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VIII. Defendant Union Oil Company of California , by reason of the disputed claims to the funds held by them for the account of defendant B. D. Richardson necessarily had performed for it by the law firm of Williams and Alley legal services in the reasonable value of $250.00.

From the foregoing Findings of Fact the Court has reached and does make the following

Conclusions of Law

I. This Court has jurisdiction of the parties and subject matter of this suit.

II. The plaintiff United States of America is entitled to judgment against the defendant B. D. Richardson in the principal sum of $5,020.88 and the further sum of $733.39 interest together with interest on the total of principal and interest at the rate of 6% per annum from and after date of judgment.

III. The defendant D. L. Lemon is entitled to judgment against the defendant B. D. Richardson in the sum of $795.00, together with interest thereon at the rate of six per cent per annum from April 28, 1957 , until paid.

IV. The plaintiff United States of America is entitled to receive from defendant Union Oil Company of California the sum of $285.32 comprising the entire Blalock contract balance due defendant B. D. Richardson from defendant Union Oil Company of California, and the sum of $1,633.00 arising out of the John Day contract, less the sum of $200.00 which shall be retained by defendant Union Oil Company of California as and for attorneys' fees, to-wit: the total sum of $1718.32, and said sums to be received by plaintiff United States of America from defendant Union Oil Company of California shall be credited against its judgment against defendant B. D. Richardson.

V. Defendant D. L. Lemon is entitled to receive from defendant Union Oil Company of California the balance of the John Day fund, or the sum of $555.08 less the sum of $50.00 which shall be retained by defendant Union Oil Company of California as and for attorneys' fees, to-wit: the net sum of $505.08, which said net sum to be received by defendant D. L. Lemon shall be credited against his judgment against defendant B. D. Richardson.

 

 

[60-1 USTC 9116]In the Matter of Vogue Bag Co., Inc., Bankrupt

U. S. District Court, East. Dist. N. Y., No. 54727, 10/6/59

[1954 Code Sec. 6321]

Liens for taxes: Priority over admin istration and wage claims in bankruptcy: Levy on interest in factored accounts.--A U. S. lien for $3,840.64 in taxes had priority over admin istration and wage claims in bankruptcy where notice of tax levy was served, before bankruptcy of the taxpayer, upon a factor, in an attempt to reach taxpayer's interest in factored accounts receivable, at a time when there was no amount due the taxpayer from the factor. Because the Court regarded this as a case of novel impression, decision upon original presentation [59-1 USTC 9131] was postponed pending a report on the availability of sufficient funds in the bankrupt's estate to pay all claims since a finding of sufficient funds would have made it unnecessary to make the above decision.


[R. S. Sec. 3466]

Withholding taxes: Bankruptcy: Priority in admin istration: Tax claim as wage claim.--The Government's claim in bankruptcy to priority status, under Sec. 64(a)(4) of the Bankruptcy Act, for delinquent withholding taxes in the amount of $3,153.71, the Government asserting equitable wage claim status for such taxes, was denied on the ground that any enlargement of the word "wages," under Sec. 64(a)(2) of the Act, calls for Congressional action.

Alexander H. Rockmore, 570 7th Ave. , New York , N. Y., for trustee. Cornelius W. Wickersham, Jr., United States Attorney, by Irving L. Innerfield for the District Director of Internal Revenue, Brooklyn .

Referee's Memorandum and Order

CASTELLANO, Referee in Bankruptcy:

The District Director of Internal Revenue Brooklyn, hereinafter referred to as Director, filed a claim for taxes herein on May 28, 1958 , in the amount of $10,014.07. The trustee filed objections thereto on January 21, 1959 , and the trustee objects to classification of part of Director's final amended claim as a wage claim. Under order dated April 9, 1959 , the trustee paid to the Director a part of his claim to the extent of $3,840.64, the amount due the Director under a Levy made prior to the bankruptcy, upon the R. H. Herman & Co. Inc., the factor for the bankrupt. The Director filed a final amended claim on September 21, 1959 .

Upon the adjourned hearing on the objection held on September 23, 1959 , the Director and the trustee entered into and filed a Stipulation dated September 23, 1959 , which provides in addition to other matters:

The final amended claim of the Director dated September 21, 1959, sets forth the total amount of taxes now due from the bankrupt is the sum $5,532.54, for withholding and F. I. C. A. taxes, plus interest, for the fourth quarter of 1957, and the first quarter of 1958.

The Director asserts a wage claim priority as to a part of his claim to the extent of $3,153.71, as representing an assignment of wages from workmen for wages earned within three months of the filing of the petition in bankruptcy, for the first quarter of 1958. Sec. 64(a)(2) Bankruptcy Act.

The petition in bankruptcy was filed March 21, 1958.

[Withheld Taxes as Wage Claim]

That the sum of $3,153.71 consists of withheld wages $1,694.50, withheld employees' contributions F. I. C. A. $729.61 and Employer's contributions F. I. C. A. $729.61. This part of the claim in the total sum of $3,153.71 is based upon wages earned within 3 months of the bankruptcy, and that of said amount of $3,153.71, the allocable share relating to any one workman does not exceed $600.00.

Under the Stipulation as amended by letter from the United States Attorney dated September 29, 1959, it is conceded by the Director that the balance of its claim to the extent of $2,375.73 plus interest of $3.10, should be allowed only as general priority tax claim under Section 64(a)(4) of the Bankruptcy Act, as the final amended claim states that the lien asserted thereunder did not arise until March 31, 1958, a date after the bankruptcy.

No lien is asserted by the Director as to the 1958 first quarter tax, as the lien arose June 27th 1958, after the bankruptcy. The sole issue is whether the part of the claim, to the extent of $3,153.71 is entitled to priority and payment as a wage claim under Section 64(a)(2), of the Act, or whether this amount should be allowed as a general priority tax claim under Section 64(a)(4) of the Bankruptcy Act, payable in the order fixed by Subdivision 4.

It is agreed that the estate is ready for distribution. Administration expenses have not been paid.

The trustee's report dated and filed September 28, 1959, shows a balance in the estate of $5,989.47.

Wage claims and tax claims have been filed and allowed as follows:

Claims for wages .........................         $ 694.00

City of 

New York Excise Tax

 claim ........           401.45

State Tax Commission, 

New York

 ...........            59.63

New York State Department of Labor,

Div. of Employment .......................         1,546.77

District Director of Internal Revenue


Brooklyn
 .................................         5,532.54

 

The balance in the estate is insufficient to pay commissions of the trustee, the allowance to be made to his attorney, other admin istration expenses, wage claims and tax claims in full.

[Priority Status Sought]

If the claim of the Director to the extent of $3,153.71 is classified and allowed as a priority claim for wages under Subdivision 2 of Section 64(a) of the Act, the order of payment provided for by Section 64(a), will require its payment in full. The Government is seeking a priority status superior to the tax claim priority fixed by Subdivision 4 of Section 64(a) of the Act.

The debts which have priority in advance of payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment, are set forth in Section 64 of the Bankruptcy Act, 11 U. S. C. 104.

[Theory of Equitable Assignment]

The burden of establishing any debt as one entitled to priority and its order of payment rests upon the party asserting the claim for priority. The Director bases his request for the allowance of his claim to the extent of $3,153.71, as this amount represents an "Assignment" of wages from workmen for wages earned within 3 months of the Bankruptcy. The Director proceeds on the theory of an equitable assignment. The Director also requests that this claim be allowed as an admin istration expense claim under Section 64(a)(1) of the Act.

Priority claims cannot be allowed unless the debts upon which the claim is asserted comes clearly within the particular subdivision of the statute. The withholding taxes involved cannot be classified as claims for wages entitled to the priority fixed by Section 64(a)(2) of the Bankruptcy Act. They are tax claims arising under the Internal Revenue Code entitled to the priority status fixed under Section 64(a)(4) of the Bankruptcy Act, and payable in the order fixed by the statute.

[Enlargement of Term "Wages"]

Any enlargement of the term "wages" under Section 64(a)(2), so as to include taxes withheld should be left to Congressional action through an amendment to the Act. (Local 140 Security Fund v. Hack, 242 F. 2d 376, 2nd Cir., cert. den., 355 U. S. 833.)

Order

Upon the final amended claim of the District Director of Internal Revenue Brooklyn, filed herein on September 22, 1959, upon the objections of the trustee filed as to the original claim of the District Director, upon the Stipulation of the District Director of Internal Revenue and the trustee dated September 23, 1959, as amended by letter from the United States Attorney dated September 30, 1959, upon the minutes of the hearing held September 23, 1959, and upon the application of the Director included in the Stipulation, it is

ORDERED that the application of the Director for payment of part of his claim to the extent of $3,153.71, as an Administration claim, be denied, and it is further

ORDERED that the application of the District Director of Internal Revenue Brooklyn, to have part of his claim for the first quarter 1958, F. I. C. A. and withholding taxes, to the extent of $3,153.71, allowed as a priority claim for wages, (payable after admin istration expenses), be, and the same is hereby denied, and it is further

ORDERED that the entire amended claim of the District Director of Internal Revenue Brooklyn, filed September 22, 1959, in the sum of $5,532.54 be, and the same is hereby allowed as a claim for taxes due the United States and payable as a tax claim under Section 64(a)(4) of the Bankruptcy Act.

 

 

[59-2 USTC 9689]The Arthur Company, a Partnership, 122 Western Avenue, Akron, Ohio, Plaintiff v. Chicago Paints, Inc., 4500 West 14th Street, Chicago, Illinois, Northern Minnesota National Bank of Duluth, Alworth Building, Duluth 2, Minnesota, Northland Paint Company, Inc., 105 Grant Avenue, Eveleth, Minnesota, Defendants, and the United States of America, Intervenor

U. S. District Court, Dist. Minn., 5th Div., No. 5-58 Civil 79, 175 FSupp 50, 8/15/59

[1954 Code Sec. 6323]

Lien for taxes: Priority: Materialmen and bank assignments.--It is held that the lien of the United States for assessed withholding and FICA taxes had priority over the claims of a supplier of materials and bank loans. Although, prior to the assessments, a customer of the taxpayer had issued two checks payable to taxpayer with the understanding that they would go to the supplier of the materials, they were retained by the taxpayer in its bank account, and the supplier neither filed a materialman's lien nor reduced its claim to judgment. The bank had financed the taxpayer, taking assignments of accounts receivable as security for an open line of credit. Although, prior to the assessment date, the bank had a schedule of accounts for work completed and in progress, this assignment was unperfected as a basis for priority, and became subordinate to the tax liens of the United States. The bank was not a "purchaser" or mortgagee. Since the assessed taxes exceeded the amount paid to the court for determination of priority of claims, the United States is entitled to the full amount.

Larson, Loevinger, Lindquist & Fraser, by Gerald E. Magnuson, Midland Bank Building, Minneapolis, Minn., for defendant Chicago Paints, Inc. Nye, Montague, Sullivan & McMillan, by Craig P. Gilbert, 1200 Alworth Building, Duluth 2, Minn., for defendant Northern City National Bank of Duluth (formerly Northern Minnesota National Bank of Duluth). Fallon Kelly, 221 Federal Courts Building , United States Attorney, by William S. Fallon, Assistant United States Attorney, St. Paul 2, Minn. , for The United States of America , Intervenor.

Memorandum Order ( 7/18/59 )

DONOVAN, District Judge:

This proceeding, commenced in the Northern District of Ohio and venue transferred here, is in the nature of a bill of interpleader 1 to determine which of several claimants are entitled to the sum of $9,071.13 paid by plaintiff into the registry of the Court.

[Priority of Lien for Taxes]

Defendants have answered and each of them claim they are entitled to all or a part of said sum, excepting Northland Paint Company, which alleges the United States has priority. Following joinder of issues and by agreement of the parties the action as to plaintiff was dismissed.

The United States has intervened 2 claiming all of the fund deposited as subject to a lien for taxes past due.

The parties, in the order named in the caption, will hereinafter, for brevity, be referred to as Arthur, Chicago , the Bank, Northland and Intervenor, and as the claimants, when referred to collectively.

The basic facts were stipulated by counsel at a pretrial conference held on May 19, 1959. Brevity will be served by a summary thereof.

It is undisputed that this controversy arises out of the performance of contracts executed in 1956, whereby Northland agreed to paint certain structures in northeastern Minnesota for Arthur, and to sell Arthur a certain quantity of paint therefor. Northland has been paid all sums due in connection therewith except a balance of $9,071.13, which plaintiff Arthur deposited in the registry of this Court after Northland became financially involved. This fund is the bone of contention in the instant case.

[Assignment to Bank as Security for Indebtedness]

Since 1954, the Bank had been financing Northland and taking assignments of accounts receivable from time to time as security for an open line of credit. Notes were executed each time money was borrowed. Under the arrangement Northland had separate accounts at the Bank, a regular and a collateral account. All checks in payment for services performed by Northland were deposited in the collateral account. The regular account contained only sums loaned to Northland by the Bank. At no time were any funds shifted from the collateral account to the regular account.

