Prior Law Page9

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On December 18, 1957, the Internal Revenue Service seized the personal property of the taxpayer under the provisions of Section 6331 of the Internal Revenue Code of 1954, and served notice of levies upon the constable, the bank, the landlord and the alleged purchaser. No money was recovered, however, and it was subsequently determined that no money was ever paid by the alleged purchaser, Alex Sowa.

On January 17, 1958, a suit was commenced in the United States District Court for the Western District of Pennsylvania, Civil Action No. 16595, to foreclose the federal tax liens against the taxpayer's personal property. As a result of that suit, based upon stipulation of counsel, the court directed the Marshal to proceed with the sale, which he did on March 26, 1958, realizing the sum aforesaid.

As to the law covering the facts in this case, this court agrees with Government counsel that the facts raise an issue which is a federal question, because it involves the priority of federal tax liens. Where dispute arises as to the priority between a tax lien of the United States and a lien under state law, there exists a federal question. United States v. Liverpool & London & Globe Ins. Co., Ltd., et al., 348 U. S. 215 [55-1 USTC ¶9136]; United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138].

[Bank's Chattel Mortgage]

The Government concedes in this case that the first lien is the chattel mortgage duly entered of record in the office of the prothonotary in favor of the Western Pennsylvania National Bank, McKeesport , Pennsylvania . The Government's contention is correct also that a federal tax lien attaches to all property and rights to property of the taxpayer from the date of assessment. Sections 6321 and 6322, Internal Revenue Code of 1954. This section is applicable to all other claimants except the Western Pennsylvania National Bank. Such liens shall not be valid against a mortgagee, pledgee, purchaser or judgment creditor, however, until a notice of lien has been duly filed. Section 6323, Internal Revenue Code of 1954.

[No Sale Under Landlord's Warrant]

As noticed here, there was an actual seizure of the property of the taxpayer by Government agents. The premises were locked and the Government remained in possession until the Marshal's sale. The constable's levy under the landlord's warrant and subsequent sale appears to be a nullity. The constable did not take and retain possession. Under the facts here, there was no valid sale under the constable's proceedings. The United States was entitled to priority over the landlord. United States v. Scovil, 348 U. S. 218 [55-1 USTC ¶9137] and In re Litt, 128 Fed. Supp. 34 [55-1 USTC ¶9187].

In the Litt case, decided by Judge Clary of the Eastern District, the court held that a landlord who had distrained on a tenant's property was not a judgment creditor within Section 6323 of the 1954 Code and was subordinate to a federal tax lien even though notices of liens were not recorded prior to the distraint. But in the instant case, notices of the liens were filed prior to the landlord's proceeding. Certainly the Government is entitled to priority over the holder of a judgment note since that lien, as against a federal tax lien, is not perfected as to personal property until execution is issued on the judgment. Ersa, Inc. v. Dudley , 234 Fed. (2d) 178 (3 Cir., 1956) [56-2 USTC ¶9621].

[Claims of Employees and State]

Certain employees of the taxpayers made claim for unpaid wages. These under Federal law are but inchoate claims and puts the holders in the class of general creditors, inferior to the tax lien held by the Government.

At the trial, counsel for the Commonwealth of Pennsylvania appeared and was given opportunity to present evidence as to certain claims of the Commonwealth for unemployment compensation assessments or taxes. Counsel for the state was given an opportunity to file a brief on the subject but has not done so, nor have the other claimants filed briefs. The court finds that the Commonwealth of Pennsylvania is entitled to none of the fund as its liens were not perfected as required by the federal decisions.

This court feels, however, that as the personal property was stored under lock and key on the premises by the Government for a period of three months and eight days, that being the period of time from the distraint of the goods by the Internal Revenue Service until the sale by the Marshal, that the landlord, Nicolina Caruso, should be compensated in a reasonable amount for the use of her premises for the aforesaid purpose. The court finds that the sum of $750.00 is fair and reasonable rental for the premises during the aforesaid period and that such charge shall be considered as part of the costs of the sale.

THEREFORE, this 31st day of December, 1958, THIS COURT ORDERS, ADJUDGES and DECREES that the fund in the registry of this court, this is, the sum of $9,298.40, be distributed as follows:

1. To 
Western Pennsylvania
 National

Bank, 

McKeesport
, 
Pennsylvania

,

Chattel mortgage entered March

29, 1956, including the interest ..............         $5,685.00

2. To Nicolina Caruso, rental of premises .....          $ 750.00

3. 

United States of America

, F.U.T.A.

and F.I.C.A. tax deficiencies assessed

May 9, 1957 ...................................          2,863.40

Total .........................................         $9,298.40

 

 

[58-2 USTC ¶9907] United States of America , Plaintiff v. Delaware Trust Company, Trustee Under the Will of Joseph H. Gooding, Elizabeth Gooding Wilkins, Arthur H. Wikins and Charles P. Gooding, Defendants

U. S. District Court, Dist. Del., Civil Action No. 1835, 167 FSupp 465, 10/29/58

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

Lien for taxes: Validity as against assignee of interest in trust: Notice not filed in state of residence of trust property.--Notices of tax liens filed in the districts of taxpayer's residence, Montgomery County, Maryland, and the District of Columbia, were not effective to make such tax lien valid as against an assignee of taxpayer's interest as beneficiary of a trust consisting of real property located in Delaware, in which district no notice was filed.

Richard M. Rob erts, Department of Justice, Washington, D. C., Leonard G. Hagner, United States Attorney, Wilmington, Del., for plaintiff. Everett E. Borton, Wilmington , Del. , for defendants.

LAYTON , District Judge:

The question presented for decision here is whether notice of a tax lien filed in the State of the taxpayer's residence was effective to make such tax lien valid as against an assignee of taxpayer's interest as beneficiary of a trust consisting of real property located in another state where notice of the lien was not filed.

