed that if at any time hereafter an action shall be filed to foreclose this mortgage, then in that case a solicitor's fee of THREE HUNDRED--Dollars shall at once become due and payable to complainant's solicitor, said fee to be taxed and collected as a part of the costs of such foreclosure suit, or included in the amount found due complainant, as complainant may elect."

This second mortgage had the same provision, except it provided for an attorney fee of $200.00.

[Government Lien]

The findings of the Court further disclose that the amount due the United States for unpaid income taxes, with interest to July 25, 1961, was $18,103.41. The last notice of the Government's lien was duly filed subsequent to the date of the recording of the mortgages but prior to the filing of this action.

[Priority of Liens]

It was stipulated by and between the Government and the mortgagees and the parties to the action "that the question of the priority between the claim of the United States and the fees for mortgagees' attorneys under their said mortgages shall be determined by the Court."

[Government's Position]

The United States admits that the principal amount secured by the mortgages, and the interest thereon, have priority over the Government's lien for taxes, but objects to the allowance of fees for mortgagees' attorneys, and maintains that the tax lien of the United States has priority over attorney fees because the claim for attorney fees was inchoate and subsequent in time to the lien for federal taxes.

[Statutory Provisions]

The question of priority of liens for federal taxes is governed by the statutory provisions and must be construed according to federal law. United States v. Security Trust and Savings Bank of San Diego , 1950, [50-2 USTC 9492] 340 U. S. 47.

Section 6321, Title 26 U. S. C. provides for lien in favor of the United States for unpaid taxes "upon all property . . . whether real or personal, belonging to" the taxpayer. Section 6322 fixes the lien imposed by 6321 as of the date of assessment. Section 6323 protects the mortgagee until notice of the tax lien is filed in the County where the property is located.

Congress had the power and authority to establish statutes for the collection of federal taxes. The meaning of the statutes must be determined by the Court. United States v. Gilbert Associates, 1952, [53-1 USTC 9291] 345 U. S. 361. Congress evidently intended by section 6323 to give priority to the claim of the mortgagee where the notice of lien was filed after the mortgage was recorded. The sole question, therefore, is whether the attorney fees provided for in the mortgage, upon answer being filed or foreclosure of the mortgage by the mortgagee, shall take precedence over the tax lien where the attorney fees were incurred after the notice of the federal tax lien. There is no question but that the attorney fees were indefinite in amount and were not due or payable to the mortgagee, under the terms of the mortgage, until foreclosure or answer was filed by the mortgagee.

[Choate v. Inchoate Liens]

In United States v. Bond, 4 Cir., 1960, [60-2 USTC 9532] 279 F. 2d 837, cert. denied 364 U. S. 895, the Court in the majority opinion, after reviewing the cases decided by the Supreme Court of the United States on choate and inchoate liens, determined that attorney fees for the mortgagee were inchoate and subordinate to the federal tax lien where notice of the tax lien preceded the incurrence of attorney fees. In that case, as in this case, there were insufficient funds from the sale of the property in an action by the Government to foreclose its lien for taxes to pay the attorney fees as well as the entire federal tax. There is a dissenting opinion in the Bond case which fails to give proper weight to the cases decided by the Supreme Court of the United States , and cited in the majority opinion, which gave priority to federal tax liens over inchoate state lines. Moreover, the dissenting opinion relies upon cases decided prior to the cases decided in the Supreme Court.

[Cases Distinguished]

The attorneys for the mortgagees have cited several cases in support of their position that attorney fees should be given priority over the tax lien. These cases are not decisive of the question. In United States v. American Nat. Bank of Jacksonville, 5 Cir., 1958, [58-2 USTC 9564] 255 F. 2d 504, the question of attorney fees does not seem to have been in dispute. The real question there involved was whether the tax lien could attach to the property until the death of the taxpayer's wife where the property was held in the entirety by the husband and wife under the Florida state law, and the tax lien was for unpaid taxes of the husband and not of the wife. United States v. Sampsell, 9 Cir., 1946, [46-1 USTC 9186] 153 F. 2d 731, was decided prior to the pronouncements of the Supreme Court of the United States of the doctrine that a state lien does not take preference over a lien for taxes were it was inchoate at the time notice of the federal lien for taxes was filed. Again in Smith v. United States, D. C. D. Hawaii, 1953, [53-2 USTC 9533] 113 F. Supp. 702, the question of attorney fees for the mortgagee does not seem to have been disputed.