As general assignments were executed by Northland they were accompanied by lists of work in progress for which customers had not been billed, as well as by accounts receivable. Attached to assignments of October 9, 1956, November 7, 1956, December 31, 1956, and January 31, 1957, were the schedules reflecting the accounts receivable or to become receivable from Arthur. On March 9, 1957, the Bank notified Arthur that it had "an assignment from Northland as security for indebtedness." The Bank's claim herein is predicated upon this assignment.

[ United States Is Intervenor]

Intervenor bases its rights upon specific tax liens arising from assessments for withholding and F. I. C. A. taxes made against Northland by the District Director of the Internal Revenue Service. Liens were perfected by the assessments made on March 6, 1957, and April 29, 1957. Each was followed by notice of assessment and demand for payment issued to the taxpayer. Notices of lien were filed. A balance of $3,963.52 is due on the first assessment and the latter amounting to $22,367.77 is unpaid.

[Material Supplier's Claim]

Chicago , as a supplier of materials, furnished and delivered to Northland between September 28, 1956, and November 2, 1956, paint and materials used by Northland in the housing project at Babbitt and Silver Bay , Minnesota , for the agreed price equal to Chicago 's claim of $5,786.40. On December 18, 1956, and prior to notice by the Bank to Arthur of its assignment, Arthur issued two checks totalling $5,700.00, earmarking one for " Silver Bay material" and the other for "Babbitt material." Said checks were made payable to Northland and deposited in the collateral account at the Bank, although correspondence from Arthur indicated the sums were intended ultimately to go to the material supplier.

[Order of Priority of Claims]

The sole issue for determination in the case at bar is the question of priority as between the three claimants.

The respective priority between the claimants is governed by 26 U. S. C. A., Section 6323(a), Internal Revenue Code of 1954:

"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."

[Supplier's Claim]

Is the claim of Chicago entitled to priority?

Chicago bottoms its claim to priority on its contention that it was the supplier of the materials that went into the housing project. There is no serious denial that it furnished the material for the particular painting job performed. It also stresses the undenied fact that Arthur earmarked two checks made payable to Northland by Arthur indicating the jobs for which the paint furnished by Chicago was used. This is an indication that Arthur was advising the Bank of its wish to get these two payments ultimately to Chicago . Unfortunately, the Bank was not legally required to pay heed to such writing on the face of the Checks. 3 Chicago could have had recourse to the Minnesota law that would protect it in so far as possible through the filing of a materialman's lien, 4 or reducing its claim to judgment against Northland. It did neither.

The cases Chicago cites in support of its contention that Northland had no property right in the portion of the fund sought by Chicago are inapplicable. Nothing in the pleadings 5 or facts stipulated herein indicates that Arthur was in any way obligated to Chicago rather than Northland. There is no evidence of a contractual duty imposed upon Arthur that established any prior rights in Chicago . Suffice to say that any equities Chicago has by what it was or did as a supplier are subject to controlling pre-existing liens or property rights. The Court rules Chicago is not entitled to priority and that its equities are secondary to the claims of the Intervenor.

[Bank's Claim]

Did the Bank's arrangement with Northland and its practice and conduct in connection therewith satisfy the exception in the quoted statute and thereby create a choate and perfected right of property superior to that of the Intervenor?

The majority opinion in the case of United States v. Ball Construction Company, 355 U. S. 587 6 [58-1 USTC 9327], opposes the Bank's claim that it was first in time and hence first in right. See United States v. New Britain , 347 U. S. 81, 85 [54-1 USTC 9191], for a discussion of the ancient principle of "first in time is the first in right." The Bank's claim is based on instruments which remained unperfected as a basis for priority. 7 Thus it became subordinate to the Intervenor's tax liens. Counsel for the Bank would distinguish the Ball case from the instant case because it is contended that here "the assignment was for a full valid present consideration." Mr. Justice Whittaker, speaking for the minority, makes obvious that all of this was considered in the conference room of the Court. The dissent at pages 593-594 emphasizes that:

"* * * under the law and the facts in this record, the 'assignment' was in legal effect a 'mortgage' and inasmuch as it antedated the filing of the federal tax liens it was superior to them under the expressed terms of 3672(a). * * * The fact that the assignment was of property to be afterwards acquired did not affect its validity as a 'mortgage,' * * *. The questioned assignment conveyed to the surety all sums then due and thereafter to become due * * * as security for the payment * * *, * * * the assignment was in legal effect a mortgage, * * * perfected on its date, in all respects choate * * * [and it] antedated * * * the federal tax liens [and hence is] superior to those liens. * * *."

In First State Bank of Medford v. United States (D. C. Minn.), 166 F. Supp. 204 [58-2 USTC 9758], this Court, by Chief Judge Nordbye in construing the Ball case, held that "an assignment [does not constitute] a mortgage within the meaning of" the notice filing provision.

The Bank insists that it is entitled to the status of "purchaser" by reason of the loan and assignment. The Supreme Court has said that "a purchaser within the meaning of Section 3672 [now 6323(a)] usually means one who acquires title for valuable consideration in the manner of a vendor and a vendee." 8

This Court is convinced that the Bank's security transaction has failed to meet the test laid down by law for preference over a federal tax lien. Failure to meet such requirement must result in denial of priority to the competitor. The dissent in the Ball case makes clear that the majority opinion recognized the danger of continuing the "general and unperfected lien" doctrine because of its effect on legitimate commercial transactions.

[Federal Question]

The relative priority of claims, such as those of the instant case, where one is for unpaid taxes due the government, is always a federal question and in the case now before the Court, I hold the claims of Chicago and the Bank as unperfected and inferior to the claim of the United States.

All briefs in chief and in reply submitted as agreed by the parties have been studied by the Court. The references cited therein supporting contentions opposed to the conclusion reached by the Court in this Memorandum are readily distinguished from the instant case.

Intervenor may submit findings of fact, conclusions of law, order for judgment and form of judgment.

Exceptions are allowed.

Findings of Fact, Conclusions of Law and Order for Judgment (8/15/59)

The above cause came on before this Court on May 19, 1959, at which time the facts were submitted to the Court by written stipulation.

The following appearance were made:

Larson, Loevinger, Lindquist & Fraser by Gerald E. Magnuson, Minneapolis , Minnesota ; attorneys for defendant, Chicago Paints, Inc.;

Nye, Montague, Sullivan & MacMillan, by Craig P. Gilbert, Duluth, Minnesota; attorneys for defendant Northern City National Bank of Duluth (formerly Northern Minnesota National Bank of Duluth);

Fallon Kelly , United States Attorney for the District of Minnesota, by William S. Fallon, Assistant United States Attorney, St. Paul , Minnesota , for the United States of America , Intervenor.

The Court having considered the evidence and the briefs submitted and upon all of the files, records and proceedings herein, in addition to the Findings of Fact, Conclusions of Law, set forth in its Memorandum Order of July 18, 1959, makes its following:

Findings of Fact

I. This action was commenced in the United States District Court for the Northern District of Ohio by the plaintiff, The Arthur Company, on November 8, 1957; subsequent thereto, on motion of the defendant, Northern City National Bank of Duluth, for change of venue, no objection being made, the action was transferred to this Court, and, subsequent thereto, the United States of America pursuant to leave of Court filed its Complaint of Intervention.

II. This proceeding is authorized by Section 1335, Title 28 United States Code, and is in the nature of a bill of interpleader to determine which of several claimants is entitled to the sum of $9,071.13. Said sum having been deposited in the registry of the Court and upon Stipulation and Order of the Court, The Arthur Company was released and dismissed from the case.

III. This Court has jurisdiction of this action by reason of Title 28 United States Code, Section 1335, and further, by reason of the intervention of the United States of America under Title 28 United States Code, Section 1345.

IV. On or about September 8, 1956, The Arthur Company, hereinafter referred to as Arthur, entered into an agreement with the Northland Paint Company, hereinafter referred to as Northland, whereby Northland agreed to paint certain houses at Babbitt, Minnesota, and Silver Bay, Minnesota. This agreement was later amended to provide for the payment to Northland of the sum of $415 per house painted by Northland. Pursuant to the terms and conditions of the contract, the total amount to be paid Northland by The Arthur Company was $31,125.

V. In October, 1956, Arthur ordered from Northland certain paint at an agreed price of $2,956.20.

VI. At the time this action was commenced, The Arthur Company had paid to Northland $25,010.07 so that the sum of $9,071.13 was remaining due and owing to Northland from Arthur under the contract and for the paint purchased by Arthur, and that that amount has been deposited in the registry of the Court by Arthur and is the subject matter of this lawsuit.

VII. Since 1954 the Northern City National Bank of Duluth, hereinafter referred to as the Bank, had been financing Northland and taking assignments of accounts receivable as security for credit extended by Bank. On May 13, 1954, and periodically thereafter, Northland borrowed funds from the Bank, executing certain notes for the funds so borrowed which were secured by the assignment by Northland of its accounts receivable. Under this arrangement the Bank maintained three separate accounts for Northland: A collateral account into which all deposits were placed, a regular account into which monies loaned by the bank were placed, and a payroll account into which funds from the regular account were transferred. All monies received by the Bank from Northland were deposited in the collateral account. The only funds in the regular account were sums loaned by the Bank to Northland, and at no time were any funds transferred from the collateral account to the regular account. None of the monies so received by the Bank are involved herein.

VIII. On the occasion of each loan Northland executed an assignment of accounts receivable and attached thereto a list of the accounts receivable and the work then in progress.

IX. (a) On October 9, 1956, Northland assigned to the Bank all funds then due under its contract with Arthur; there was then due Northland from Arthur on the contract $12,591.

(b) On November 7, 1956, Northland assigned to the Bank all funds then due under its contract with Arthur; there was then due Northland from Arthur on the contract $21,728.

(c) On December 31, 1956, Northland assigned to the Bank all funds then due under its contract with Arthur; there was then due Northland from Arthur on the contract $28,900.

(d) On January 31, 1957, Northland assigned to the Bank all funds then due under its contract with Arthur; there waas then due Northland from Arthur on the contract $20,900.

X. Any right, title, interest or claim in or to the fund of $9,071.13 deposited in the registry of this Court which the Bank may have is and at all times has been inchoate and unperfected.

XI. On March 6, 1957, an assessment against Northland in the amount of $18,906.78 was made by the United States of America by the District Director, Internal Revenue Service, for withholding taxes and F. I. C. A. taxes, penalties and interest for the taxable period ending December 31, 1956. Notices of such assessments and demands for payment were duly issued to Northland on March 6, 1957. Due and proper notice of federal tax lien with respect to this assessment was filed April 9, 1957, with the Clerk, United States District Court, St. Paul, Minnesota. The sum oif $14,943.26 has been paid on this assessment and a balance of $3,963.52 is presently owing.

XII. On April 29, 1957, a further assessment against Northland in the amount of $22,367.77 was made by the United States of America by the District Director, Internal. Revenue Service, for withholding taxes, F. I. C. A. taxes, penalties and interest for the taxable period ending March 31, 1957. Notices of such assessment and demands for payment were duly issued to Northland on April 29, 1957. Due and proper notice of federal tax lien with respect to this assessment was filed May 3, 1957, with the Clerk, United States District Court, St. Paul, Minnesota, and on September 6, 1957, with the Register of Deeds, St. Louis County, Minnesota. The entire amount so assessed remains unpaid.

XIII. Chicago Paints, Inc., hereinafter referred to as Chicago , as a supplier of paints and paint materials, furnished and delivered to Northland between September 28, 1956, and November 7, 1956, paint materials of a value of $2,908.70 for the work Northland was doing under its contract with Arthur at Babbitt , Minnesota . None of these materials has been paid for.

XIV. Chicago between September 27, 1956, and November 6, 1956, furnished additional materials to Northland of a value of $2,877.70 for work Northland was doing under its contract with Arthur at Silver Bay , Minnesota . None of these materials has been paid for.

XV. Any right, title, interest or claim in or to the fund of $9,071.13 deposited in the registry of this Court which Chicago may have is and at all times has been inchoate and unperfected.

Conclusions of Law

I. This Court has jurisdiction of the present action by reason of Title 28 United States Code, Sections 1335 and 1345.

II. The sum of $9,071.13 deposited by The Arthur Company into the registry of the Court constitutes property or right to property of the Northland Paint Company within the meaning of Section 6321, Title 28 United States Code.

III. Pursuant to Section 6321, Title 26 United States Code, the United States of America by its assessments of taxes, penalties and interest described in Findings Numbers XI and XII obtained and has liens for said taxes, penalties and interest from and after the dates of said assessments, being March 6, 1957, and April 29, 1957, which liens attached to all of the property of the defendant Northland Paint Company including all rights to that sum of $9,071.13 now on deposit in the registry of this Court.

IV. The defendant, Northern City National Bank, at the times the respective tax liens of the United States of America hereinbefore described first arose, was not a mortgagee, pledgee, purchaser or judgment creditor with respect to the fund of $9,071.13 now on deposit in the registry of the Court within the meaning of Title 26, United States Code, Section 6323; and that any right, title, interest or claim of the Northern City National Bank to and in said fund of $9,071.13 was and still is unperfected and inchoate and by reason thereof cannot be afforded priority over the tax liens of the United States of America.