The Commissioner of Internal Revenue assessed income taxes against the defendant Charles P. Gooding, as follows:

Year              Assessment List Received          Amount

1948         
July 31, 1950
 ...............         $971.26

1949         
August 14, 1950
 .............          555.10

1950         
July 16, 1951
 ...............           40.17

 

Notices of liens for the above stated taxes were filed as follows:

Year                     Date                       Place Filed

                                    Circuit Court, 

Montgomery

1948         
Sept. 25, 1950
         County, 

Maryland

.

                                    Register of Deeds of

1949         
Mar. 19, 1951
          District of 

Columbia

.

                                    

Clerk
, 
United States

                                    District Court, District

1950         
Apr. 22, 1955
          of 

Columbia

.

 

The notices were filed in the districts where the taxpayer lived in 1948, 1949 and 1950, namely Montgomery County , Maryland , and the District of Columbia .

The taxpayer is a beneficiary under a Delaware trust, and Delaware Trust Company, a banking corporation of Delaware , is trustee.

[Assignment of Trust Interest]

In 1951, the taxpayer assigned to the defendants, Elizabeth and Arthur Wilkins, all of his share of the income to arise from this trust until payments to the assignees totaled $3,400.00. Consideration for the assignment was a loan by the assignee to the assignor for $2,700.00 and the cancellation of an outstanding debt of $500.00 due from the latter to the former. The assignment also provided that in the event of the dissolution of the trust, any unpaid portion of the $3,400.00 debt would be paid from the taxpayer's share of the corpus.

This suit seeks to enforce the judgment for taxes against the taxpayer's interest in the above described trust.

"The applicable federal statutes follow:

"26 U. S. C. 1952 Ed.

"Internal Revenue Code of 1939:

"SEC. 3670. PROPERTY SUBJECT TO LIEN.

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

"SEC. 3671. PERIOD OF LIEN.

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time.

"SEC. 3672 [As amended by Sec. 401 of the Revenue Act of 1939, c. 247, 53 Stat. 862, and Sec. 505 of the Revenue Act of 1942, c. 619, 56 Stat. 798]. VALIDITY AGAINST MORTGAGEES, PLEDGEES, PURCHASERS, AND JUDGMENT CREDITORS.

"(a) Invalidity of Lien Without Notice.--Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--

"(1) Under state or territorial laws.--In the office in which the filing of such notice is authorized 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 authorized the filing of such notice in an office within the State or Territory; ¹ (my emphasis)"

* * *

It is conceded by both sides not only that the assignment was valid but that it constitutes a "pledge" within the meaning of the above cited act. Consequently, if the property sought to be impressed with the lien is located in Delaware , the notices filed by the Government in Maryland and the District of Columbia gained no priority over the assignment.

Counsel agree that, for all practical purposes, this is a trust composed of real property located in Wilmington , Delaware . The property was bequeathed by the testator to his wife for her life and until the youngest child ² reached the age of 45 years, at which time the trustee was authorized to "divide the principal and income among my said children." There was a power of sale but the trustee, in disposing of the remainder, was not expressly directed to sell the realty. ³

[Government's Contentions]

The Government argues that the interest of the beneficiary in future income arising from this trust is inchoate and in some manner differs from his interest in the trust res with the result that the assignment of future income is tantamount to an assignment of personal property located at the residence of the assignor. Furthermore, it is urged that, as a practical matter, the assignee is better protected as the result of the existence of the notice at the residence of the assignor because, before accepting the assignment, he can examine the tax lien records where the assignment taxes place.

[Discussion of Effectiveness of Notices]

While these contentions are not without merit, they are supported by no authorities and leave unanswered a number of inquiries.

In the first place, it is axiomatic that the locus of a trust is usually the domicile of the trustee. Here the trustor was a Delawarean, the trustee domiciled here and the real property, or trust res, situated in this State. Unquestionably, the intent of the trustor was to establish a Delaware trust. 90 C. J. S. Trusts, Sec. 160(b); Wilmington Trust Co. v. Wilmington Trust Co., 15 A. 2d 153; 25 Del. Ch. 121, Aff'd 24 A. 2d 309; 26 Del. Ch. 397. Moreover, the entire trust res being realty, the authorities regard the trust as a trust of real, not personal, property. Gordon v. Gordon, 129 N. E. 2d 706 (Sup. Ct. Ill.); compare Senior v. Braden, 295 U. S. 422.

We have no authority except the Government's own statement to support its position that the taxpayer beneficiary here enjoyed a mere inchoate right and that the assignment of future dividends arising from the trust constituted the assignment of personal property only. On the other hand, Blair v. Commissioner, 300 U. S. 5 [37-1 USTC ¶9083], casts considerable doubt on that argument. There, the life beneficiary under a very large trust of real property, assigned certain portions of the future income to which he was entitled to his children. It was held that the assignment by the beneficiary of this income was an assignment not only of the right to receive income but of an interest in the trust estate itself--that is to say, of something akin to real property--with the result that the assignees were thereafter liable for the payment of income tax on the amounts assigned. While the case is not on all fours with this, much of its language squarely conflicts with the Government's theory of recovery here.

Not only that, but I remain unconvinced by the argument that the filing of the notice of the lien at the residence of the taxpayer (assignor) affords better protection to the assignee who can always look to the lien records of the former's residence rather than at the location of the trust. In my view, the opposite is more nearly true. Men frequently shift their residences but the location of a real estate trust rarely, if ever, would change from one state to another. Thus, it is at the locus of the real estate trust that the assignee can more safely make inquiry as to the existence of liens against the assignor's interest therein. Moreover, as a practical matter, the trustee is better protected. He is not charged with notice of the existence of a lien filed in some other state but by filing the notice at the locus of the property, nearly always the trustee's domicile, he is put on notice of the existence of a tax lien against the beneficiary and thereafter would pay over income to the beneficiary (or an assignee of which he has notice) at his peril.