[Cases Approved]

In United States v. Lord, D. C. D. N. H., 1957, [58-1 USTC 9181] 155 F. Supp. 105, the Court held that advances by the mortgagee for insurance made after the notice of the tax lien did not take priority over the federal lien for taxes, although the mortgage, by its terms, provided for these advances by the mortgagee.

In United States v. Christensen, 9 Cir., 1959, [59-2 USTC 9621] 269 F. 2d 624, the mortgagee, in compliance with the provisions of the mortgage agreement, paid the local taxes after notice of the federal tax lien. The Court held that the federal lien for taxes took priority over the amount so advanced under the mortgage for local taxes. In the instant case, although the mortgage provided for reasonable attorney fees upon answer or foreclosure by the mortgagee, these services and the amount to be paid came into existence and were due the mortgagee for attorney fees after the notice of the federal tax lien.

[Rule of Law]

The rationale of United States v. Christensen, supra, and United States v. Bond, supra, was recognized in Hoare v. United States, 9 Cir., 1961, [61-2 USTC 9681] 294 F. 2d 823. In that case the chattel mortgage was executed before the notice of the federal tax lien for the sum of $15,000.00 to secure payments of rent. The Court allowed the mortgagee's lien for the amount in default on the date the federal tax lien was effective under 6323, but held that the further amount in default in payment of rent was subordinate to the federal tax lien. This case, as well as other cases, indicates that the protection afforded by 6323 to a mortgagee covers only the definite amount due prior to the notice of the federal tax lien.

In United States v. Ringler, D. C. N. D. E. Ohio, 1958, [58-2 USTC 9878] 166 F. Supp. 544, the Court recognized the inchoate nature of a lien for attorney fees. The taxpayer to secure the payment of legal services executed a mortgage on the taxpayer's property. The Court held that the attorney fees earned prior to the notice of lien took preference under the mortgage where they were performed prior to the time of the notice of the tax lien, but as to the balance of attorney fees after the date of the notice of the federal lien the attorney's lien was inchoate even though secured by a mortgage, and was inferior to the lien for federal taxes.

The Supreme Court has pronounced a harsh rule on priority of federal tax liens. However, this Court is bound by the decisions of the Supreme Court. The attorney fees in this case should not precede the federal lien for taxes. The order of distribution shall so provide. IT IS SO ORDERED.

 

 

[62-1 USTC 9437]McDonnell, etc. v. Bucks County Farms, Inc.

U. S. District Court, East. Dist. Pa., No. 27004, 203 FSupp 819, 4/13/62

Tax liens: Priority: Judicial sale of property: State's claim for realty transfer taxes: State v. Federal law.--Pennsylvania law provides that where there is a judicial sale of property, the taxes due the State must be paid before any other claim is satisfied. In U. S. v. Brosnan et al. (Sup. Ct. ) 60-2 USTC 9516, 363 U. S. 237, it was held that where the title to realty will be severely dislocate, State law should be applied. Even though under Federal law the Government's recorded tax lien would prevail over the State's claim for realty transfer taxes, nevertheless State law should apply and thus the State's claim prevailed.

J. B. Coak, Phila. , Pa. , for Murray Ferguson . J. L. Grim, Bucks County , Pa. , for E. W. Rob erts. Levi, Mandel & Miller, Phila. , Pa. , for M. W. Birrell. Clark, Ladner, Fortenbaugh & Young, Phila. , Pa. , for Community Federal Savings & Loan Ass'n of Phila. A. B. Adelman, Phila., Pa., for the receivers of Bucks County Farms, Inc. J. B. Justice, Phila., Pa., for Anna Yeske. Blank, Rudenko, Klaus & Rome, Phila., Pa., for Willow Grove Federal Savings & Loan Ass'n. I. A. Sharger, Phila. , Pa. , for the Commonwealth of Pennsylvania . Drew J. T. O'Keefe, U. S. Attorney, and J. R. Ritchie, Jr., Phila. , Pa. , for the U. S.

LORD, JR., Judge:

This phase of a chapter X reorganization is another episode in the process of unravelling the tangles which Lowell Birrell left here when he departed for South America . In addition to difficult question of fact, the present issue involves a difficult legal problem, since the Commonwealth of Pennsylvania and the United States of America are each seeking the same fund, part of the proceeds of a sale of realty.