V. The defendant, Chicago Paints, Inc., at the times the respective tax liens of the United States of America hereinbefore described first arose was not a mortgagee, pledgee, purchaser or judgment creditor with respect to the fund of $9,071.13 now on deposit in the registry of the Court within the meaning of Title 26 United States Code, Section 6323, and that any right, title, interest or claim of Chicago Paints, Inc., to and in said fund of $9,071.13 was and still is unperfected and inchoate and by reason thereof cannot be afforded priority over the tax liens of the United States of America, and

IT IS ORDERED: That judgment be entered that the Intervenor, The United States of America, is entitled to the sum of $9,071.13 on deposit in the registry of the Court and the whole thereof; and

IT IS ORDERED: That the Clerk of this Court do pay from the registry of the Court the aforesaid sum of $9,071.13 to the Intervenor, the United States of America .

1 28 U. S. C. A., 1335; Standard Surety & Casualty Co. v. Baker, 8 Cir., 105 F. 2d 578.

2 28 U. S. C. A. Rule 24, Federal Rules of Civil Procedure.

3 10 C. J. S., Bills and Notes, 330(a), pp. 829-831.

4 Minnesota Statutes Annotated, 514.01-514.17; Compare: U. S. v. White Bear Brewing Co., 350 U. S. 1010 [56-1 USTC 9440], where a mechanic's lien did not prevail even after recordation and filing of suit prior to tax assessment.

5 Paragraph V of Chicago's Answer to the Complaint of Intervention admits and alleges that its claim is against "the moneys due and owing from The Arthur Company to Northland Paint Company, Inc."

6 The decision of the Court of Appeals, 5 Cir., 239 F. 2d 384, was an appellee's dream, i. e.; "Per Curiam. The facts of this case are well recited and the controlling principles of law are well stated in the opinion of Judge Rice. * * * 140 F. Supp. 60 * * * Affirmed."

7 See note: Applicability of the "General and Unperfected Lien" Doctrine to Contractual Liens, 43 Minn. L. R. 755 (1959), for history, analysis and speculation as to the precise holding of the Ball case. The Bank relies upon the conclusion of the author that the Supreme Court has separate tests for contractual and statutory liens and that a contractual lien perfected in the "commercial" sense is entitled to priority. Even though Minnesota Statutes Annotated, 521.02 provides for validity and perfection without recordation of accounts receivable, the author's suggested rule of "commercial" perfection for contractual liens appears to require either taking possession of the secured property or filing of the security interest. The note indicates dissatisfaction with the standard of perfection urged by the Bank in the instant case.

This Court fails to find any intent evinced in the Supreme Court decisions to classify interests such as the undisclosed lien of the Bank herein as perfected in the federal sense enabling them to subordinate subsequently filed federal tax liens.

8 United States v. Scovil, 348 U. S. 218, 221 [55-1 USTC 9137]; R. F. Ball Construction Company v. Jacobs (D. C., W. D. Tex.) 140 F. Supp. 60, 63-64 [56-1 USTC 9514].

 

 

[59-2 USTC 9574]In the Matter of Gale Dorothea Mechanisms, Inc., Bankrupt

U. S. District Court, East. Dist. N. Y., No. 52809, 3/16/59

[1954 Code Secs. 6321-6323]

Lien for taxes: Bankruptcy proceedings: Priorities.--The lien of the United States arising under tax assessments made before an involuntary petition in bankruptcy was filed against the taxpayer was valid as against the trustee in bankruptcy and was entitled to priority over liens for state and municipal taxes. The United States did not waive its lien by filing the original claim as a priority tax claim.

Louis P. Rosenberg, attorney for trustee. Cornelius W. Wickersham, Jr., United States Attorney, Rob ert C. Carey, Assistant United States Attorney for District Director of Internal Revenue, Brooklyn, N. Y. Louis J. Lefkowitz, Attorney General, State of New York (Samuel Stern, Assistant Attorney General, Abraham M. Jukovsky, of counsel), for Industrial Commissioner of the State of New York, Unemployment Insurance Fund, 500 Eighth Avenue, New York City, N. Y. Charles H. Tenney, Corporation Counsel, City of New York (Stanley Buchsbaum, Bernard H. Sherris, Louis Pollack, of counsel), Municipal Building, New York City, N. Y.

Referee's Memorandum on Tax Liens, and Order of Distribution and Payment of Referee's Fees, U. S. Tax Lien in Full, and Dividend on Three Tax Liens

CASTELLANO, Referee in Bankruptcy:

The trustee moves for an order, upon Notice of Motion dated September 30, 1958 , returnable October 8, 1958 determining the rights of respondents herein to participate as priority creditors in and to the funds of this estate. The respondents are District Director of Internal Revenue, Brooklyn, New York State Unemployment Insurance Fund, State Tax Commissioner of New York, Franchise Tax, Corporation Tax Section, and Corporation Counsel, City of New York, Attorney for Bureau of Excise Taxes, office of Comptroller, City of New York. The questions presented as to the tax liens asserted require a statement as to the funds on hand, the sources of the fund and the payments made for admin istration expenses and wage claims.

The trustee filed his final report

and account on 
August 12, 1957
,

showing the receipt of ....................         $21,212.67

from Maxwell A. Sturtz, formerly

Assignee for the benefit of creditors,

Supreme Court, 

Queens
 
County

,

and Disbursements made for

wage claims and other items,

total .....................................         $ 1,349.95

leaving a balance on hand of ..............         $19,862.72

By Supplemental account filed

February 20, 1959, the trustee set

forth further payments of $571.76

for Assignee's withholding taxes

and stenographer's bill leaving a

balance on hand of ........................         $19,290.96

 

After the filing of the Supplemental Account, allowances were granted and paid to the parties rendering services in this proceeding. The allowances to the trustee, attorney for the trustee, attorney for petitioning creditors, assignee, attorney for the assignee and accountant for assignee amount to $3,829.81. Claims for wages have been paid. The trustee's present balance is $15,461.15.

The sources of all of the trustee's funds are funds received by the trustee from Maxwell A. Sturtz, formerly Assignee for the benefit of creditors. The Assignee's account discloses that the bankrupt's premises were located at Woodside, Queens County , New York , that he conducted a sale of the personal property of the bankrupt at publication on November 10, 1955, which realized

the gross sum of ............................         $ 6,819.06

That he collected on accounts receivable

existing prior to the assignment

for the benefit of creditors, ...............         $15,054.97

Receipts on accounts receivable

from Assignee's operation of business .......         $ 5,525.13

Assignee's total receipts from

personal property ...........................         $27,399.16

Total disbursements of Assignee .............           6,186.49

Assignee's balance, turned over

to trustee's in bankruptcy ..................         $21,212.67

 

The Involuntary petition in bankruptcy was filed herein on December 7, 1955, adjudication in bankruptcy was entered on December 27, 1955. Priority tax claims have been filed herein in the approximate sum of $24,554.37. Certain portions of the tax claims filed are asserted as liens on personal and real property of the bankrupt. No real property was sold by the Assignee or the trustee. The liens asserted attach to proceeds of the personal property, now in the hands of the trustee.

General unsecured claims filed herein amount to $67,062.32. The estate is insolvent.

There is no dispute as to the fact that none of the respondent taxing agencies took possession of any of the personal property of the bankrupt under their statutory tax liens. For this reason the liens for taxes must be postponed in payment to the debts specified in clause (1) and (2) of Section 64 of the Bankruptcy Act; as provided for under Section 67(b) and (c)(1), of the Bankruptcy Act.

Such liens for taxes of the State and City of New York are not liens for "debts" described in Section 67(c)(2), of the Bankruptcy Act. (Re Baron, D. C. Conn. 1958, 165 Fed. Supp. 186). The liens for taxes are valid as against the trustee in bankruptcy under the provisions of Section 67(b) of the Act. The issue here is the question of priority in payment of the liens asserted by the Government, the State and the City of New York .

[Federal Tax Liens]

The District Director of Internal Revenue filed a claim for taxes due on January 18, 1956 for $9,865.53, an amended claim on June 29, 1956, for $19,021.22, a second amended claim on August 6, 1956 for $20,609.02. No lien was asserted under the claims filed up to August 6, 1956. The District Director of Internal Revenue, Brooklyn , filed a final amended claim on August 15, 1958, for taxes due in the total sum of $19,312.87.

The trustee agrees that the total sum due the District Director of Internal Revenue for taxes is $19,312.87, as set forth in his final amended claim.

Under the final amended claim, the District Director of Internal Revenue asserts a tax lien for a portion of the claim.

The part of the claim reciting the dates when tax liens arose, prior to December 7, 1955, the date of bankruptcy, cover the following tax items including interest for which Assessments were made and delivered to the District Director prior to December 7, 1955.

Assessment date December 17, 1954                $ 235.87

Assessment date March 5, 1955                    3,787.97

Assessment date June 8, 1955                     4,964.06

Assessment date August 8, 1955                   5,050.75

                                               $14,038.68

 

The tax items total the sum of $13,294.15, the balance $744.50 is interest.

A Notice of Federal Lien executed by the District Director of Internal Revenue covering the foregoing items was filed against the taxpayer, the bankrupt herein, with the City Register Queens County , on May 28, 1956, more than five months after the Bankruptcy. Copy of the Notice is attached to the claim.

The notice recites in substance, that the taxes have been assessed under the Internal Revenue laws against the taxpayer named, which, after demand for payment thereof, remain unpaid, and that by virtue of the mentioned statutes, the amount of taxes together with interest is a lien in favor of the United States upon all property and rights to property belonging to said taxpayer.

The District Director of Internal Revenue urges that his statutory liens for taxes on personal property, unaccompanied by possession, and which arose under the provisions of the Internal Revenue Code, prior to December 7, 1955, the date of filing of the Involuntary petition in bankruptcy, should be satisfied in full, after the payment of admin istration expenses and wage claims, as provided by Section 67(b) and (c)(1) and 64(a), (1), (2), of the Bankruptcy Act.

Sec. 67(c) of the Bankruptcy Act 11 U. S. C. 107(c), provides:

"Where not enforced by sale before the filing of a petition initiating a proceeding under this title, and except where the estate of the bankrupt 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, on personal property not accompanied by possession of such property, * * * shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 104 of this title. * * *"

Note: 11 U. S. C. A. Section 104 (Section 64 of the Bankruptcy Act) sets forth the order of debts which are to have priority in advance of the payment of dividends to creditors and to be paid in full out of bankruptcy estates. Clauses (1) and (2) of subdivision (a) of this section provide for the payment of admin istrative expenses and certain wage claims respectively.

[City and State Tax Claims]

The Bureau of Excise Taxes, of the office of the Comptroller of the City of New York , filed a claim for sales and business tax on June 19, 1956, for $4,000.00. On February 28, 1958, the City filed an Amended claim for $1,505.40. On March 3, 1958 the Comptroller of the City of New York entered into a written stipulation reducing the claims of the City of New York for sales and business taxes to the total sum of $1,267.74. The claims and stipulation make no reference to any lien being asserted by the Comptroller. Subsequently, and on November 28, 1958, the Comptroller filed a Second Amended claim for this sum of $1,267.74. The Second Amended claim asserts a lien to the extent of $613.82 of its claim by virtue of the filing against the bankrupt in Queens County on October 14, 1955, of a warrant in accordance with the provisions of the Administrative Code of the City of New York . The City claims the priority in payment accorded to statutory tax liens under subdivision (b) and (c) of Section 67 and Section 64(a)(1), (2), of the Bankruptcy Act.

The Comptroller of the City of New York concedes in his memorandum, that the District Director of Internal Revenue is entitled to his paramount right to the payment of the Government's statutory lien from dates the assessments arose, and interest, to the date of the filing of the petition in bankruptcy on December 7, 1955, and that the Government's lien and the Comptroller's lien on personal property unaccompanied by possession are subordinate to the payment of admin istration expenses and wage claims.

The Industrial Commissioner of the State of New York, on behalf of New York State Department of Labor, Division of Employment filed a claim on April 13, 1956, in the sum of $1,541.00, and filed an Amended claim on May 17, 1956, setting forth that there is due for payroll contributions, under the New York State Unemployment Insurance Law to the New York State Unemployment Insurance Fund, contributions in the reduced sum of $1,502.22 which includes interest to December 7, 1955. This claim does not assert any lien for the taxes due.

The Attorney General of the State of New York, on behalf of the Industrial Commissioner, urges that the statutory liens for taxes asserted by the District Director of Internal Revenue and the Comptroller of the City of New York, be adjudged to be invalid, and that the funds in the trustee's hands be distributed pro rata on all tax claims filed. The Commissioner contends that the Government and the Comptroller of the City of New York waived their lien claims by the filing of their original claims as priority tax claims. The record however, discloses that the liens asserted by the Government and the Comptroller of the City of New York were asserted prior to any distribution to creditors or to taxing agencies. Under such circumstances, the Government and the Comptroller did not waive their liens. (Mass. Bonding & Ins. Co. and U. S. v. State of N. Y., Fago Const. Co. Bkpt., 2 Cir. 7/11/58, 259 Fed. (2d) 33 [58-2 USTC 9704].)