Assume that this taxpayer resided in the District of Columbia , owned real property which he leased to others a mile away in Maryland and then assigned the rentals to X for a proper consideration. The Government is forced to the position that the notice of the lien against the taxpayer must be filed in the District. But the statute very clearly means that it shall be filed in Maryland . I can see little difference between the facts of this case, where the trust res is realty, and of the hypothetical case.

Finally, it may be conceded that the Government is faced with many practical difficulties in determining the proper place at which notices of tax liens should be filed in compliance with the statute. But the short answer to this complaint is that it here stands in no better position than any other private creditor seeking to impress a lien upon his debtor's assets and, even more importantly, Section 3672, above quoted, was not passed for the benefit of the Government at all, but as a protection to that class of persons (purchasers, judgment creditors, mortgagees, etc.) who, without such notice, stand to lose in their dealings with such property. Thus, the only place where they can safely look for the existence of liens or other incumbrances is the place where the property is located.

[Conclusion]

I am of the opinion that under these facts the plain intent of the statute requires the filing of the notice of lien at the domicile of the trustee where the real property is located and not at the taxpayer's residence. ⁴

An order will be entered on notice.

¹ Delaware has authorized the filing of such notices in certain designated places. 10 Del. C. 1953, Sec. 4736.

² Taxpayer is one of the children of the testator.

³ I doubt the necessity of here construing the trust in order to decide whether at its termination, the trustee was ordered to sell by clear inference or whether upon his failure to exercise the power of sale and divide the proceeds, the real estate would have descended to the remaindermen, including this taxpayer, as tenants in common or as joint tenants. Whatever the result, the taxpayer had not only an interest as beneficiary for a term of years but also an interest as remainderman in the residue at the termination of the trust.

⁴ This trust consisting of realty, I am not called upon to decide what would be the result in a case where the trust was part realty and part personalty or all personalty.

 

 

[58-2 USTC ¶9878] United States of America , Plaintiff v. Jane R. Ringler, Executrix of the Last Will and Testament of Harold J. Ringler, Deceased, et al., Defendants

U. S. District Court, No. Dist. Ohio, East Div., Civil Action No. 30887, 166 FSupp 544, 7/9/58

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

Lien for taxes: Priority against mortgagees: Mortgage given to secure future legal services.--A mortgage was filed against a taxpayer's property on June 18, 1953, securing the payment of future legal services of the mortgagees. The government's notice of tax lien was filed on August 5, 1953 . The mortgage lien for services rendered after August 5, 1953 , was not ascertainable in amount and, therefore, was not perfected. The mortgage lien for services rendered between June 18, 1953 , and August 5, 1953 , however, was ascertainable in amount and was not inchoate. The mortgage lien has priority over the government's tax lien only to the extent of the value of the services performed between June 18, 1953, and August 5, 1953.

Sumner Canary, 400 Federal Building, Cleveland , Ohio , for plaintiff. Claude P. Herman, 1201 First National Tower , Akron , Ohio , for defendant Ringler. Claude P. Herman, Frank E. Steel, 2522 First National Tower Building, Akron, Ohio, for defendants Gary Ringler, Oak Leaf Trailer Park, Inc., Virginia Ellison, Homes Sales & Building Co., Mary Wozniak, George Horton, Rob ert Shackelford, John Tate, Wiley Harris. W. J. O'Neill, 201 Firestone Bank Building, Akron , Ohio , for Firestone National Bank. Franklin Polk Leader Building, Cleveland, Ohio, for Acme Lumber Co. Weick & Genovese, 1910 First National Tower, Akron, Ohio, for Norman Boyer.

Opinion

MCNAMEE, District Judge:

The sole question presented is whether a mortgage from Oak Leaf Trailer Park, Inc. to Claude P. Herman and Stephen Wozniak to secure the payment of legal services which the mortgagees promised to perform is entitled to priority of payment over a tax lien of the United States against the property of Oak Leaf Trailer Park, Inc. The mortgage was executed on June 16, 1953 and filed for record with the Recorder of Summit County, Ohio on June 18, 1953 . The tax lien of the Government against Oak Leaf Trailer Park, Inc., as transferee, was delivered to the Collector on August 3, 1953 and filed for record with the Recorder of Summit County, Ohio on August 5, 1953 . The Firestone Bank of Akron , Ohio holds a mortgage on the same property dated March 28, 1950 securing the payment of a note for $10,000. No question is raised as to the priority of the mortgage of the Firestone Bank.

The facts essential to an understanding of the decision reached herein are:

For many years during his lifetime Harold J. Ringler, deceased, was engaged in the real estate business in Summit County , Ohio . In the year 1950 he was the owner of several parcels of real estate and of a substantial number of mortgages on properties sold to others. Ringler had failed to pay the full amount of his annual income taxes for the years 1939 to 1950. In the latter year he engaged Stephen Wozniak as his counsel, and Wozniak continued to serve as such until the summer of 1953, during which time the Government was investigating the civil and possible criminal tax liabilities of Ringler. Wozniak received about $5,000 from Ringler as payment in full for services rendered during the above period. Wozniak also received advice from his office associate, Herman, in connection with the matters about which Ringler consulted Wozniak. On August 1, 1952 Oak Leaf Trailer Park, Inc. was organized and immediately thereafter the property described in the mortgage here in question was transferred by Ringler and his wife, Jane R. Ringler, to Oak Leaf Trailer Park, Inc. without any consideration except the issuance of stock in the corporation to the grantees. The property transferred to Oak Leaf Trailer Park, Inc. was the most valuable parcel of real estate owned by Ringler. Park of this property was used as a trailer park. Several apartment buildings were located thereon and a tavern was operated on the premises by Ringler, who was the owner of a D-5 liquor permit issued by the Department of Liquor Control of the state of Ohio . On March 4, 1953 Oak Leaf Trailer Park, Inc. transferred to The Home Sales & Building Company, another Ringler corporation, a portion of the property conveyed by Ringler to Oak Leaf Trailer Park, Inc. On June 2, 1953, jeopardy assessments were made by the Commissioner of Internal Revenue against Ringler and his wife, and the notice of tax liens was filed with the Recorder of Summit County, Ohio on August 27, 1953. On June 16, 1953 Ringler engaged the services of both Wozniak and Herman to represent him and Mrs. Ringler in opposing the tax claims of the Government. On the same date Ringler caused to be executed and delivered to Wozniak and Herman a mortgage of Oak Leaf Trailer Park, Inc. securing payment of a demand note of $20,000. As shown by oral testimony, the mortgage was given to secure the payment of the reasonable value of legal services to be rendered by Wozniak and Herman. These services were to be rendered in behalf of Harold J. Ringler, Jane R. Ringler, Oak Leaf Trailer Park, Inc. and Virginia Ellison, the latter two being transferees of Ringler. As stated above, the mortgage was filed for record with the Recorder of Summit County on June 18, 1953 and the transferee tax lien against Oak Leaf Trailer Park, Inc. was filed for record with the Recorder on August 5, 1953. In the fall of 1953 Herman and Wozniak filed several petitions in the Tax Court of the United States in behalf of Mr. and Mrs. Ringler, Virginia Ellison and Oak Leaf Trailer Park, Inc. Before the tax cases came on for trial the Government, on March 8, 1954, filed this action to foreclose the tax liens against the Ringlers and their transferees and for the appointment of a receiver. A receiver was appointed by this Court on April 1, 1954. About two weeks after the appointment of the receiver Wozniak died, and Mary Wozniak was appointed Administratrix of his estate and substituted as a party in this action. About three months after the appointment of the receiver Harold J. Ringler died, and Mrs. Jane R. Ringler was appointed Executirx of his estate and made a party to this action. After Wozniak's death Herman continued to represent the Ringler interests. He represented them in a two day trial in the Tax Court, following which he prepared and submitted extensive briefs to that court. Herman also appeared at several of the hearings in this Court in connection with the receivership proceedings and also at the final hearing of this case and at the hearings on the various applications by the receiver to sell properties. There is no claim by the Government that the legal services rendered by Herman and Wozniak were unnecessary or that they were not rendered in good faith. It appears that on and after June 16, 1953 Wozniak, during his lifetime, and Herman at all times after said date, relied upon the mortgage as security for the payment of the reasonable value of legal services rendered by them. After the property of Oak Leaf Trailer Park, Inc. was sold, and upon inquiry by the Court at a special hearing, Herman stated that the reasonable value of the services rendered by himself and Wozniak in connection with the tax liability of the Ringler interests, including services rendered in connection with this case, was about $10,000. He stated that the reasonable value of the services rendered between June 16, 1953 and August 5, 1953 was $1600. The Tax Court determined the tax liability of Jane R. Ringler, Executrix of the estate of Harold J. Ringler, deceased, for the years 1942 to 1947, inclusive, plus penalties and interest for those years and for the year 1939 to be $207,069.66; that Jane R. Ringler, Executrix of the estate of Harold J. Ringler, deceased, and Jane R. Ringler, individually, were jointly and severally liable for income taxes, penalties and interest for the year 1950 in the amount of $22,714.66 and that Jane R. Ringler, Executrix of the estate of Harold J. Ringler, deceased, was liable for income taxes, penalties and interest for the years 1948 and 1949 in the sum of $20,095.59. The Tax Court also determined that Oak Leaf Trailer Park, Inc., transferee, was liable to the extent of $56,100 plus interest from August 1, 1952. No appeal was taken from the findings of the Tax Court, which were incorporated in and made a part of the final decree of this Court. At the time of the transfer of the real estate from Harold J. Ringler and Jane R. Ringler to Oak Leaf Trailer Park, Inc. the transferors were either insolvent or were rendered insolvent as a result of said transfers. Oak Leaf Trailer Park, Inc. was insolvent or became insolvent by its transfers of real estate to The Home Sales & Building Company. The property described in the mortgage to Wozniak and Herman has been sold for an amount insufficient to pay the liens and the amount realized by the Receiver from all sources, including the unpaid balances due on mortgages delivered to the Director of Internal Revenue, is insufficient to pay the tax liabilities of Jane R. Ringler, Executrix, Jane R. Ringler, individually, and of Oak Leaf Trailer Park, Inc.

Relying on former Section 3672 of the Internal Revenue Act of 1939 (now Section 6321) the mortgagees contend that the tax lien of the Government against Oak Leaf Trailer Park, Inc. is invalid as against their prior recorded mortgage. Former Section 3672 provides that the tax lien of the Government shall not be valid against mortgagees, pledgees or judgment creditors until notice thereof has been filed in the office provided by the law of the state for such filing. The mortgage was filed for record more than a month and a half prior to the recordation of the tax lien of the United States . However, the Government contends that at the time the tax lien was recorded the mortgage lien was inchoate and imperfect and thus not entitled to priority. In Spokane County v. United States, 279 U. S. 80 [1 USTC ¶387], in a proceeding involving the priority of debts to the United States owed by an insolvent debtor, the Supreme Court "launched the doctrine of the inchoate and general lien." Yale Law Journal, Vol. 63, p. 911 (1954). The doctrine was applied and extended in subsequent cases where the priority of the unsecured claims of the United States was at issue under Title 31, §191. New York v. Maclay, 288 U. S. 290; United States v. Waddill, Holland & Flinn, Inc., et al., 323 U. S. 353, 357 [45-1 USTC ¶9126]; Gordon v. Campbell, 329 U. S. 362. In the last cited case the Supreme Court defined the elements of a "choate lien" as follows:

"The long established rule requires that the lien must be definite, and not merely ascertainable in the future by taking further steps, in at least three respects as of the crucial time. These are: (1) the identity of the lienor, United States v. Knott, 298 U. S. 544, 549-551; (2) the amount of the lien, United States v. Waddill Co., 323 U. S. at 357-358; and (3) the property to which it attaches, United States v. Waddill Co., supra; United States v. Texas, supra; New York v. Maclay, supra. It is not enough that the lienor has power to bring these elements, or any of them, down from broad generality to the earth of specific identity."