The realty of the corporation has been sold to a private purchaser and the funds await distribution. The land comprising Bucks County Farms, Inc., had been collected through the purchase from individuals of smaller parcels. At the time of transfer to Bucks County Farms, Inc., there was a failure to pay the correct realty transfer tax resulting in the Commonwealth's reassessment of tax due. On December 23, 1958 , the corporation executed a mortgage in favor of the United States to secure a renegotiation claim which the Government had against the sole stockholder of the corporation, L. L. Constantin & Company. This mortgage provided that it would be subordinate to the existing mortgages on the realty. The United States did not record this mortgage until December 21, 1959 , after equity receivers had been appointed by this court.

The receivers, on May 26, 1961 , petitioned this court for confirmation of a private sale of the corporation's realty. The agreement of sale provided for a clear title or one that would be insured by a title company. The petition recited that the delinquency in Commonwealth taxes would be satisfied upon settlement.

The title company listed as objections to insuring the title the deficiencies in Commonwealth transfer taxes. Accordingly, the title company now holds in escrow an amount sufficient for payment. Further, the receivers have negotiated with the Commonwealth and have achieved a settlement at an amount less than that originally insisted upon by the Commonwealth. Thereupon, the receivers petitioned this court for approval to compromise the claim of the Commonwealth.

The United States opposes this motion, insisting that no payments be made except after strict proof that the claim has existed as a lien prior to the time when the corporation executed the mortgage in favor of the United States.

The legal issue involved here presents a facet of the critical balance of national and State interests. The United States, holders of a junior mortgage, seek to restrain the payment of delinquent realty transfer taxes to the Commonwealth. The receivers, on the other hand, seek the aid of this court to extricate themselves from the embarrassing position in which they find themselves. They have pledged to deliver good title to the realty, but the failure to pay the Commonwealth taxes will prevent the fulfillment.

This court, in deciding the instant case, must determine which law it is to apply, State or Federal. It is true that the Federal courts should fashion the governing law according to their own standards: Clearfield Trust Co. v. United States, 318 U. S. 363 (1943); United States v. Allegheny County, 322 U. S. 174 (1944). However, the Federal court is not foreclosed from applying State law when it has especial merit. This court decides in the instant case that the State statutes should be followed.

In United States v. Brosnan [60-2 USTC 9516], 363 U. S. 237 (1960), the Supreme Court had before it for decision the peculiar Pennsylvania law which extinguished junior liens where a senior lien was enforced through a confession of judgment clause. The United States was the holder of a junior lien which the court felt was divested even though it was the sovereign. The court said (page 240):

". . . because federal liens intrude upon relationships traditionally governed by state law, it is inevitable that the Court, in developing the federal law defining the incidents of such liens, should often be called upon to determine whether, as a matter of federal policy, local policy should be adopted as the governing federal law, or whether a uniform nationwide federal rule should be formulated."

Further, the court decided that where the title to realty will be affected, State law should be applied in instances such as the instant case (page 241):

". . . when Congress resorted to the use of liens, it came into an area of complex property relationships long since settled and regulated by state law. We believe that, so far as this Court is concerned, the need for uniformity in this instance is outweighed by severe dislocation to local property relationships which would result from our disregarding state procedures. . . ."

The New York Court of Appeals in Buffalo Savings Bank v. Victory, 30 L. W. 2448, has interpreted Brosnan as providing for the payment of local taxes which attach to the land prior to the satisfaction of Federal liens. We think that this is perfectly sound for if, as here, State law will prevent property dislocations, the whole of the local policy must be applied.

The Pennsylvania statute, 72 PS 1401, requires that where there is a judicial sale of property, the taxes due the Commonwealth must be paid before any other claim is satisfied. This Commonwealth lien will remain as a clog on the title unless the receivers are permitted to compromise the tax claim. They will be unable to pass good title to the land which will be in violation of the agreement of sale.

The United States argues that the rights of the United States are not to be determined by State law: Clearfield Trust Co. v. United States , supra; United States v. Allegheny County , supra. These cases are very important in the body of Federal law, but inapposite here. In Clearfield , the court had before it the problem of what law to apply where a Treasury check was purloined and cashed by one other than the payee. There, the Supreme Court held that a uniform Federal rule of law was to be applied where the funds of the United States would be jeopardized by differing commercial practices among the several states. In Allegheny, the property of the United States was included in a municipal assessment for taxes. The court held that where a Federal activity is taxed, the Federal law should be applied. In the instant case, however, we are concerned with the clear title of realty long governed by State statutes and procedures.