The Industrial Commissioner raises the question as to whether the liens asserted by the Government and the City of New York constitute a lien against all assets in the hands of the trustee. It is clear from the record that the funds now in the hands of the trustee arose from the liquidation of personal property of the bankrupt. The liens attach to such property and the proceeds thereof.

The final contention of the Industrial Commissioner is that the trustee is a judgment creditor within the purview of Title 26 U. S. C. 6323, and that the Government's lien is invalid as to the trustee.

The lien of the District Director of Internal Revenue arose under Title 26 U. S. C. 6321 upon receipt by the Director of the assessment. It is valid even though not recorded, against all parties, except as to the parties set forth in 26 U. S. C. 6323. ( U. S. v. Kings County Iron Works 224 Fed. (2d) 232 [55-2 USTC 9536].)

The provisions of Title 26 U. S. C., which are applicable, are as follows: (formerly Secs. 3670, 3671, 3672)

"Section 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.

"Section 6322

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

"Section 6323

"(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's lien, arising under assessments made prior to the bankruptcy, is valid as against the trustee in bankruptcy. The Trustee is not a judgment creditor in the "conventional sense" of one who obtains a judgment in a court of record. ( U. S. Security Trust & Sav. Bank, etc., 340 U. S. 47 [50-2 USTC 9492]; U. S. v. Gilbert Associates, Inc., 1953, 345 U. S. 361 [53-1 USTC 9291]; U. S. v. England, 9 Cir. 1955, 226 Fed. (2d) 205 [55-2 USTC 9693]; Brust, Trustee v. Sturr, Collector, 2nd Cir. 1956, 237 Fed. (2d) 135 [56-2 USTC 9954].)

The State Tax Commission of the State of New York filed an Amended claim on September 12, 1956 , for franchise taxes and interest in the sum of $1,054.95, amending its prior claims filed on March 21, 1956 . A statutory lien is asserted in each of the claims under the provisions of Tax Laws of New York Articles 9, 9A, Sec. 213:2. Under a further amendment to the claim the lien is asserted only as to the sum of $782.39 which amount was assessed prior to December 7, 1955 for assessment made in January 1954, and January 1955 for the fiscal years July 1, 1952 , to June 30, 1953 ; and July 1, 1953 , to June 30, 1954 .

The Michigan Unemployment Compensation Commission, c/o Attorney, General's office, 7310 Woodward Avenue , Detroit (2) Michigan , filed a claim in the sum of $41.83 for unpaid taxes. The claim asserts a secured tax lien under notice of lien filed November 10, 1955, in Oakland County , Michigan .

The lien asserted under the claim of the District Director of Internal Revenue, Brooklyn , New York to the extent of $14,038.65 is entitled to priority in payment and payment in full, before any payment is made on any of the other tax claims and the liens asserted thereunder.

The lien asserted under the claim of the Bureau of Excise Taxes, Office of Comptroller, City of New York , c/o Corporation Counsel, City of New York , to the extent of $612.81 is allowed at this amount.

The lien asserted by the State Tax Commission, State of New York , under its claim for Franchise Taxes, to the extent of $782.37, is allowed at this amount.

The lien asserted by the Michigan Unemployment Compensation Commission c/o Michigan Attorney General, Detroit , Michigan , under its proof of secured tax claim is allowed at the sum of $41.83.

The liens of the Bureau of Excise Taxes of the City of New York , the State Tax Commission of the State of New York , and Michigan Unemployment Compensation Commission are subordinate to the lien of the District Director of Internal Revenue, Brooklyn .

The three subordinate lienors did not take possession of any property of the bankrupt, the taxpayer. The unrecorded lien of the Government is valid as to all parties, except those specified in Title 26 U. S. C. 6323. (State Tax Commission v. Union General Corp., 144 N. Y. S. (2d) 75), and cases cited above.

The three subordinate liens shall share pro rata in the trustee's balance on hand, after the payment in full of the tax lien of the District Director of Internal Revenue, Brooklyn , and fees due the Referee's salary and expense funds.

Order annexed.

 

 

[59-2 USTC 9557]Narragansett Bay Gardens, Inc., Plaintiff v. Grant Construction Company, Inc., The Wardwell Lumber Company, John Correira--doing business as Alma's Hardware and Supply, John A. O'Connell, John Marshall--doing business as Marshall's Landscaping Company, Defendants United States of America, Intervening Plaintiff v. Narragansett Bay Gardens, Inc., Grant Construction Company, Inc., The Wardwell Lumber Company, John Correira--doing business as Alma's Hardware and Supply, John Marshall--doing business as Marshall's Landscaping Company, and Narragansett Improvement Company, Defendants in Intervention United States of America, Plaintiff v. John Marshall--doing business as Marshall's Landscaping Company, Commodore Perry Village, Inc., Narragansett Improvement Company, Grant Construction Company, Inc., The Wardwell Lumber Company, and John Correira--doing business as Alma's Hardware and Supply, Defendants

U. S. District Court, Dist R. I., Civil Action Nos. 2289, 2406, 176 FSupp 451, 6/11/59

[1954 Code Sec. 6323]

Lien for taxes: Priority as against attachment creditors: Allowance of attorneys' fees and costs in interpleader.--A tax lien of the United States which was recorded before attachment creditors obtained judgments was entitled to priority, attachment liens being inchoate for federal tax purposes. Since the tax lien was in excess of the amounts owed to the delinquent taxpayer by two debtors who had filed bills for interpleader and paid the funds into court, they could have no recourse to the runds for counsel fees and court costs.

Russell C. King, Rob ert J. Conley, Providence , R. I., for plaintiff. Morphis A. Jamiel, Warren, R. I., for defendants, Grant Construction Company, Inc., et al., Joseph Mainelli, United States Attorney, Samuel S. Tanzi, Assistant United States Attorney, Providence, R. I., for intervening plaintiff.

Opinion

DAY, District Judge:

These actions, which were consolidated for trial, present identical questions as to the priority of federal tax liens over Rhode Island attachments and as to the allowance of counsel fees and costs to the debtors of a delinquent taxpayer as plaintiffs in a complaint in interpleader and a counterclaim in interpleader.

Civil Action No. 2289 was originally begun as a bill in equity for interpleader in the Superior Court for the State of Rhode Island . One of the defendants named therein was John A. O'Connell, then and now District Director of Internal Revenue for the District of Providence. The action was subsequently removed to this Court by him pursuant to the provisions of 28 U. S. C. A. 1442 and 1444. The remaining respondents named in said bill of complaint are Grant Construction Company, Inc. and The Wardwell Lumber Company, both Rhode Island corporations; John Correira, doing business as Alma's Hardware and Supply; and John Marshall, doing business as Marshall's Landscaping Company. Both Correira and Marshall are citizens of Rhode Island .

[Claims to Funds in Debtor's Hands]

After the removal of said bill in equity to this Court, the plaintiff, in accordance with the Federal Rules of Civil Procedure, filed a new complaint conforming to said Rules. In this complaint the plaintiff alleges in substance that it has in its hands and possession the sum of $2,400 due and owing to the defendant John Marshall under a certain contract between them; that it claims no interest in said sum; that on November 7, 1957 the defendants Wardwell Lumber Company, John Correira and Grant Construction Company, Inc. caused writs of attachment, returnable to a court of the State of Rhode Island, to be served upon it, attaching the personal estate of the defendant John Marshall in its hands and possession; that on December 4, 1957 it received notice that federal tax liens in the aggregate sum of $5,636.24 against all the property rights and monies of the said John Marshall had been perfected in accordance with the provisions of the Internal Revenue Code of 1939, notice of such liens having been recorded as provided by law in the office of the Town Clerk at Bristol, Rhode Island on August 28, 1957 and November 7, 1957; that judgments were entered on December 5, 1957 in favor of said Wardwell Lumber Company, Grant Construction Company, Inc. and John Correira in their respective actions against the said John Marshall; that on December 12, 1957, executions issued on said judgments; that said judgment creditors have made demands upon the plaintiff for the satisfaction of said executions out of the personal estate of said John Marshall in its hands and possession; that said John Marshall claims to be entitled to receive said sum of $2,400, and has threatened to institute proceedings against plaintiff for its recovery; and that plaintiff is willing to pay said sum to the person or persons legally entitled thereto, but is in doubt as to whom it should be paid. After the recital of these facts the complaint concludes with a prayer that the plaintiff be permitted to deposit said sum of $2,400 in the registry of this Court; that the defendants and each of them be required to interplead and settle among themselves their respective claims in and to said sum of $2,400; and that the plaintiff be awarded reasonable costs and counsel fees.

[Federal Tax Liens]

Thereafter, it appearing that the federal tax liens were claimed by the United States and not by the named defendant John A. O'Connell, the latter was dismissed as a party defendant and the United States was granted leave to intervene as a party plaintiff and to file a complaint as intervenor. In this intervening complaint (in which the remaining defendants, the plaintiff Narragansett Bay Gardens, Inc., and Narragansett Improvement Company, a Rhode Island corporation, were joined as defendants) the United States alleges that the said John Marshall owes certain taxes and penalties aggregating $7,019.06; that said taxes were duly assessed, that liens were duly perfected thereon, and that notice thereof was duly recorded as provided by law; that Narragansett Bay Gardens, Inc. is indebted to said John Marshall in the sum of $2,400; that the defendants are each claiming an interest therein; and that the United States seeks a determination that John Marshall is indebted to it in said sum of $7,019.06, with interest as allowed by law, as well as a determination of the rights of the respective parties in and to said sum of $2,400.

In Civil Action No. 2406, brought by the United States , the defendants are the said John Marshall, John Correira, Grant Construction Company, Inc., Wardwell Lumber Company, Narragansett Improvement Company, in addition to Commodore Perry Village, Inc., a Rhode Island corporation. This complaint likewise alleges that John Marshall is indebted to the plaintiff for certain federal taxes and penalties in the aggregate sum of $7,019.06, with interest thereon as allowed by law; that said taxes were duly assessed, that liens were duly perfected thereon, and that notice thereof was duly recorded as provided by law; that the defendant Commodore Perry Village, Inc. is indebted to the said John Marshall in the sum of $1,341; and that each of the defendants is claiming an interest in said sum. The complaint concludes with a prayer that this Court adjudge and decree that the said John Marshall is indebted to the plaintiff in the amount of $7,019.06, together with accrued interest thereon as allowed by law; and that this Court determine the rights of all of the parties to said sum of $1,341.

In its answer Commodore Perry Village, Inc. counterclaims in interpleader, alleging that on November 4, 1957 a writ of attachment, returnable to a court of the State of Rhode Island, was served upon it in an action then pending in said court wherein Narragansett Improvement Company was plaintiff and the said John Marshall was defendant; that said writ attached the personal estate of the latter in its hands and possession; that it then had in its hands and possession the sum of $1,341 belonging to said John Marshall, that thereafter on December 4, 1957 it received notice that federal tax liens in the sum of $5,636.24 against all the property rights and monies of said John Marshall had been perfected, notice of such federal liens having been recorded, as provided by law, in the office of the Town Clerk at Bristol, Rhode Island on August 28, 1957 and November 7, 1957; that on December 4, 1957 a levy was made upon it; that a question has arisen as to the relative priority as between said attachment lien and said tax liens; and that it is in great doubt as to which of said lienors is entitled to priority of payment. The counterclaim prays that this Court order the plaintiff and the defendants Narragansett Improvement Company and John Marshall to interplead their respective claims to said sum of $1,341; and award it counsel fees and costs.

Prior to trial, Narragansett Bay Gardens, Inc. deposited the sum of $2,400 into the registry of the Court, and Commodore Perry Village, Inc. likewise deposited the sum of $1,341. Also, by agreement of the parties, the complaint in Civil Action No. 2406 was dismissed as to the defendants Grant Construction Company, Inc., Wardwell Lumber Company, Narragansett Improvement Company and John Correira. At the same time, the defendant John Marshall having failed to plead or otherwise defend, an entry of default was made against him. In Civil Action No. 2289, similar entries of default were made for the same reasons against him and against the defendant Narragansett Improvement Company.

[Facts]

The evidence adduced during the trial established the following facts: that at the time of the institution of these actions the defendant John Marshall was indebted to the Government in the sum of$7,019.06 on account of unpaid withholding and excise taxes; that notice of the assessment of these taxes and demands for the payment thereof were seasonably made upon him; that notice of the perfection of tax liens in the sum of $5,634.24 on all the property rights and monies of the defendant John Marshall was received by Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. on December 4, 1957, notice of said liens having been recorded on August 8, 1957 and November 7, 1957; that judgments in favor of Grant Construction Company, Inc., Wardwell Lumber Company and John Correira in their respective state court actions were entered on December 5, 1957; and that no judgment in favor of Narragansett Improvement Company has as yet been entered in its action in the state court.

[Priority of Tax Liens]

It is well settled that a tax lien of the United States is entitled to priority over an attachment lien created pursuant to state law if the federal lien is recorded prior to the date when the attachment creditor obtains judgment. United States v. Liverpool & London & Globe Insurance Co., Ltd., 1955, 348 U. S. 215 [55-1 USTC 9136]; United States v. Acri, 1955, 348 U. S. 211 [55-1 USTC 9138]; United States v. Security Trust Co., 1950, 340 U. S. 47 [50-2 USTC 9492].