See also United States v. New Britain , 347 U. S. at p. 86 [54-1 USTC ¶9191]. In United States v. Security Trust & Savings Banks, 340 U. S. 47 [50-2 USTC ¶9492], the Supreme Court first applied the doctrine of the inchoate lien in a case involving the relative priority of a tax lien of the United States and an attachment lien filed in California where the federal tax lien was recorded subsequent to the date of the attachment but prior to the date the attaching creditor obtained judgment. In that case the court said:

"The effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question."

and held that the tax lien of the United States was superior to the inchoate attachment lien of the judgment creditor. The same question was presented in United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138]. There the question was the relative priority as between a tax lien of the United States and an attachment lien under the laws of the state of Ohio . As in Security Trust Co., supra, the tax lien was filed for record subsequent to the attachment but prior to the date the attaching creditor obtained judgment. Even though the Supreme Court of Ohio had designated an attachment lien "an execution in advance" and the Ohio courts had treated attachments as perfected liens, the United States Supreme Court held that for federal tax purposes an attachment lien in Ohio is an inchoate lien "because at the time the attachment issued the fact and the amount of the lien were contingent upon the outcome of the suit for damages." In United States v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191], it was held that the priority of each statutory lien there involved depended upon the time it attached to the property in question and became choate. In United States v. Gilbert, 345 U. S. 361 [53-1 USTC ¶9291], the court rejected the determination of the New Hampshire state court that the assessment of the state tax in question was "in the nature of a judgment," and held the so-called judgment lien to be inchoate.

The Supreme Court has not yet passed upon the question involving the relative priority of a tax lien and a mortgage under Section 3672 where the tax lien was filed subsequent to the recording of a mortgage given to secure future advances. But the court's uniform policy of applying the doctrine of "the inchoate lien" in cases involving the relative priority of United States tax liens and judgment liens under Section 3672 seems clearly to forecast a similarly strict application of the doctrine in future cases involving the relative priority of United States tax liens and mortgages. It is safe to assume that in such a case the three-fold test of choateness as laid down in Gordon v. Campbell , supra, and reiterated in United States v. New Britain, supra, will be applied to determine whether a prior recorded mortgage is a perfected lien entitled to priority. Proceeding on such assumption, it appears that here there is identity of lienors and identity of the property to which the mortgage lien attached, but on August 5, 1953 , when the tax lien was recorded, the total amount secured by the mortgage was not known or ascertainable. Except as to the value of the services rendered between June 18, 1953 and August 5, 1953 the amount secured by the mortgage was contingent upon events occurring after August 5, 1953 , and as to the value of services rendered subsequent to that date the mortgage was inchoate. While the authorities are divided on the question, there is abundant authority in support of the view that a mortgage to secure future advances which the mortgagee is obligated to make takes priority over a subsequent lien recorded before the future advances were made. 36 Am. J. 807, §232, et seq.; 138 A. L. R. 580. Ohio is in accord with this view where the amount of future advances is definite and expressed in the mortgage instrument. Kuhn v. Loan & Trust Co., 101 O. S. 34; 126 N. E. 820. However, whenever a question involving the relative priority of United States tax liens and other liens arises, courts are required to apply the test of choateness to the competing liens. Applying that test here, it must be held that as to the indefinite future advances (in the form of legal services) which were to be made after August 5, 1953, the mortgage lien is subordinate to the tax lien of the United States . The lien of the mortgage securing the value of services rendered between June 18, 1953 and August 5, 1953 stands on a different footing. As shown by the record, on August 5, 1953, legal services of the value of $1600 had been rendered by the mortgage. To that extent, therefore, the the mortgage. To that extent, therefore, the mortgage lien was not inchoate or imperfect. I am of the opinion that as to the amount of the mortgage lien securing such indebtedness the rule of first in time--first in right, applies. While the authorities are in conflict on the question whether a mortgage to secure future advances takes priority over a subsequent lien recorded before any of the advances are made, it is a rule of almost universal acceptance that such a mortgage has priority over subsequent liens to the extent of the advances made before the subsequent liens attach. 27 O. J. 175; 10 R. C. L. 429. The application of that principle here in favor of the priority of the mortgage lien to the extent of $1600 results in no retroactive displacement of the tax lien of the United States which did not become valid and effective against the mortgage until August 5, 1953. It does not appear that the Government is opposed to such treatment of the mortgage lien. In its brief the Government suggests that if the mortgagees rendered legal services between the date of the recording of the mortgage and the date when the tax lien was filed for record, they probably would be entitled to a prior lien to the extent of the value of the services rendered during such a period.

Accordingly it is held that the mortgage to Wozniak and Herman is prior to the tax lien of the United States to the extent of $1600, but, as to the balance claimed to be secured by the mortgage, the Government's lien has priority.

The liens hereinabove referred to have been transferred to the fund realized from the proceeds of the sale of the Oak Leaf Trailer Park property.

An order of distribution may be made in accordance with the foregoing.

 

 

[58-2 USTC ¶9828]In The Matter of Harry A. Palmer and Richard Palmer, Individually and as copartners, d/b/a under the name of Palmer Brothers Construction Company, Bankrupt

U. S. District Court, N. Dist. N. Y., In Bankruptcy No. 38834, 8/5/57

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

Tax liens: Priority: Mechanic's liens.--Where 12 creditors had not perfected mechanics' or materialmen's liens under New York law, a final construction contract payment of $3200 to the bankrupt contractor for their benefit was not impressed with a trust in their favor, nor did they have any priority for the payment of their claims. The government's tax lien, however, was entitled to priority under Bankruptcy Act Sec. 64, even though it did not arise until after the adjudication.