Accordingly, this court feels it must follow the ruling of Brosnon, supra, and apply the State law as the Federal law to be applied in this case.

And now, for all the foregoing reasons, it is the ruling of this court that the receivers be allowed to compromise the claim of the Commonwealth of Pennsylvania for delinquent realty transfer taxes, and it is so ordered.

 

 

[60-2 USTC 9781] United States of America , Plaintiff v. Sam A. Fiorella, Katherine Fiorella, Frank Head, W. W. Wallace, Jr., George Rogers, Joe Agnesia, Defendants

U. S. District Court, No. Dist. of Ala. , So. Div., Civil Action No. 9545, 10/24/60

[1954 Code Sec. 6323]

Priority of liens: Partnership funds seized by police: Attorneys' claims.--Funds seized by local police in a raid on taxpayer's partnership business establishment, and turned over to his attorneys under a claim of assignment, were, to the extent of taxpayer's interest in the partnership, subject to a U. S. lien for income taxes assessed against taxpayer. This was so even though the taxes were assessed two months after the seizure but before the police had turned over the funds, where the attorneys had actual knowledge of the Government's tax claim at the time the funds were turned over to them. And, in any event, an attorney's lien for services performed for a taxpayer in criminal proceedings in a state court is subordinate to a U. S. lien for taxes.

W. L. Longshore, United States Attorney, M. L. Tanner, Assistant United States Attorney, Federal Bldg., Birmingham , Ala. , for plaintiff. William H. Mills, Rogers, Howard & Redden, Frank Nelson Bldg., Birmingham , Ala. , for W. W. Wallace, Jr., and George Rogers. C. E. Huey, Frank Nelson Bldg., Birmingham, Ala., for Sam Fiorella, Katherine Fiorella and Joe Agnesia. Frank Head, Circuit Solicitor of Shelby County, Shelby County Courthouse, Columbiana , Ala. , pro se.

Findings of Fact, Conclusions of Law and Judgment

GROOMS, District Judge:

This action having come on for trial to the Court without a jury at Birmingham on October 17, 1960 and the evidence and arguments of counsel having been heard and carefully considered, the Court makes and enters the following findings of fact, conclusions of law and judgment thereon:

Findings of Fact

1. The Commissioner of Internal Revenue on May 22, 1959 made an assessment of income tax against defendants Sam A. Fiorella and Katherine Fiorella in the amount of $11,305.75 for the tax year 1958.

2. The assessed amount of $11,305.75 remains unpaid and is asserted by the United States as a claim in this action.

3. During the year 1958 and that part of the year 1959 up to March 18, the defendants Sam A. Fiorella and Joe Agnesia conducted as partners a business operation at what is known as the "Kid McCoy" place in Shelby County within the Northern District of Alabama.

4. Currency in the amount of $7,141.00 seized on March 18, 1959 by constables of Shelby County during a raid on the operation of defendants Sam A. Fiorella and Joe A. Agnesia was treated by these defendants as an asset of the partnership.

5. There are no creditors of the partnership claiming in this case.

6. The interest of defendant Sam A. Fiorella in such partnership asset is 80 per cent and the interest of defendant Joe Agnesia is 20 per cent.

7. The defendants George Rogers and W. W. Wallace, Jr. claim $5,000.00 of the fund in question as attorneys fees and by assignment from defendants Sam A. Fiorella and Joe Agnesia.

8. There was no definite assignment or pledge to the individual claimants herein by Sam A. Fiorella and Joe Agnesia.

9. Defendants Frank Head, W. W. Wallace, Jr. and George Rogers had actual notice of such tax claim of the United States in December, 1959 when $6,050.60 of the seized currency was delivered by defendant Frank Head to defendants George Rogers and W. W. Wallace, Jr.

Conclusions of Law

1. Plaintiff, by virtue of the 1959 assessment, has a valid and subsisting tax lien in the amount of $11,305.75, plus interest as provided by law upon all property and rights to property, real and personal, of Sam A. Fiorella and Katherine Fiorella.

2. Such lien of the United States arose on the date of assessment, May 22, 1959. 26 U. S. C. 6322.

3. There was no effective assignment or pledge of the currency in question by defendants Fiorella and Agnesia to defendants Rogers and Wallace in March, 1959 or at any time prior to December, 1959.