In United States v. Acri, supra, the Supreme Court held at page 213:

"The relative priority of the lien of the United States for unpaid taxes is, as we said in United States v. Waddill Co., 323 U. S. 353, 356, 357 [45-1 USTC 9126]; Illinois v. Campbell, 329 U. S. 362, 371; United States v. Security Trust Co., 340 U. S. 47, 49 [50-2 USTC 9492], 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."

Here the attachment liens are inchoate for federal tax purposes, the fact and amount of such liens being contingent on the outcome of the actions in which they were issued. Since the tax liens of the United States were recorded prior to the entry of judgments in favor of said attaching creditors, and were in an amount in excess of the aggregate of the sums held by the debtors of the delinquent taxpayer, I find and conclude that the federal tax liens have priority over the liens of said attaching creditors and that the sums presently on deposit in the registry of the Court are payable to the United States.

[Allowance for Attorneys' Fees and Costs]

There remains the question of whether any amount should be deducted from each of said sums as an allowance to Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. for counsel fees and costs sustained by them in these proceedings.

It is admittedly the general rule, in the absence of a statute making provision to the contrary, that a party who is confronted with conflicting claims to a fund in his possession and who claims no interest therein, may in good faith interplead the several claimants, deposit the fund involved in the registry of the Court, and recover his reasonable costs and counsel fees out of such fund. This rule is followed both in the federal courts and in the courts of Rhode Island . See, e.g., Palomas Land & Cattle Co. v. Baldwin, 1951, 9 Cir., 189 Fed. (2d) 936; Manchester Paint Works v. Stimson, 1853, 2 R. I. 415. It is agreed here that both Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. are merely disinterested stakeholders who have asserted no claims of ownership to the funds involved.

Despite the existence of this general rule, the Government contends that such an allowance of counsel fees and costs cannot be made where (1) the United States under a federal tax lien is the prevailing claimant to a fund and (2) the amount due under such federal tax lien exceeds the amount of the fund.

On the other hand, the stakeholders contend that I should follow the general rule which prevails in the usual interpleader proceeding in the courts of Rhode Island .

In support of its position, the Government relies upon the holding of the Supreme Court in United States v. Liverpool & London & Globe Insurance Co., Ltd., supra. While it may be claimed that the denial of counsel fees and related costs in that case was based upon the peculiar provisions of the state statute there involved, I believe that any latent ambiguity therein is removed by the subsequent per curiam decision in the later case of United States v. R. F. Ball Construction Co., 1958, 355 U. S. 587 [58-1 USTC 9327]. In my judgment the contention of the Government is sound. I concur with the observations and reasoning of Chief Judge Forman in Ford Motor Co. v. Hackart Construction Co., 1956, D. C. N. J., 143 Fed. Supp. 216 [56-2 USTC 9831], where he said at page 218-219:

"The determination of the Supreme Court on the facts of the Liverpool & London case that counsel fees could not be allowed is controlling here. It is not significant that the source of power used by the lower courts in that case to justify their allowance was a Texas rule which here it is inherent equity authority plaintiff asked this court to exercise. None of the three opinions in the Liverpool case (the district court's opinion is reported as Sunnyland Wholesale Furniture Co. v. Liverpool & London & Globe Ins. Co., 107 Fed. Supp. 405 [53-1 USTC 9121]) questions the validity of the application of the Texas rule in the federal court. That rule was treated throughout that case as a competent source of power for the allowance of counsel fees in the ordinary case just as is the equity power of this court ordinarily a valid source of power to be utilized for that purpose. But in the Liverpool case and in this one these usual prerogatives of the court must fall before the primacy of the federal tax lien. A superior source of power forbids the allowance of counsel fees here. The Supreme Court held in the Liverpool case that property subject to a valid and paramount tax lien cannot be invaded even for the allowance of the counsel fees to an innocent stakeholder, and this court must obey that ruling."

A similar conclusion was reached in United States v. Gasaway, 1958, D. C. Mo., 1 A. F. T. R. 2d 1189 [58-1 USTC 9412]. There, as here, a disinterested stakeholder sought to recover counsel fees in an interpleader action in which the United States was the prevailing claimant. The Court, relying on United States v. Liverpool & London & Globe Insurance Co., Ltd., supra, and United States v. R. F. Ball Construction Co., supra, held that since the fund involved was insufficient to satisfy the prevailing federal tax lien, no recourse to such fund could be had for the allowance of counsel fees to the stakeholder. This decision is of particular force in view of the clear precedents under the state law for awarding such fees in similar actions not involving claims under federal tax liens. See, e.g., Woodson v. Woodson, 1949, 359 Mo. 972, 224 S. W. (2d) 978; John A. Moore & Co. , Inc. v. McConkey, 1947, 240 Mo. App. 198, 203 S. W. (2d) 512.

In further support of this interpretation of the Liverpool decision, see Commercial Standard Insurance Co. v. Campbell, 1958, 5 Cir., 254 Fed. (2d) 432 [58-1 USTC 9477]; Boston Insurance Co. v. Stubbs, 1956, D. C. Wash., [56-2 USTC 9695] 51 A. F. T. R. 1782; cf. United States v. Goldstein, 1958, 2 Cir., 256 Fed. (2d) 581 [58-1 USTC 9478]. See also 9 Mertens, Law of Federal Income Taxation (Zimet Revision 1958), 54.46.

The cases of United States v. Ullman, 1953, D. C. Pa., 115 Fed. Supp. 211 [53-2 USTC 9648], and American Alliance Insurance Co. v. Mitchell, 1958, -- Mo. App. --, 299 S. W. (2d) 536 [57-1 USTC 9506], relied upon by Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc., are in my opinion clearly contrary to the weight of authority, and hence I am unwilling to follow them.

In conclusion, I find and conclude that said John Marshall was at the time of the institution of these actions indebted to the United States in the sum of $7,019.06 for federal taxes and penalties thereon, plus interest; that the United States has valid prior liens on the sums of $2,400 and $1,341 presently on deposit in the registry of this Court, which liens are superior to any liens thereon in favor of the attaching creditors of the said John Marshall; that the United States is entitled to the payment of said sums, such payment to be applied to the reduction of said indebtedness; and that the prayer of Narragansett Bay Gardens, Inc. and Commodore Perry Village, Inc. for the entry of orders awarding them their respective counsel fees and costs must be, and they hereby are, denied. The United States will prepare and submit to me within ten (10) days a computation of the amount presently due and owing by the said John Marshall as federal taxes and penalties, plus interest thereon; and thereupon judgments shall be entered in each of these actions in favor of the United States in that amount less the sum of $3,741 ($2,400 plus $1,341) and in accordance with the other conclusions hereinbefore expressed.

 

 

[59-1 USTC 9484]United States of America, Plaintiff v. Linzer Cleaning & Dyeing Corp., Angela Parisi, as Chairman of The Workmen's Compensation Board of the State of New York, Sidney Schwamm, Joseph Apfel and David L. Frankel, Defendants

U. S. District Court, So. Dist. N. Y., Civil 139-59, 173 FSupp 227, 5/26/59

[1954 Code Sec. 6323]

Lien for taxes: Priority: Workmen's Compensation Board as judgment creditor.--Workmen's Compensation Board of the State of New York is not a judgment creditor within the meaning of Code Sec. 6323, though an order signed by the County Clerk of Bronx County, and dated prior to the date of notice of levy for federal taxes, directed the entry of a judgment and issuance of an execution therefor. The federal tax lien had priority, and the motion of the United States for summary judgment is granted.

Arthur H. Christy, United States Attorney (Marguerite R. deSmet, Assistant United States Attorney, of Counsel), for plaintiff. Louis J. Lefkowitz, Attorney General of the State of New York, for Workmen's Compensation Board of the State of New York and its Chairman, The Capitol, Albany 1, N. Y., and 80 Centre Street, N. Y. 13, N. Y. (John J. Quinn, Assistant Attorney General, of Counsel).

Opinion

[Priority of Tax Lien]

LEVET, District Judge:

Plaintiff , United States of America , has moved for summary judgment. The issue involves interpretation of the words "judgment creditor" in Title 26 U. S. C. A. 6323. The USA and the Workmen's Compensation Board of the State of New York (hereinafter called the "Board") each claims priority to a certain fund.

The facts are undisputed and in substance are as follows:

(1) On October 17, 1958, plaintiff filed a Notice of Federal Tax Lien in the amount of $5,634.66 with the Register of the City of New York, Bronx County, covering withholding, social security and unemployment taxes assessed against the defendant Linzer Cleaning & Dyeing Corp. (hereinafter called "Linzer") for the months of July and August, 1958.

(2) On October 17, 1958 , notices of levy in the amount of $5,703.17, covering the above-mentioned taxes, plus statutory additions, were served upon defendants Sidney Schwamm, Joseph Apfel and David L. Frankel. These defendants had the following interests, derived by reason of the sale on May 2, 1958 of Linzer's business to Frankel for the sum of $2,500:

(a) Frankel had paid Linzer the sum of $750 prior to the closing of the sale. An additional $750 in cash was paid at the sale and 20 promissory notes, each in the sum of $50, payable monthly, amounting to a total of $1,000, were likewise delivered to complete the purchase price of $2,500. The notes were secured by a chattel mortgage.

(b) Schwamm and Apfel, attorneys, hold in escrow the cash of $750, the notes of $1,000 and the chattel mortgage.

(3) On October 17, 1958, the date on which the notice of levy above mentioned was served, Schwamm and Apfel held the sum of $635.75 in cash, together with 15 promissory notes and the mortgage securing the notes. Thus, at that date Frankel owed Linzer the sum of $750 on the notes. Both Frankel and Schwamm concededly are stakeholders and have agreed to turn over the above-mentioned monies, notes and mortgage to the party determined by this court to be entitled thereto.

[Workmen's Compensation Board]

(4) The only adverse claimant to these assets as against the USA is Angela Parisi, Chairman of the Board. The Board claims to be a "judgment creditor" of Linzer by virtue of the following facts:

(a) On May 27, 1958, a Notice of Determination of Employer Liability Under the Disability Benefits Law was served upon defendant Linzer.

(b) An order for payment dated August 8, 1958, was addressed to defendant Linzer.

(c) An Affidavit of Regularity signed by Edith L. Hendon, Assistant Counsel to the Board, was filed reciting all of the foregoing and non-compliance by Linzer and directing the Clerk of Bronx County to enter judgment against Linzer.

(d) An order signed by the County Clerk of Bronx County , dated September 12, 1958, directed the entry of a judgment in the sum of $405.59 and the issuance of an execution therefor.

This procedure apparently followed the provisions of Section 219 of the New York Workmen's Compensation Law, which is as follows:

"219. Enforcement of payment in default

"In case of a default in the payment of any benefits, assessments or penalties payable under this article by an employer who has failed to comply with the provisions of section two hundred eleven of this chapter or refusal of such employer to reimburse the fund under section two hundred fourteen for the expenditures made therefrom pursuant to section two hundred thirteen or to deposit within ten days after demand the estimated value of benefits not presently payable, the chairman may file with the county clerk for the county in which the employer has his principal place of business (1) a certified copy of the decision of the board or order of the chairman, or (2) a certified copy of the demand for deposit of security, and thereupon judgment must be entered in the supreme court by the clerk of such county in conformity therewith immediately upon such filing."

(5) On October 6, 1958, the Board served third party subpoenas and restraining orders on defendants Schwamm and Apfel.

[U. S. Lien]

(6) This action was commenced on October 21, 1958, plaintiff demanding judgment, declaring its lien to be a valid and subsisting first lien on all monies owing by Frankel to Linzer, including the monies, notes and mortgage held in escrow by defendants Schwamm and Apfel, and that the judgment direct defendants Frankel and Schwamm to pay over to plaintiff the aforesaid monies, notes and mortgage in partial satisfaction of plaintiff's lien against Linzer, and for costs against the Board.

(7) The defendants Linzer and Schwamm have failed to appear and are now in default.

The relevant federal statutes, to wit, 6321, 6322 and 6323(a)(1) of the Internal Revenue Code of 1954, Title 26 U. S. C. A., are as follows:

"6321. Lien for taxes

"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."

"6322. Period of lien

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

"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 * * *"

The only question involved in this motion is whether or not the Board is a "judgment creditor" within the meaning of Section 6323 of the Internal Revenue Code of 1954.

The relative priority of the lien of the USA for unpaid taxes is a federal question, determined by federal law. United States v. Acri, 348 U. S. 211, 213 (1955) [55-1 USTC 9138]; Aquilino v. United States of America, 3 N. Y. 2d 511, 515 (1957). The Board is not a "judgment creditor" within the meaning of the federal statute. United States v. Gilbert Associates, Inc., 345 U. S. 361 (1953) [53-1 USTC 9291]. In this case the Supreme Court in the opinion of Mr. Justice Minton wrote:

"A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a 'judgment creditor' should have the same application in all the states. In this instance, we think Congress used the words 'judgment creditor' in 3672 in the usual, conventional sense of a judgment of a court of record, since all states have such courts. We do not think Congress had in mind the action of taxing authorities who may be acting judicially as in New Hampshire and some other states, where the end result is something 'in the nature of a judgment,' while in other states the taxing authorities act quasi-judicially and are considered admin istrative bodies.