Palmer and Hankin, 117 Hawley St. , Binghamton , N. Y., for bankrupts. John J. Buckely, P. O. Box 49 , Johnson City , N. Y., for C & C Ready-Mix Corp. Kenneth P. Whiting, Jr., Security Mutual Bldg., Binghamton , N. Y., trustee in bankruptcy.

Referee's Decision

GOLDSTEIN, Referee in Bankruptcy:

In the admin istration of the above-entitled bankrupt estate, namely, Harry A. Palmer and Richard Palmer, individually and as copartners, d/b/a Palmer Brothers Construction Company, the following certain orders were granted and heard before this Court to solve the question which arose concerning a certain sum of $3200.00 presently in the hands of the trustee.

Upon the petition of creditor, C & C Ready Mix Corporation, this Court made its show cause order of March 30, 1956 directing trustee to turn over to said creditor the sum of $706.70 upon its allegation that it was a lien creditor entitled to said sum from the $3200.00 in trustee's possession, as a trust fund under Section 36(a) of the Lien Law of the State of New York.

It appearing thereafter that there were twelve (12) creditors similarly situated and this Court did grant an additional show cause order dated April 20, 1956 and returnable on May 3, 1956 directed to said creditors to determine their rights, if any, to said fund.

This Court did thereafter hear the evidence submitted by interested parties and witnesses who were examined and cross-examined, exhibits offered and received, including other creditor's proofs of claims duly filed and after careful and serious consideration, this Court does make the following findings of fact, namely;

I FIND that Harry A. Palmer and Richard Palmer, individually and as copartners, d/b/a Palmer Brothers Construction were engaged in the building business in Johnson City, N. Y., and the general area of Binghamton, New York.

I FIND that they ceased construction work about December 1, 1955, filed a voluntary petition in bankruptcy and were adjudicated bankrupts on January 21, 1956.

I FIND that said Palmers, having completed a home for one Warren Seamons on Kendall Avenue, Binghamton, did in the late October, 1955 receive the sum of $3200.00 as final payment by a check to their order which they endorsed and turned over to their attorneys, Palmer and Hankin of Binghamton.

I FIND that said $3200.00 check was deposited in said attorneys' trust account and was turned over with other funds to the trustee herein, after his election and qualification.

I FIND that none of the twelve creditors who furnished labor and material to said Seamon house ever filed a mechanic or materialman's lien as provided for under Section 10 of the Lien Law.

I FIND that failure to file the notice of lien within the statutory period is fatal to the lien. (Stevans v. Ogden , 130 N. Y. 182; Sect. 10, Lien Law)

I FIND that a mechanic's lien, even if filed after adjudication, but within the required statutory period, would take precedence over trustee in bankruptcy. (In re; Cramard, 145 Fed. 966; Sect. 13, Lien Law)

I FIND that Section 36(a) of the Lien Law does impress a trust upon moneys paid to a contractor for the benefit of unpaid material and labor claimants and make him criminally liable for larceny under Section 1302 of the Penal Law, if he should convert said moneys to his own use, but that said bankrupts did not convert said sum of $3200.00.

I FIND that the first meeting of creditors was held at Binghamton on February 2, 1956 and last day to file claims was therefore August 2, 1956.

I FIND that the Director of Internal Revenue did file first claim for tax priority in this case on July 6, 1956 which was within the statutory time and properly filed.

I FIND, however, that January 21, 1956, the date of adjudication, fixed and determined the legal status of all creditors and claimants in this estate.

I FIND that the government's lien for taxes and its priority arises at the time the assessment list was received by the Collector which in this case was July 6, 1956 as appears from the photostat exhibit of the government offered and received in evidence in this matter. (Sec. 3671, U. S. Code , U. S. v. White Bear Brew Co., 227 Fed. 363)

I FIND that no lien creditor can prevail against federal tax lien unless the lien was reduced to judgment prior to the filing of the assessment list with the Collector (U. S. v. White Bear Brew, 350 U. S. 1010 [56-1 USTC ¶9440]).

I FIND that material and labor claimants having failed to file liens as required by law gives them no priority or benefit of any trust and by law determines their status as general unsecured creditors.

I FIND that the government's claims for taxes not having been assessed before January 21, 1956, the date of adjudication, divests them of the superior priority they would have been entitled to under the decision of U. S. v. White Bear Brew, 350 U. S. 1010 [56-1 USTC ¶9440].

I FIND however that government's claim for taxes are entitled to the priority accorded them under Section 64 of the Bankruptcy Act and direct that the same be paid under said priority at the final closing of this estate.

Conclusions of Law

As a matter of law and discretion, I determine and so order that all claimants set out in this Court's order dated April 20, 1956 are general creditors and that the governments claims for unpaid taxes filed herein are entitled to payment as priority under Section 64 of the Bankruptcy Act and further that the sum of $3200.00 presently in the hands of the trustee with other funds, is not impressed with any trust in favor of lien creditors and is part of the general funds of this estate, subject to distribution as set out in Section 64 of the Bankruptcy Act.

 

 

[58-2 USTC ¶9823]In the Matter of George Shirt Company, Inc., Bankrupt

U. S. District Court, Dist. Md., Bankruptcy No. 10785, 162 FSupp 749, 6/13/58

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

Lien for taxes: Priority as against trustee in bankruptcy: Failure of Director to secure possession of property.--Where a levy was made on taxpayer's machinery for the purpose of enforcing collection of unpaid taxes, but adequate possession had not been obtained at the time the bankruptcy petition was filed, the Court, reversing the referee, held that the government's lien claim must be subordinated to admin istration and wage claims as provided by Bankruptcy Act Sec. 67(c). By removing the levy tags, allowing taxpayer to continue to operate his plant and use the machines, and by taking no steps to sell the property but instead allowing taxpayer to engotiate for a private sale, the District Director had not done all that he could to satisfy the statutory requirement that the lien be "accompanied by possession."