4. Any claimed attorneys' lien of defendants Rogers and Wallace for services rendered defendants Fiorella and Agnesia in criminal proceedings in state court is subordinate to the asserted lien of the United States for taxes.

5. During the period of time pertinent to this case, there was a valid and subsisting partnership between defendants Fiorella and Agnesia, the interest of each being 80 per cent and 20 per cent, respectively.

6. The currency in question is an asset of such partnership.

7. The United States is entitled to recover 80 per cent of the amount presently in controversy, after deduction of $55.00 confiscated by state court order of December 18, 1959 , and costs of $10.15.

8. The United States is entitled to judgment for the difference between the amount recovered in this suit and the amount of the assessment.

Judgment

It is accordingly ORDERED, ADJUDGED and DECREED that the tax lien of plaintiff be and the same hereby is foreclosed upon the interest of defendant Sam A. Fiorella in the partnership.

It is further ORDERED that defendants George Rogers and W. W. Wallace, Jr. forthwith pay into the registry of this Court the sum of $4,788.28.

It is ORDERED that the Clerk disburse the sum paid in by his check, in the amount of $4,788.28 payable to Treasurer of the United States and delivered to the United States Attorney.

It is ORDERED, ADJUDGED and DECREED that the United States have and recover of defendants Sam A. Fiorella and Katherine Fiorella the sum of $6,530.42, representing the difference between the amount realized in this action and the amount of tax lien asserted.

It is ORDERED that costs herein be taxed against defendants.

 

 

[60-1 USTC 9455]In the Matter of American Zyloptic Co., Inc., Bankrupt

U. S. District Court, East. Dist. N. Y., In Bankruptcy No. 55413, 181 FSupp 77, 2/30/60

[1954 Code Sec. 6323(a)]

Priority of liens: Bankruptcy: Rights of chattel mortgagee.--If a chattel mortgage is junior only to a U. S. tax lien under local law, then the application of the Bankruptcy Act, which gives costs of bankruptcy admin istration and certain wage claims precedence over tax liens, should not serve to elevate the admin istration costs and wage claims above the rights of the chattel mortgagee. A bankruptcy referee's report, therefore, which gave those two classes of claims precedence over the chattel mortgagee, was ordered amended. Under the order of precedence decreed by the court, admin istration costs and wage claims were to be paid out of the amount of the U. S. tax lien, and this amount was given top priority; then the chattel mortgage was to be paid; and the balance, if any, was to be reapplied to the three classes of claims in the first group.

Jacob Frummer, for trustee. Cornelius W. Wickersham, Jr., United States Attorney, Brooklyn, N. Y., by Lawrence Levine, Assistant United States Attorney, for United States . Benjamin, Galton & Rob bins, 21 East 40th Street, New York, N. Y. (Edward Greenbaum, 285 Madison Avenue, New York, N. Y., of counsel), for Otarion Listener Corporation. I. Philip Sipser, 50 Broad Street , New York , N. Y. (Richard A. Weinmann, of counsel), for wage claimant.

BYERS, District Judge:

This petition to review the decision of Referee Castellano of December 31, 1959 is addressed solely to the order of priority to govern the distribution by the trustee in bankruptcy of $13,057.53 now in his hands.

The involuntary petition in bankruptcy was filed February 2, 1959 , about seven months after the dates referred to below.

[Question Is Priority of Tax Lien]

The question arises under Section 67(c) of the Bankruptcy Act (11 U. S. C. 107(c)), the presently material provision of which is:

"Where not enforced by sale before the filing of a petition initiating a proceeding under this Act and except where the estate of the bankruptcy is solvent: (1) though valid against the trustee under subdivision b of this section, statutory liens, including liens for taxes or debts owing to the United States or to any State or any subdivision thereof, on personal property not accompanied by possession of such property, and liens, whether statutory or not, of distress for rent shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 of this Act."

Also Section 64 which ordains priority as follows:

"Debts Which Have Priority. a. The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment, shall be (1) the actual and necessary costs and expenses of preserving the estate subsequent to filing the petition; . . .. (2) wages and commissions, not to exceed $600 to each claimant, which have been earned within three months before the date of the commencement of the proceeding . . .."

The said decision provides on this subject:

"1. Administration expenses including fees due referees' salary and expense funds, amounts to be fixed, to be paid in full.

"2. Thirty six claims for wages to be paid in full, wage claims total $2389.60.