"We conclude that whatever the tax proceedings of the Town of Walpole may amount to for the purposes of the State of New Hampshire, they were not such proceedings as resulted in making the Town a judgment creditor within the meaning of 3672." (pp. 364-365)

See also 26 Code of Federal Regulations, Sections 301.6323-1(a)(2)(i)(b) and 301.6323-1(a)(2)(ii), which read in part as follows:

"* * * Nor does the term 'judgment' include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity, such as, for example, the action of State taxing authorities. United States v. Gilbert Associates (1953), 345 U. S. 361 [53-1 USTC 9291]; and United States v. City of New Britain (1954), 347 U. S. 81 [54-1 USTC 9191].

"(ii) The determination whether a person is a * * * judgment creditor, entitled to the protection of section 6323(a), shall be made by reference to the realities and the facts in a given case rather than to the technical form or terminology used to designate such person."

This determination has been recognized and followed by New York State courts. See State Tax Commission v. Union General Corp., 208 Misc. 133 (Sup. Ct. , N. Y., 1955) [56-1 USTC 9394]; Lincoln Savings Bank of Brooklyn v. L. Blau & Sons, 148 N. Y. S. 2d 208 (Sup. Ct. , Queens , 1955) [56-2 USTC 9623].

[Board Is Not a Judgment Creditor]

The Board here is not a "judgment creditor" in the usual, conventional sense since it commenced no action, filed no complaint, served no summons, allowed no opportunity to answer and prepared no judgment. It may have something "in the nature of a judgment," but it is not a "judgment creditor" under the interpretation of the statute hereinbefore mentioned.

Accordingly, plaintiff's motion for summary judgment is granted.

Settle order on notice.

 

 

[59-1 USTC 9471]United States of America, Plaintiff v. J. H. Clendenin, North Carolina Department of Revenue, Employment Security Commission of North Carolina, Consolidated Tax Department of the City of Wilmington and New Hanover County, Rob ert E. Bellamy and Son, Inc., W. H. King Drug Co., Abbott Laboratories, American Drug Sundries Company, Dillard Paper Company, Maola Milk and Ice Cream Company, Inc., Monarch Marking System Company, National Drug Company, Parke-Davis and Company, Procter & Gamble Dis. Co., Lydia E. Pinkham Medicine Company, E. B. Read & Sons Co., Shulton, Inc., the Upjohn Company, Vick Chemical Company, White Ice Cream and Milk Company, S. and B. Soloman, Inc., Defendants

U. S. District Court, Middle Dist. N. C., Greensboro Div., Civil Action No. C-151-G-57, 4/29/59

[1954 Code Sec. 6321]

Levy and distrain: Sale of property for taxes: Distribution of proceeds.--When taxpayer failed to pay federal taxes due, the Internal Revenue Service seized his stock of merchandise, furniture and fixtures, and sold them for a net amount which was in excess of the amount of taxes then due plus a subsequently determined tax. Since the combined city taxes and North Carolina sales taxes owed by the taxpayer exceeded the sum remaining after satisfaction of the federal taxes in full, the remainder is to be applied to each of the two claims at the same rate per dollar claim as each bears to the net sum available for distribution. The court holds that the enforced liquidation of the business by the United States government to satisfy its taxes is in essence the same as if it had been done through bankruptcy or receivership or liquidation under order of the court, and that Sec. 105-376, subsection D of the General Statutes, is applicable.

Lafayette Williams, Assistant United States Attorney, for plaintiff. John Taylor Schiller, Wallace Building, Wilmington, N. C., Peyton B. Abbott, Assistant Attorney General of N. C., Raleigh, N. C., for defendants.

Findings of Fact

HAYES, District Judge:

From the pleadings and evidence and statements made in Court, the Court finds:

1. That J. H. Clendenin was the proprietor of Service Drug Company of Wilmington , N. C., as shown by certified record from the Clerk's Office in New Hanover County , which certificate of proprietorship is hereto attached and made Exhibit #1 and made a part of these findings.

[Tax Sale ]

2. That James H. Clendenin as proprietor of Service Drug Company became indebted to the United States government Internal Revenue Department for taxes in the net sum of $4,189.00, and pursuant to the United States statutes, the Internal Revenue Service seized the stock of merchandise, fixtures and accounts of the said J. H. Clendenin, proprietor of Service Drug Company and sold the same to satisfy the taxes, at which sale it received the sum of $8,500.00 for all of said assets.

3. That the said J. H. Clendenin, proprietor of Service Drug Company was indebted in connection with said business in the sum of $18,446.53.

4. That the defendant, J. H. Clendenin left this jurisdiction shortly after the seizure of this property by agents of the Internal Revenue Department and has, since that time, remained out of the jurisdiction of this Court and is reportedly in the State of Florida. Numerous attempts were made to secure personal service on the defendant in the State of North Carolina all of which failed, because the Marshal was unable to locate him in the state. Whereupon the Court entered an order which appears of record, authorizing personal service on the defendant, J. H. Clendenin in the District of Florida where he resides and the service thereof has been completed. There has been no answer filed by J. H. Clendenin.

[City and State Liens]

5. The Court finds that the defendant, J. H. Clendenin, as proprietor of Service Drug Store was indebted to the City of Wilmington and County of New Hanover for taxes on said business in the sum of $1,916.42 which became a lien against this property under Section 105-376, sub-section D of the General Statutes.

6. That the said J. H. Clendenin, as proprietor of the Service Drug Store, likewise became indebted to the State of North Carolina, Department of Revenue, for sales taxes in the sum of $2,103.20 and which became a lien against the assets here involved by virtue of General Statutes Section 105-164.38. That the State Department of Revenue caused a constructive levy to be made on these funds in the hands of the Court which was not subject to levy but which it could do to assess a lien.

7. That a subsequent tax due the United States arose in the sum of $1,086.55, which left a balance in the hands of the United States of $3,224.45 which it has deposited in the Register of this Court for distribution among the claimants as may be determined by this Court. In addition to this sum, the agents of the Internal Revenue recovered $9.49 from coin devices which, added to the foregoing balance, made a total of $3,233.94 for distribution.

8. The claims of the State Department of Revenue and the City and County claims for taxes added together exceed the amount of money for distribution. The general creditors and the State Department of Revenue question the application of Section 105-376, sub-section D of the General Statutes for the reason that that section is designed and intended only in cases of bankruptcy or receivership or liquidation of an insolvent estate and doesn't apply to a situation of this kind.

Conclusions of Law

The Court finds and concludes that the enforced liquidation of this business by the United States government to satisfy its taxes is, in essence, the same as a liquidation so far as the facts are concerned as if it had been done through bankruptcy or receivership or liquidation under order of Court. The sale was involuntary and was a legally enforced liquidation. The owner left the state and is not amenable to process and the indebtedness in excess of $18,000.00 gave every indication of insolvency and the Court concludes that so far as these funds are concerned, that the taxes of the City of Wilmington and County of New Hanover and that of the State Department of Revenue are substantially identical and that both of them are preferred over other general creditors, and accordingly the Court orders that the $3,233.94 be pro-rated between the tax claimants. In other words, that each one be paid the same rate per dollar claim as it bears to the net sum for distribution.

The Clerk of Court is directed, after first deducting any excess in this proceeding, to distribute the balance in his hands on the pro-rated basis of $1,916.42 for the City of Wilmington and County of New Hanover and $2,103.20 to the State Department of Revenue.

Judgment

THIS CAUSE coming on for hearing before the Court and pleadings and evidence and argument of counsel being heard and the Court having made its findings of fact and conclusions of law which appear of record to which reference is made, it is now ORDERED, ADJUDGED and DECREED that none of the claimants to funds involved in this proceeding are entitled to any part of the $3,233.94 paid into the Clerk's Office other than claimant the City of Wilmington, N. C. and County of New Hanover, N. C., both of whom are entitled to the one sum of $1,916.42 and the North Carolina Department of Revenue which is entitled to the sum of $2,103.20.

It is further ORDERED and ADJUDGED that inasmuch as the cost will have to be deducted from the $3,233.94 which the Clerk of Court is directed to compute and to deduct, the Clerk is directed to distribute the balance of the fund ratably between the City of Wilmington and the County of New Hanover, N. C. and the North Carolina Department of Revenue in accordance with these findings above referred to.

 

 

[59-1 USTC 9453]Metropolitan Life Insurance Company, a corporation, Plaintiff v. Edward L. Wells, Mary H. Wells; Title Insurance & Trust Company, a corporation; Victoria A. Block; B. H. Anderson; The United States of America; First Doe to Tenth Doe, inclusive, Defendants

Superior Court of Calif. , County of Los Angeles , No. Pomo C-3129, 3/17/59

[1954 Code Sec. 6323]

Lien for taxes: Priority as against judgment creditor: Requirement that abstract of judgment be filed under California law.--The rights of a creditor who obtained a judgment in a California court before a federal tax lien against the debtor was filed, but who did not record an abstract of the judgment until after the tax lien had been filed, were subordinate to the tax lien. Miller v. Bank of America , (CA-9) 48-1 USTC 9185, 166 Fed. (2d) 415, was cited as authority for the conclusion that a judgment creditor must obtain not only a judgment, but also a judgment lien, before the filing of a federal tax lien in order to be entitled to priority. In this case, a mortgagee's rights were superior to the federal tax lien.

Homer H. Henrie of Carter, Young, Zetterberg & Henrie, California Bank Building, Pomona , Calif. , for plaintiff. William Katz, Harry Boxer, Suite 415, Chester William Building, 215 W. 5th Street, Los Angeles 13, Calif., for Victoria A. Block. Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, 808 Federal Building, Los Angeles 12, Calif., for United States.

Findings of Fact and Conclusions of Law

ZIEMANN, Superior Judge:

This cause came on for trial on December 4, 1958, before the Honorable Howard J. Ziemann, Judge of Pomona "B" of the Superior Court of Los Angeles County, State of California, sitting without a jury, Homer H. Henrie of the law firm of Carter, Young, Zetterberg & Henrie, appearing as attorney for the plaintiff, and Edward R. McHale, assistant United States Attorney, appearing as attorney for Defendant, THE UNITED STATES OF AMERICA, Harry Boxer, appearing for Defendant, VICTORIA A. BLOCK, and it appearing to the satisfaction of the Court that Title Insurance and Trust Company and B. H. Anderson, Edward L. Wells and Mary H. Wells, have been duly and regularly served with Summons herein, and have failed to answer herein, and that the default of those defendants for failing to appear and answer herein has been regularly entered herein, and the dismissal having been entered as to FIRST DOE TO TENTH DOE, inclusive, and evidence both oral and documentary having been submitted to the Court, and the Court being fully advised of the premises, renders its decision as follows, and finds the following Findings of Fact:

Findings of Fact

1. That each and every allegation contained in Paragraphs 2, 3, 4, 5, 6, 7 and 12 of Plaintiff's Complaint is true.

2. That there is now due, owing and unpaid to Plaintiff herein from the Defendants Edward L. Wells and Mary H. Wells, and each of them, the following:

(a) For and on account of principal upon said promissory note and deed of trust described in Plaintiff's Complaint, the sum of Ten Thousand Four Hundred Sixty-Two and 21/100 Dollars ($10,462.21);

(b) For and on account of interest due on said note, the sum of Five Hundred Fifty-Two and 72/100 Dollars ($552.72);

(c) For and on account of costs incurred herein and the filing and service of said Complaint, the sum of $22.00;

(d) For the sum of One Thousand Dollars ($1,000.00) as a reasonable and proper amount to be allowed to Plaintiff for its attorneys' fees herein incurred, and

(e) Making a total of $12,036.93, and there is now due, owing and unpaid to Plaintiff from said Defendants Edward L. Wells and Mary H. Wells, and each of them, said sum.

3. That on September 21, 1956, the delegate of the Secretary of the Treasury assessed against the Defendants and taxpayers Edward L. Wells and Mary H. Wells, federal income taxes for the calendar year 1955, in the sum of $3,660.48; that shortly thereafter notice of the tax assessed was given to the taxpayers and demand was made upon them for the payment of the taxes so assessed; that said taxpayers, after notice and demand, paid only the sum of $389.30, and no more, and remain indebted to the United States of America for the balance; that on December 28, 1956, a notice of tax lien was filed in the office of the County Recorder of Los Angeles County, California, pursuant to Section 6323 of the 1954 Internal Revenue Code as lien number 180112; that there remains due, owing and unpaid to the United States of America on said assessment, the sum of $3,834.74, which represents the balance of the assessed tax plus subsequently accruing penalties and interest computed through January 15, 1959, at the statutory rate of six per cent per annum, which amounts to $0.54 per day, until paid; that, in addition, lien filing fees of $1.50 have been incurred.