Charles E. Hearne, Jr., East Maine Street, Salisbury, Md., for George Shirt Co., Inc. John W. T. Webb, Salisbury, Md., for petitioning creditors.

THOMSEN, Chief Judge:

The trustee herein seeks review of a decision by the referee that the government's tax lien on certain tangible personal property of the bankrupt was "accompanied by possession of such property", and therefore not postponed in payment to admin istration expenses and wage claims under sec. 67(c) of the Bankruptcy Act, 11 U. S. C. A. 107(c).

The facts are not disputed. On May 15, 1957, the District Director of Internal Revenue made an assessment against George Shirt Company, Inc., of Wicomico County, Maryland, for unpaid withholding and social security taxes in the amount of $2,666.82, and on July 26, 1957, levied on the machinery of the company under 26 U. S. C. A. 6331 for an unpaid balance of $1,957.55. Notices of seizure were posted on the walls of the plants, the machines were tagged, and notice of levy and an inventory were served on an officer of the company, as required by sec. 6335(a). The keys to the factory were not turned over to the District Director; he allowed the company to continue operations for several weeks, completing work on hand, and to negotiate for a private sale of the property. Several days after the levy the District Director allowed the tags to be removed from the machines. He took no steps to sell the property under the levy, pursuant to sec. 6335(b). When the work on the materials on hand had been completed, the company turned the keys over to its attorney, who refused to deliver them to the District Director.

At the time of the levy about $3,500.00 was due employees of the factory for unpaid wages. On September 27, 1957 , seven of those employees filed a petition in bankruptcy against the company. On October 7, the company was adjudicated bankrupt; a receiver was appointed, and, subsequently, a trustee was elected and qualified.

On October 15, 1957 , the receiver filed a petition for leave to inventory, appraise and return as a part of the bankruptcy estate the machinery and equipment upon which the levy had been made. After a hearing, the referee denied the petition. This appeal is taken from that denial. The property was sold by the government for $2,613.12, and the proceeds deposited in the registry of this court.

[Section 67(c) Interpreted]

The trustee concedes that the government's lien on the machinery is valid against the trustee under sec. 67(b) of the Bankruptcy Act, but contends that it was not "accompanied by possession of such property" and therefore "postponed in payment to the debts specified in clauses (1) and (2) of subdivision (a) of section 64", as provided by sec. 67(c). Sec. 64(a) gives priority to (1) admin istration costs, and (2) wages not to exceed $600 to each claimant, earned within three months before the date of the commencement of the bankruptcy proceeding. The wage claims in this case all arose within the three month period and before the July 26 levy by the District Director.

The first part of sec. 67(c), with which we are concerned in the instant case, was adopted in 1939 to protect wage earners. Goggin v. Division of Labor Law Enforcement of California, 336 U. S. 118 [49-1 USTC ¶9142]; In re Quaker City Uniform Co. , 3 Cir., 238 Fed. (2d) 155. The term "possession" was not defined. In City of New York v. Hall, 2 Cir., 139 Fed. (2d) 939, the court said: "The word 'possession' drips with ambiguity. It is not a single purpose word and must be contextually construed. That for some purposes, under some sections of the act, it may include 'constructive' possession gives us no answer to our question. We are convinced that Section 67, sub. c, meant something more. * * * Whether a lien exists within Section 67, sub. b, is a question of State 'law'. Whether steps taken pursuant to State 'law' are sufficient to constitute 'possession' under 67, sub. c, is a question of Federal 'law'. That conduct must adequately warn potential petitioning creditors of the existence of the lien." In 1952 Congress added the second part of sec. 67(c), usually referred to as sec. 67(c)(2), which deals with certain liens on personal property "not accompanied by possession of, or by levy upon or by sequestration or distraint of, such property." Remington on Bankruptcy (Henderson ed.) sec. 1637.2, suggests that the "further phrasing" in sec. 67(c)(2) was stimulated by the comments in City of New York v. Hall, and indicates that only actual possession of personalty, prior to and at the time of the filing of the petition in bankruptcy, either by the lienholder or an agent, servant or officer acting for him, will satisfy sec. 67(c)(1).

As Remington notes, there is no precedent directly in point on the facts in this proceeding; the cases dealing with possession and abandonment of possession under levies, executions and attachments apply various rules to reach various results under various statutory provisions. See 21 Am. Jur., Executions, secs. 107, 108, 110, 129, 142; 21 Am. Jur., Attachment and Garnishment, secs. 536, 537, 541, 542, 543. We are not dealing here with the validity of the levy or with the possible loss of its lien. We are dealing with a narrow question of priorities, where Congress has indicated an intention to protect wage earners. It is not necessary to decide whether anything less than actual possession of tangible personal property will ever satisfy the statutory provision; constructive possession may be sufficient in certain cases. But in the instant case the District Director did not "do all he could" to secure and retain possession of the property. Cf. U. S. v. Eiland, 4 Cir., 223 Fed. (2d) 118, 123 [55-1 USTC ¶9487]. He did not take the keys of the factory; he left no representative in charge; he did not constitute an officer or employee of taxpayer his agent to hold the tangible personal property; he allowed taxpayer to continue its operations and to use the machines; he removed the tags from the machines; he took no steps to sell the property under the levy, but allowed taxpayer to negotiate for a private sale. Under these facts, the government's lien was not "accompanied by possession" within the meaning of sec. 67(c), and must be postponed to admin istration expenses and such wage claims as are provided for by sec. 64(a)(2).

The decision of the referee is reversed and the matter is remanded to him for further proceedings consistent with this order.

 

 

[58-2 USTC ¶9758]First State Bank of Medford , Plaintiff v. The United States of America , Defendant, and Harry L. Altman, Intervener

U. S. District Court, Dist. Minn., First Div., Civil No. 565, 166 FSupp 204, 7/11/58

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

Tax lien: Oral and unrecorded assignment of indebtedness to bank: Validity as against tax levy.--A federal tax lien, arising from an assessment for unpaid withholding taxes, is superior to a prior oral and unrecorded assignment of indebtedness to a bank as security in a loan transaction. Such a lien is inchoate and unperfected and remained dormant until after the tax lien had become perfected.