"3. Tax lien of the District Director of Internal Revenue, District of Lower Manhattan $6007.30 to be paid in full.

"4. The balance then remaining to be paid to Otarion Listener Corp. on account of its chattel mortgage lien of $5000.00 and interest."

The petitioner is Otarion Listener Corporation (Otarion) the holder of a chattel mortgage in the sum of $5,000.00 given to secure promissory notes amounting to that sum.

The filing date was June 20, 1958 and the validity of the mortgage is not in question.

Eight days earlier (June 12, 1958) the Director of Internal Revenue duly filed a notice of tax lien in the sum of $6,007.30 against the bankrupt, the priority of which, as a matter of law, over the chattel mortgage is conceded by Otarion.

$2,050.23, representing the difference between the total of the first two items and the trustee's balance, is insufficient to pay the admin istration expenses and the wage claims; thus the question for decision becomes whether those items must be paid before any sum can be allocated to the chattel mortgage.

[Mortgagee's Contention]

The petitioner's argument is that the decision of the Referee subordinates the chattel mortgage to the admin istration and wage claims, solely as the result of the presence of the tax lien; if there were none, the lien of the chattel mortgage would come first in the order of distribution, and that the result of the interposition of the tax lien is a fortuitous circumstances which is not seen to create the inevitable consequence of subtracting from the chattel mortgage lien all that the Referee's decision involves.

To stress the contention, it is urged that conceivably the tax lien could be in a nominal sum, such as $10.00, and in such circumstances the admin istration and wage claims should not be promoted out of the order which they would have occupied had no tax lien whatever been filed.

That the question of circuity of lien is not free from difficulty appears from the discussion in the opinion of the case upon which the Referee relies: In re Quaker City Uniform Co., Inc., 238 F. 2d 155, at 158 and 159 and footnote 6. See also Collier, 14th ed., Vol. 4, pp. 296 and 297.

It is not urged for Otarion that its chattel mortgage constituted a statutory lien and it is therefore not here so regarded.

Since neither the Collector nor Otarion enforced a lien before the filing of the petition in bankruptcy, and since there was no lien "of distress for rent," the only lien here involved falling within the precise wording of Section 67c is that for United States taxes, and it is that lien which in terms is subordinated to admin istration expenses and wage claims.

[Discussion of Tax Lien "Circuity"]

Therefore in effect to insert into the text of the Act, "or a valid lien created by chattel mortgage upon the property of the bankrupt" or similar text, would be to accomplish an amendment to the law. Whether that can be wrought with propriety under the guise of construing the statute as applied to a given state of facts, is to suggest an inquiry touching the true function of the courts, which has engendered much controversy.

The court in Quaker City meets the dilemma thus (p. 159):

"In view of the fact that Congressional intent was to favor expenses of admin istration and wage claims' (see p. 158, top of second column) "while leaving state priorities unaffected, we hold that the lien of the chattel mortgage, inferior under state law," (i.e., to landlord's lien under Pennsylvania law) "is by necessary implication postponed by Section 67, sub. c, to a position behind the subordinated landlord's lien. Thus, the order of payment becomes: (1) costs of admin istration; (2) wage claimants; (3) landlord; and (4) chattel mortgagees. * * *"

This quotation indicates that the decision does not in terms adjudicate that the presence of a Federal tax lien necessarily subordinates a chattel mortgage to admin istration expenses and wage claims. It is true, however, that the liens created by Pennsylvania law present in that case, may be regarded as analogous to the one here involved, for the purpose of establishing priority in distribution.

It has been said that Congress had in mind the general purpose of providing that those two claims should have priority over any others, in the distribution of a bankrupt's assets; whether that is entirely true, however, cannot be stated with assurance. See the discussion in Goggin v. California etc., 336 U. S. 118 [49-1 USTC 9142] and footnotes.

The present difficulty is that the Congressional purpose was not so clearly stated as to leave no room for doubt. It is a plausible suggestion that having mentioned certain liens as being subordinate to admin istration and wage claims, all others are excluded by necessary implication. That is, the principle of expressio unius etc. may be of assistance in the present task. This would attribute a deliberate, albeit indirect, purpose to the legislative process. Reference to what has been written in the authorities herein referred to, concerning the legislative preoccupation with the impact of accumulated tax liabilities--including penalties--upon admin istrative cost and the claims of wage earners, lends weight to the argument that it was tax liens that were mainly thought to interfere with an equitable distribution of funds in bankruptcy, rather than all liens which had a valid inception and a legal status. In other words, that Congress deliberately selected the liens that were to be subordinate to these particular claims, and refused to deal similarly with liens not specifically enumerated.