4. That on May 29, 1956, an action was filed in the Superior Court of the State of California, in and for the County of Los Angeles, Case No. 661057, entitled Minnie Bennett, plaintiff, versus B. F. Wells, E. L. Wells, et al.; that the amount demanded was $39,789.79, together with interest and costs of suits; that on June 6, 1956, an attachment issued out of the Superior Court in said action and on the same day was recorded as Instrument No. 4876 in Book 51374, Page 422 of the Official Records of Los Angeles County; that a judgment was entered therein on July 20, 1956, in favor of the plaintiff, and against the defendants, in the sum of $40,845.99, plus costs in the amount of $331.10; that an assignment of said judgment from the plaintiff to Victoria E. Bloch was filed therein October 23, 1956; that an abstract of judgment for $41,177.09, and any other amount due thereunder against B. F. Wells, et al., in favor of Victoria E. Block, assignee of Minnie M. Bennett, was recorded February 20, 1958, as Instrument No. 2527 in Book 56490, Page 480, of the Official Records of the County of Los Angeles.

Conclusions of Law

1. That the lien of the United States for taxes owing to it by Edward L. and Mary H. Wells arose on the date of the assessment, September 21, 1956, and became valid against the world, except as to mortgagees, pledgees, purchasers and judgment creditors, as to which it became valid on the date of filing, December 28, 1956; that Metropolitan Life Insurance Company became a "mortgagee" within the meaning of Internal Revenue Code, Section 6323, on March 3, 1953.

2. That Victoria Bloch did not become a judgment creditor within the meaning of Section 6323 of the Internal Revenue Code until February 20, 1958, when she recorded with the County Recorder of Los Angeles County an abstract of her judgment pursuant to Cal. CCP Section 674; that until said abstract of judgment was recorded she had no judgment lien; that her prior attachment of the property did not confer upon her a judgment lien or the status of a judgment creditor at the time of entry of judgment within the meaning of the federal law.

3. That the words "judgment creditor" in Internal Revenue Code, Section 6323, mean a creditor who not only obtains a judgment against the debtor, but also a judgment lien upon the judgment debtor's property prior to the filing of a notice of federal tax lien. Miller v. Bank of America , 166 Fed. (2d) 415 [48-1 USTC 9185]; Treas. Reg. Sec. 301.6323-1(a)(2)(i)(b); Revenue Ruling 54-125, 1954-1 Cum. Bull. 282.

4. That the principle of first in time, first in right, governs priorities herein, and the order of priority is first, Metropolitan Life Insurance Company, second, United States of America , third, Victoria Bloch.

5. That Plaintiff is entitled to have its said deed of trust foreclosed upon the land and premises covered by said deed of trust hereinafter described, and the proceeds of sale of said property apply to the payment of the said sum due upon the debt secured by its said deed of trust, counsel fee, cost of this action, and expense of the sale of the property, and should plaintiff be paid in full then the overplus from said sale, if any, shall be paid to defendant, THE UNITED STATES OF AMERICA, upon the sum found due said UNITED STATES OF AMERICA, as aforesaid, to wit the sum of Three Thousand Seven Hundred Sixty-Eight and 68/100 Dollars ($3,768.68) with interest at the rate of six per cent (6%) per annum from September 15, 1958, and should plaintiff be paid in full and the UNITED STATES OF AMERICA paid in full then the over-plus from said sale, if any, shall be paid to defendant VICTORIA A. BLOCH, upon the sums found due said VICTORIA A. BLOCH, as aforesaid, to wit, the sum of $41,177.09 with interest at the rate of seven per cent (7%) per annum from November 13, 1956, any balance thereafter to be paid into Court to await further determination of the rights of the persons entitled thereto.

6. That the claims, interests and liens of defendants TITLE INSURANCE AND TRUST COMPANY and B. H. ANDERSON are inferior and subordinate to the lien of Plaintiff's deed of trust.

7. That said real property be sold according to law by either the sheriff of the County of Los Angeles, State of California, or by a duly appointed and qualified commissioner, and the proceeds applied to the payment of the amount due on said promissory note and deed of trust with interest, disbursements and counsel fees; that if the proceeds of said sale be sufficient to pay the amount so found due plaintiff as aforesaid, the surplus of said proceeds shall be applied to pay the amount due the defendant THE UNITED STATES OF AMERICA; that if the proceeds of said sale by sufficient to pay the amount so found due Plaintiff and so found due Defendant THE UNITED STATES OF AMERICA, the surplus of said proceeds shall be applied to pay the amount due the Defendant, VICTORIA A. BLOCH; that Plaintiff herein waives any claim to a deficiency judgment against any of the defendants herein.

8. That the lien of the Deed of Trust of the Plaintiff is a valid and subsisting lien on said land and premises; and that Plaintiff is entitled to a judgment and decree of this court foreclosing said Deed of Trust and to carry out the foregoing, and also providing that any party to this action may become a purchaser at the sale of said property, said purchase or purchasers to be let into possession of said land and premises so sold under the expiration of the redemption period and that a writ of assistance issue therefor, if necessary, without notice.

9. That the real property ordered to be sold as aforesaid is as follows:

Lot 26 of Tract No. 17465, in the City of Pomona , County of Los Angeles , State of California , as per map recorded in Book 422 Pages 48 and 49 of Maps, in the office of the county recorder of said county."

THAT JUDGMENT AND DECREE BE ENTERED ACCORDINGLY.

 

 

[59-1 USTC 9368]Edward E. Cook, on behalf of himself and all other employees of Wyco Construction Inc. similarly situated, Plaintiff v. Wyco Construction Inc., a corporation, Defendant v. First National Bank of Fleming; Continental Oil Company, a corporation, United States of America: E. A. Hutton, d/b/a Hutton's Conoco Service Co., Craig, Colorado, et al., Interveners

District Court, City & County of Denver , State of Colo. , C. A. No. B-14658, 1/16/59

Lien for taxes: Priority.--In a suit by employees to recover wages due them for services performed for the defendant, the United States and other creditors filed claims as interveners. The claim of the United States is for withholding taxes and other payroll taxes. The court holds that the United States has a prior lien for the full amount of such taxes against the property of the defendant, including the funds on deposit with the court. The order of distribution to the employees and other interveners is determined.

Philip Hornbein, Jr., of Hornbein & Hornbein, Denver 2, Colo. , for plaintiff. Rob ert C. Hawley, W. M. Griffith, Denver 2, Colo., for Continental Oil Co. W. H. Hazlitt, Denver 2, Colo., for Hutton, Conoco Service. Sherman Walrod for First National Bank of Fleming, Colo. R. B. Danks, Denver, Colo., for Moffat County State Bank. G. W. Hirschfeld for Wyco Construction Co.

Findings of Fact, Conclusions of Law and Judgment

RAWLINSON, Judge:

1. This action was brought by Plaintiff against Wyco Construction Inc., as a class action on behalf of himself and all other employees of the Defendant similarly situated, to recover wages due them for work and services performed for the Defendant.

2. A Petition to intervene by the United States of America was granted, such intervention being for the purpose of claiming for and on behalf of the United States a priority lien for payroll taxes.

3. A Petition to intervene by the First National Bank of Fleming, Colorado, was granted, such Intervener claiming by reason of a purported assignment of accounts receivable due Intervener by the Defendant.

4. Similarly, Petitions to intervene were granted in favor of the following Interveners claiming as holders of checks issued by Defendant and negotiated by Defendant's employees, said Interveners being the Moffat County State Bank; Craig Drug Store Inc.; K. M. Teter, d/b/a Craig Motor Company; Donald and Wilma Wickam, d/b/a Midwest Cafe; Fred and Henry Seibott, d/b/a Seibott Hardware; W. H. Jordan, d/b/a Craig Tire Mileage; George B. Polk, d/b/a Esquire Liquor Store; and Elmer A. Hutton, d/b/a Hutton's Conoco Service Station.

5. Continental Oil Company was served with garnishee summons on January 28, 1957 , and in response thereto deposited in court a sum which garnishee admitted owing to the Defendant. After such deposit was made, Continental Oil Company was also permitted to intervene in the action, having been previously discharged as garnishee.

6. Other writs of garnishment were served upon E. Voight Company Inc., and Signal Drilling and Exploration, Inc., such garnishees having failed to answer or otherwise appear in this case.

7. The case has been before the court in trial on three occasions, totalling some seven days, and requiring the presence of seven attorneys as well their clients and witnesses. The court having heard the evidence and statements of counsel and stipulations of parties and being fully advised, makes its findings, conclusions and judgments as follows:

Findings of Fact and Conclusions of Law

1. The evidence establishes and the court finds that Hugh Best, the President of the First National Bank of Fleming, was active in the organization, operation and control of the Defendant, that George W. Hirschfeld, the President of the Defendant corporation, was subject to the control of the said Hugh Best, and that the two acted together to further the interests of the Bank at the expense of the Defendant, its employees and creditors. That there was an intent and arrangement by and between the said Best and Hirschfeld to divert the assets of the Defendant corporation to the First National Bank of Fleming. The effect of this arrangement if recognized by this court would be to deprive Defendant's employees and creditors of all means of recovery of moneys to which they are lawfully entitled.

2. The testimony further shows that there was no existing contract out of which accounts receivable could have arisen at the time of the purported assignment on which the Bank bases its claim.

3. The Plaintiffs, and each of them, were employed by the Defendant in the year of 1956 and earned wages for their labor and have owing to them on account of said wages the amounts shown on Schedule "A", together with statutory interest thereon from November 1, 1956, their court costs and reasonable attorneys' fees all as shown on Schedule "A".

[ U. S. Has Priority]

4. The Defendant withheld from wages paid to the Plaintiffs the sum of $1,262,54 as and for Federal withholding tax, and the sum of $198.06 as and for Social Security taxes, and the Defendant is further liable to the United States Government for its share of the employees' Social Security taxes in the amount of $202.44, and that the Intervener United States is entitled to judgment against the Defendant in the total amount of $1,663.04 and is entitled to a prior lien in said amount against the property of the Defendant, including the moneys on deposit in the registry of this court.

5. That the garnishee and intervener Continental Oil Company has deposited into the registry of this court the sum of $5,382.04, and that there is further owing from said garnishee and intervener the sum of $1,473.18 on account of work and labor performed for it by the Defendant.

[Others' Claims Determined]

6. As for the remaining Interveners, holders of checks of Wyco Construction Inc., the court finds that the allegations of their pleadings are true, and they are entitled to judgment as hereinafter set forth.

7. The court specifically finds that the conduct of Wyco Construction Inc., constituted a wilful and malicious injury to property of the Plaintiffs and other claimants herein.

8. That there is due to Defendant from the garnishee, E. Voight Company, Inc., the sum of $3,458.05, and that there is due from the garnishee, Signal Drilling and Exploration, Inc., to the Defendant the sum of $280.25; that the saie garnishees were properly served herein, but have failed to answer or otherwise appear, the court has jurisdiction over such persons and their default should be entered.

9. The court holds as a matter of law that the several claims of the Plaintiffs are entitled to priority as against any claim of Intervenor, First National Bank of Fleming.

10. The court holds as a matter of law that the purported assignment by the Defendant to the Intervenor, First National Bank of Fleming is invalid as against the wage claims of the Plaintiffs.

11. The court holds as a matter of law that the Plaintiffs, as employees of the Defendant, are entitled to payment for their work and labor and that their rights cannot be defeated by the device of an assignment of accounts receivable by the Defendant to the Intervener, First National Bank of Fleming.

12. The court holds as a matter of law that the Plaintiffs, as employees of the Defendant, have a lien on all amounts which may be due to the Defendant by reason of Plaintiffs' work and labor, and that such lien is superior to any right or claim of the Intervener, First National Bank of Fleming.

13. The court holds as a matter of law that the Plaintiffs are entitled to payment for the work and labor performed by them for the Defendant, and that it would be contrary to law and justice to allow such right to be defeated by a purported assignment of accounts receivable by Defendant to Intervenor, First National Bank of Fleming.

IT IS THEREFORE THE ORDER AND JUDGMENT of this court that:

1. The Plaintiffs, and each of them, have judgment against the Defendant in the amounts set forth on Schedule "A", together with statutory interest on said amounts from November 1, 1956, together with their costs of suit and attorneys' fees, all as shown on Schedule "A".

2. That the Intervener, United States , have judgment against the Defendant in the sum of $1,663.04 and have a first and prior lien for said amount against all assets of Defendant including moneys heretofore deposited into the registry of this court.

3. That the Intervener, Elmer A. Hutton, d/b/a Hutton's Conoco Service Station, have judgment against the Defendant and against the plaintiff, Frank Winterowd, in the sum of $104.84; and that Elmer A. Hutton, d/b/a Hutton's Conoco Service Station, have judgment against Defendant and against Plaintiff, Jess Boyce, in the sum of $61.29; and that Elmer A. Hutton, d/b/a Hutton's Conoco Service Station, have judgment against Defendant in the further sum of $109.51.