The problem was alluded to in California State Department of Employment v. United States, 210 F. 2d 242 at 244 [54-1 USTC 9218], under circumstancies that involved only a question of priority between the State of California and the United States . The former asserted a claim under the Unemployment Insurance Act, fortified by possession which was later in time to the filing of the lien of the United States for Federal taxes. Thus decision was required as to priority between liens, as to which the court says, quoting Collier:

`* * * 67 (sub.) c. does not, nor does any other provision of the Bankruptcy Act for that matter, set up any scheme of priorities among liens.'"

The court decided that the priority of the United States lien was not defeated by the possession taken by the State authority. Thus:

"To insure payment of admin istrative expenses and wage claims Congress decided to subordinate statutory liens to a limited extent, that is, to unsecured claims having a first and second priority under 64, sub. a." (Citing Collier.) "We find no suggestion that Congress intended by 67 sub. c to permit a subordinate lienholder" (State of California ) "who secures possession of personal property prior to bankruptcy to thus place himself in a superior position to an otherwise prior and superior lienholder."

That precise issue is not in that case, for Otarion did not seek to take possession under its chattel mortgage at any time. Thus the question of priority resolved in that case is absent here; the direction that the amount due to the Government be set aside from the proceeds in the hands of that trustee, and deductions be made therefrom for admin istration and wage claims and the remainder, if any, be applied to the State tax lien (Otarion's mortgage, here) is perhaps helpful.

City of New Orleans v. Harrell, 134 F. 2d 399, is of no assistance here, since it decided that a chattel mortgage valid under Louisiana law, would not be subordinated to the claim of the City which rested upon an inchoate lien for taxes which was incomplete before bankruptcy. That trustee proposed to distribute by paying from funds realized from the sale of bankrupt's property, two chattel mortgage creditors, and the net balance on account of admin istration costs; this would leave nothing for wage claims, or the City's tax claim. This distribution was approved by the district and appellate courts.

There seems to be no decision by the Second Circuit Court of Appeals which would resolve the dispute presented by this record, and the acceptance by the Referee of the decision in Quaker City as dispositive of the controversy is not the subject of present criticism, although it is not followed.

I do not think that the purose of Congress is so clearly to be discerned as to all liens that must be dealt with under Sec. 67c in view of all that has been written, that this court would be justified in reading into the statute, as by necessary implication, that which is not clearly stated.

The process of subjecting liens, validly created, to the priorities which have been discussed, is so important to the commercial interest involved in all credit operations, that the course of circumspect adjudication is thought to require adherence to what has been written rather than what might have been, had a more comprehensive purpose of legislation been envisaged.

This means that the petition to review is granted, and that the order of distribution should be amended so as to provide:

1. The sum of $6,007.30, the equivalent of the amount due under the Federal tax lien, should be applied to:

(a) admin istration expenses, to be fixed;

(b) wage claims;

(c) the Federal tax lien, in that order.

2. The sum of $5,000.00, plus interest as allowed, to Otarion Listener Corporation, as chattel mortgagee.

3. The balance remaining to be applied. in the order of priority stated in "1" namely, to absorb any possible unpaid balance of admin istration expenses and wage claims. and whatever is left is to be applied to the Federal tax lien.

The foregoint is based upon the suggestion found at page 298 of Vol. 6 of Collier, 14th ed.

Settle order.

 

 

[60-1 USTC 9416]United States of America, Plaintiff v. B. D. Richardson; Union Oil Company of California; D. L. Lemon; State Unemployment Compensation Commission of the State of Oregon, Defendants

U. S. District Court, Dist. Ore., Civil No. 159-59, 3/22/60

[1954 Code Sec. 6323(a)]

Liens: Priority: Attorneys' fees of interpleader.--The attorneys' fees of an interpleading stake holder were allowed out of funds which were subject to the lien of the United States for delinquent taxes and further subject to the claim of another creditor. There was just cause for the interpleader to refuse to pay over money it held until the relative rights of the government and the other creditor were settled, and the legal fees were necessary and reasonable.