4. That judgment in favor of the Defendant for the use and benefit of the Plaintiffs and Interveners, except First National Bank of Fleming and except Continential Oil Company and against Intervener, Continental Oil Company in the amount of $6,855.22 be entered, and that Plaintiffs have judgment over and against the Defendant and against said garnishee in said amount, and that the said judgment shall be fully discharged and satisfied by deposit by said Intervener of the additional sum of $1,473.18 into the registry of the court, and upon such payment said garnishee and intervener shall be discharged from any further liability or obligation to the Defendant or to the Plaintiffs, or to the other Interveners, and said payment, together with the amount heretofore deposited into the registry of court, shall constitute full satisfaction and discharge of all amounts owing by said garnishee and intervener to any and all parties in this case.

5. That judgment be entered in favor of Defendant for the use and benefit of the Plaintiffs, and the Interveners except First National Bank of Fleming and except Continental Oil Company, and against E. Voight Company, Inc., a Delaware corporation, garnishee, in the amount of $3,458.05, and that the Plaintiffs have judgment over and against the said E. Voight Company, Inc., and against the Defendant in said amount, and that the said judgment shall be fully discharged and satisfied by deposit by said Intervener of the additional sum of $3,458.05 into the registry of the court, and upon such payment said garnishee and intervener shall be discharged from any further liability or obligation to the Defendant or to the Plaintiffs, or to the other Interveners, and said payment, together with the amount heretofore deposited into the registry of court, shall constitute full satisfaction and discharge of all amounts owing by said garnishee and intervener to any and all parties in this case.

6. That the Defendant have judgment against Signal Drilling and Exploration, Inc., in the amount of $280.25 for the use and benefit of the Plaintiffs and the Interveners in this case in whose favor judgment is entered, and that the Plaintiffs have judgment over against the Defendant and against Signal Drilling and Exploration, Inc., in said amount, and that the said judgment shall be fully discharged and satisfied by deposit by said Intervener of the additional sum of $280.25 into the registry of the court, and upon such payment said garnishee and intervener shall be discharged from any further liability or obligation to the Defendant or to the Plaintiffs, or to the other Interveners, and said payment, together with the amount heretofore deposited into the registry of court, shall constitute full satisfaction and discharge of all amounts owing by said garnishee and intervener to any and all parties in this case.

7. That judgment be entered in favor of Moffat County State Bank and against the Defendant, Wyco Construction Inc., and Floyd Ledbetter in the amount of $495.80; and against Wyco Construction, Inc., and George Carter in the amount of $363.95; and against Wyco Construction, Inc., and Ed E. Cook in the amount of $178.12; and against Wyco and Harlin Owen in the amount of $106.70; and against Wyco and Ophelia Stroup in the amount of $38.25. That judgment be entered in favor of the Craig Drug Store, Inc., and against Wyco Construction, Inc., and Albert Stroup in the amount of $49.75; and against Wyco and Harold Hughes in the amount of $69.96; and against Wyco and Kenneth Hughes in the amount of $26.07. That judgment be entered in favor of K. M. Teter, d/b/a Craig Motor Company and against Wyco Construction Inc., in the amount of $242.29. That judgment be entered in favor of Donald and Wilma Wickam, d/b/a Midwest Cafe and against Wyco and Darrel Lee Smith in the amount of $29.31; and against Wyco and James Bell in the amount of $80.13, and against Wyco and Floyd Ledbetter in the amount of $50.00; and against Wyco and Roy Smith in the amount of $14.18. That judgment be entered in favor of Fred and Henry Seibott, d/b/a Seibott Hardware, and against Wyco and Ed E. Cook in the amount of $205.06. That judgment be entered in favor of George B. Polk, d/b/a Esquire Liquor Store, and against Wyco and Delmer Moore in the amount of $152.26; and against Wyco and Albert Stroup in the amount of $51.44; and against Wyco and Elmer B. Batchelor in the amount of $35.28; and against Wyco and L. A. Curtis in the amount of $10.00. That judgment be entered in favor of W. H. Jordan, d/b/a Craig Tire Mileage and against Wyco Construction, Inc., in the amount of $35.81.

8. All moneys within the registry of this court and to be deposited in the registry of this court in this case shall be paid out by the Clerk of this Court upon order of the Court as follows:

"(a) To the Intervener United States the sum of $1,663.04.

"(b) To the Plaintiffs, and their attorneys, and the Interveners as provided by Schedule 'A'.

"(c) The Clerk of the Court shall forward to each employee named in Schedule 'A' at his last known address, by registered or certified mail, deliverable to addressee only, return receipt requested, a copy of this judgment together with the check for the amount due such individual as shown by Schedule 'A'.

"(d) If the Clerk is unable to effect payment to any employee whose name appears on Schedule 'A' within six months after the date of this judgment, then said employee's share of the moneys on deposit in the registry of this court shall be distributed pro rata to the other employees as to be further provided by the court.

"(e) Individual Interveners shall be paid the amount in Schedule 'A' by payment directly to their respective counsel.

"(f) Further distribution of funds in the registry of the court and to be deposited in the registry shall be made in the same manner until all employees have received the full amount of their judgments or until the funds have been exhausted. The court retains jurisdiction to make such further orders in this matter as may be necessary to implement the provisions of this judgment."

The objections and exceptions to this judgment of the Intervener First National Bank of Fleming are noted.

[59-1 USTC 9296]Carolyn Stadelman, as executrix, etc., and another, Plaintiffs v. Hornell Woodworking Corporation, United States of America, et al., Defendants

U. S. District Court, West. Dist. N. Y., Civil No. 7851, 10/24/58

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

Priority of liens: State law v. federal law.--A motion for judgment in a mortgage foreclosure action was denied where its form, based on the New York Civil Practice Act making state and municipal tax liens the equivalent of expenses of sale, would give priority in payment to such liens over federal tax liens without a determination as to the validity or priority in time of filing of any of the tax liens, contrary to the federal rule of "first in time, first in right."

G. Orcutt Brown, Hornell, N. Y., for Plaintiffs. John O. Henderson, United States Attorney (John P. MacArthur, Assistant United States Attorney, of counsel), for the United States .

BURKE, District Judge:

This is a mortgage foreclosure action. The plaintiffs have moved to confirm the report of the referee to compute the amount due the plaintiffs on the mortgage and for judgment of foreclosure and sale. The proposed judgment provides that only so much of the mortgaged property be sold as will cover the expenses of sale and the amount which the referee computed to be due the plaintiffs herein as holders of the mortgage. It also provided that the real estate should be sold subject to unpaid state and local taxes, and that all defendants, except the holders of state and local tax liens, should be barred from all claims with regard to said mortgaged property. The United States has objected to the form of the judgment.

[Local Tax Liens Subsequent in Time]

The United States had interposed an answer, setting up as a defense that the United States has eleven tax liens outstanding against the premises sought to be foreclosed, and that on information and belief, subsequent to the filing of the tax liens of the United States certain county and city taxes, assessments and water rates were not paid, and as a result became liens and are subordinate to the tax liens of the United States. Its prayer for relief asked that the complaint be dismissed, or in the alternative, that the plaintiffs be allowed to proceed with foreclosure and sale providing the judgment of foreclosure and sale expressly requires the referee to pay out of the proceeds thereof the tax liens of the United States prior to the city and county tax liens. There has been no determination of the validity or priority in time of filing of any of the tax liens. The proposed judgment would, none-the-less, give priority in payment to the city and county tax liens.

[Effect of Local Law]

The plaintiffs, in support of the proposed judgment, assert that the liens of the United States , even though filed prior to local tax liens, are not entitled to priority in payment over local tax liens subsequently filed, because such local tax liens are considered as expenses of sale under Section 1087 of the New York Civil Practice Act. That section provides, "Where a judgment rendered in an action to foreclose a mortgage upon real property directs a sale of the property, the officer making the sale must pay out of the proceeds, unless the judgment otherwise directs, all taxes, assessments and water rates which are liens upon the property sold . . . . .. The sums necessary to make these payments and redemptions are deemed expenses of the sale within the meaning of that expression as used in any provision of this article." Section 1082 of the Civil Practice Act provides that "In an action to foreclose a mortgage upon real property, if the plaintiff becomes entitled to final judgment, it must direct the sale of the property mortgaged or of such part thereof as is sufficient to discharge the mortgage debt, the expenses of the sale, and the costs of the action . . . .."

The obvious effect of the quoted provisions of the New York Civil Practice Act is to give priority in payment to state and municipal tax liens over federal tax liens which are prior in time of filing. The New York Court of Appeals in Aquilino v. United States, 3 N. Y. 2d 511, 515 (a case not dealing with Sections 1082 and 1087 of the Civil Practice Act) said "The 'relative priority of the lien of the United States for unpaid taxes is' the Supreme Court has said, 'always a federal question to be determined finally by the federal courts.' (citations) Turning, therefore, to the federal decisions, we find the rule firmly established that, once a government tax lien is properly filed, no subsequently recorded lien or claim may prevail against it", citing among other cases United States v. New Britain, 347 U. S. 81, 84-87 [54-1 USTC 9191]; and further, at page 516, "It is, by now, exceedingly well settled that no state-created rule may defeat the paramount right of the United States to levy and collect taxes uniformly throughout the land. (citations)."

[Federal Rule Controls]

The federal tax liens were created by Section 3670 of the Internal Revenue Code of 1939, 26 U. S. C. 3670. Notice of the liens upon the mortgaged property were filed in the county clerk's office pursuant to Section 240, Subdv. 1 of the New York Lien Law. New York state cannot impair the standing of federal liens without the consent of Congress. As to any funds in excess of the amount necessary to pay the mortgage, Congress intended to assert a federal lien. The rule of "first in time, first in right" applies. United States v. New Britain , 347 U. S. 81 [54-1 USTC 9191]. The proposed judgment would deny that rule.

The motion for judgment as proposed by the plaintiffs is denied. So ordered.

 

 

[59-1 USTC 9214]United States of America, Plaintiff v. Samuel Caruso, Rudolph Benvin and Edward Evanchak, individually and trading as Caruso Cabinet Works; Western Pennsylvania National Bank; Nicolina Caruso; Alex Sowa; Joseph Grudovich; Marian Slivensky; Elmer Eichelberger; Rob ert Leland; Steve Mazik; Edward Dill; Richard Stephan; John Felmley and David Cindric, Defendants

U. S. District Court, West. Dist. of Pa., Civil Action No. 16595, 12/31/58

Assessment: Priority of liens: Perfected liens: Notice of tax lien: Recorded chattel mortgage: Employees' claims for wages: Pennsylvania's claim for unpaid unemployment assessments: Landlord's warrant.--A chattel mortgage filed by a bank prior to the filing by the Federal Government of its notice of tax lien gave the bank a first lien on amounts realized by the Government after seizure and sale of a tax delinquent's personal property, since federal tax liens are not valid against a mortgagee, pledgee, purchaser or judgment creditor until notice of lien has been duly filed. However, the Government had a prior claim to the balance of the fund over a landlord's claim under a landlord's warrant, over claims of the tax delinquent's employees for unpaid wages, and over claims of the State of Pennsylvania for unemployment compensation assessments, where there was not an actual seizure and retention of taxpayer's personal property under the landlord's warrant, and where the claims of the employees and the State were not perfected. Since the claims of the claimants other than the bank did not give them the status of pledgee, purchaser, etc., prior tax assessment gave the Government priority under the rule that a federal tax lien attaches to all property and rights to property of the taxpayer from the date of assessment.

Hubert I. Teitelbaum, United States Attorney, Pittsburgh , Pa. , for plaintiff. Rack & Broder, Masonic Temple Bldg., McKeesport, Pa., Alexander J. Bieleski, 210 National Bank Bldg., McKeesport, Pa., for defendants.

Memorandum and Order for Distribution

WILLSON, District Judge:

This matter was heard by the court on the Government's application to distribute moneys received by the Marshal in selling on March 26, 1958 , certain personal property of the taxpayers. The net sum involved for distribution is $9,298.40. All parties interested were heard at a non-jury trial of this matter held July 7, 1958 . The Court finds the following facts:

[The Facts]

The taxpayers, Samuel Caruso, Rudolph Benvin and Edward Evanchak, operated a wooden cabinet business at 1903 Cliff Street , McKeesport , Pennsylvania , where they owned certain woodworking equipment that they used in the business. On various dates during 1955 through 1957, assessments were made against the taxpayers for withholding and employment taxes. These dates are set out in the schedule attached to the Complaint and marked Exhibit "A" [not reproduced herein]. These liens have a notice and demand date from the date of filing in the prothonotary's office, as set forth in that exhibit.

On December 17, 1957, all of the personal property of the taxpayer was purportedly sold by a constable upon a landlord's warrant to Alex Sowa, 432 Fifth Avenue , McKeesport , Pennsylvania , for $3,050.00 over and above a certain chattel mortgage. The landlord is Mrs. Nicolina Caruso, 611 Owens Avenue , McKeesport , Pennsylvania , the mother of Samuel Caruso, who claims approximately $3,600.00 in unpaid rental. A chattel mortgage covers certain of the taxpayer's personal property in the approximate amount of $5,000.00 and is held by the Western Pennsylvania National Bank, 236 Fifth Avenue , McKeesport , Pennsylvania , and was duly recorded on March 29, 1956. The alleged purchaser at the constable's sale, Alex Sowa, also held a judgment note against the taxpayer with an unpaid balance of $2,200.00 which he recorded on May 28, 1956.

 

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