C. E. Luckey, United States Attorney, and Harold E. Patterson, Assistant United States Attorney, United States Courthouse, Box 1150, Portland 7, Ore., for plaintiff. D. L. Lemon and Wilber Henderson, 925 Failing Building, Portland 4, Ore., and Williams & Alley and David R. Williams, 1212 Failing Building, Portland 4, Ore., for defendant.

Opinion

SOLOMON, Judge:

I am of the opinion that the Union Oil Company is entitled to an attorneys' fee of $250.00 for the services of its attorneys in filing the interpleader in this case. It was merely a stake holder and had just cause to refuse to pay over the money either to the Government or to the defendant D. L. Lemon, because each had conflicting claims which were not resolved until the pre-trial order was entered. In view of the differences in the amounts of the recoveries from this fund, the attorneys' fee is to be divided as follows: $200.00 out of the share due the plaintiff, and $50.00 out of the share due the defendant.

The attorneys for the Government shall prepare appropriate findings and a judgment showing the amount of its claim and the amount to be paid from the funds on deposit, the amount of Lemon's judgment and the amount to be paid him, the allowance of an attorney's fee to the attorneys for Union Oil Company of California and its allocations, and the fact that the claims of the Government and Lemon are superior to those of Richardson and the State Unemployment Compensation Commission of the State of Oregon, both of whom are in default.

Findings of Fact and Conclusions of Law

The above-entitled suit has been submitted to the Court on briefs. Plaintiff appeared by and through Harold E. Patterson, Assistant United States Attorney for the District of Oregon; defendant D. L. Lemon appeared by and through Wilber Henderson; defendant Union Oil Company of California appeared by and through David Williams of the law firm of Williams and Alley; and the defendants B. D. Richardson and State Unemployment Compensation Commission of the State of Oregon neither appeared personally nor by counsel. A pretrial order was submitted to the Court, approved by the appearing parties above-named, and said order was signed and entered herein. The Court now being fully advised in the premises hereby makes its

Findings of Fact

I. This suit is brought, and the jurisdiction of this Court is founded upon the fact that the United States of America is a party plaintiff herein, and the suit was authorized by the Commissioner of Internal Revenue and brought at the direction of The Attorney General of the United States .

II. Defendants B. D. Richardson and D. L. Lemon are citizens of the United States residing at Arlington, Oregon; the defendant State Unemployment Compensation Commission of the State of Oregon is a governmental agency of the State of Oregon with principal offices at Salem, Oregon; and the defendant Union Oil Company of California is a corporation with offices and a place of business in the State of Oregon and doing business in the State of Oregon.

III. The defendants B. D. Richardson and State Unemployment Compensation Commission of the State of Oregon made no appearance, by counsel or otherwise, in this suit and are in default.

IV. The defendant Union Oil Company of California is holding, for the account of defendant B. D. Richardson, the sum of $2,188.08 due defendant B. D. Richardson from defendant Union Oil Company of California arising under a contract for the construction by defendant B. D. Richardson of a marketing station at John Day, Oregon, and the further sum of $285.32 under a contract for the construction by defendant B. D. Richardson of service station facilities at Blalock, Oregon.

V. That between June 15, 1956 and September 1957, the defendant B. D. Richardson became indebted to the United States of America for delinquent taxes in the principal amount of $4,954.52 and in December of 1957 for delinquent taxes in the additional principal amount of $66.36 for a total principal amount of $5,020.88, together with interest and other statutory additions, all of which said tax liens were filed of record in Gilliam County, Oregon; and after demand, and to partially secure the indebtedness defendant B. D. Richardson, on October 14, 1957, executed in favor of the United States of America an assignment of the first $1,633.00 owing or to be owed to defendant B. D. Richardson by defendant Union Oil Company of California arising from the John Day contract.

VI. On April 28, 1957 defendant B. D. Richardson became indebted to defendant D. L. Lemon in the sum of $795.00 for advance insurance premiums and to secure the indebtedness defendant B. D. Richardson, on October 14, 1957, executed an assignment in favor of defendant D. L. Lemon of the second $795.00 owing or to be owed to defendant B. D. Richardson by Union Oil Company of California from the John Day contract.

VII. The claims of the plaintiff United States of America and defendant D. L. Lemon to the funds held by defendant Union Oil Company of California for the account of defendant B. D. Richardson are superior in time and right to the claims of defendants B. D. Richardson and State Unemployment Compensation Commission of the State of Oregon to the said funds.

 

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