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

Tax lien: Priority as against unperfected equitable claim of lien for attorney's services.--An alleged equitable lien for attorney's services rendered was inferior to the tax lien of the Government, where such services were rendered after the Government's lien came into existence and where the claim for lien had not been perfected by recording as required by state law.

Wallace M. Tripp, of Nelson, Casey and Tripp, Owatonna , Minn. , for plaintiff.

George E. MacKinnon, United States Attorney, Kenneth G. Owens, Assistant United States Attorney, St. Paul, Minn., for defendant.

Ralph S. Schneider and Mr. Harry L. Altman, of Altman, Hennen, Malmon and Schneider, Minneapolis , Minn. , for intervener.

Memorandum Decision

NORDBYE, District Judge:

The above-entitled cause came before the Court for trial without a jury.

This suit was brought to determine the ownership of $2,500.00 on deposit with the Clerk of the District Court of Dodge County, Minnesota. The dispute arises by reason of the following facts and circumstances.

Some time prior to June, 1954, Kenneth W. Hammann and Harvey L. Hustad formed a partnership doing business as Owatonna Trenching Service (hereinafter called Owatonna or the partnership). Owatonna entered an oral agreement with Underground Constructors, Ine. (hereinafter called Underground) to perform certain operations in the installation of natural gas distribution systems in Windom and Mountain Lake , Minnesota . Under the agreement, Underground agreed to pay Owatonna eighty per cent of the amount due it as the work progressed, but Underground retained twenty per cent of the contract price as a holdback until completion and acceptance of the job.

After entering this contract, Hammann and Hustad approached an officer of the First State Bank of Medford (hereinafter called the Bank) to finance the operation. On June 30, 1954, the Bank loaned Owatonna $2,000.00. A note evidencing the indebtedness was made due in 60 days, and the $2,000.00 borrowed was deposited in Owatonna 's checking account.

On July 29, 1954, the partners procured another loan from the Bank. This note was for $2,800.00, payable on September 1, 1954. This credit was extended upon the strength of a purported oral assignment by Owatonna to the Bank of moneys due Owatonna from Underground. In connection therewith, the Bank received a letter from W. C. Donaldson, president of Underground, which stated:

"August 2, 1954

"First State Bank of Medford Medford , Minnesota

Gentlemen:

We have been requested by the Owatonna Trenching Service to assign the payments due them to your bank.

We have no objections to doing this and we will from the above date make out all payments due the Owatonna Trenching Service to them and your bank and send them to you when due. These will be accompanied with a statement of the footages and amounts withheld until the work is completed.

This assignment only pertains to the Windom, Mountain Lake jobs, and will be in force until we are requested to change these conditions.

Yours very truly

UNDERGROUND CONSTRUCTORS

By

(Signed) W. C. Donaldson

W. C. Donaldson (Pres.)"

Thereafter, except in one instance, Underground made the checks payable to the Bank, and the Bank then deposited the checks in Owatonna 's checking account. After the assignment Underground also paid certain creditors of Owatonna who might possess liens against the completed job. These amounts were deducted from the amount paid over to Owatonna without the Bank's knowledge or consent. It may be noted at this point that one check was made payable to Owatonna rather than to the Bank after the purported assignment. In addition, one check issued prior to the purported assignment was made payable to the Bank rather than to Owatonna . After the notes fell due, four checks, dated September 8, 1954, for $7,298.75, September 22, 1954, for $3,069.56, October 8, 1954, for $5,940.80, and October 19, 1954, for $2,000.00, totaling $18,309.11, were made payable to the Bank, but the Bank deposited the checks in Owatonna's checking account and did not apply any part of these funds toward satisfaction of Owatonna's notes. The Bank contends that it did not satisfy Owatonna 's indebtedness because the partners assured the Bank that Underground still owed Owatonna $17,500.00. This latter amount far exceeded Owatonna 's indebtedness, and being included in the alleged assignment it would cover Owatonna 's obligation to the Bank.

On November 23, 1954, the District Director of Internal Revenue received a $6,428.53 assessment against Owatonna for its failure to pay withholding deductions to the Government. A specific and perfected tax lien attached as of this date. On January 18, 1955, Underground was sent a Notice of Levy against Owatonna . Underground acknowledged receipt of the notice on January 20, 1955.

The Bank did not realize until January or February of 1955 that Owatonna was in financial difficulty. It then proceeded to reduce its notes to judgment, but the judgments were not obtained until September 15, 1955. In the meantime, intervener Altman had entered the picture as an accountant. He conducted an audit of Owatonna 's books in December, 1954, and billed Owatonna for these services. The indebtedness thereby incurred by Owatonna has been paid or discharged in Owatonna 's subsequent bankruptcy. However, a dispute had arisen during this time between Owatonna and Underground as to the amount due Owatonna for holdbacks and extra work not covered by the contract. Owatonna claimed that $17,500.00 was due. Underground refused to pay anything, and Owatonna engaged Altman, this time as its attorney, to collect the sum. Through Altman's efforts the claim was finally settled on April 17, 1956, for $2,500.00. This fund was paid into State Court pending a determination of its ownership. Altman received nothing for his services as Owatonna 's attorney. Both Hammann and Hustad have gone through bankruptcy. Altman apparently did not file a claim in bankruptcy for attorney's fees and did not, therefore, collect a fee from either of them.

It seems amply evident that Owatonna intended to give some form of oral assignment to the Bank of funds coming due from Underground. There is no real dispute in the testimony as to this. As between Owatonna and the Bank, the validity of this assignment is not questioned. Determining the nature of the assignment is more difficult and is actually the key to the entire case. The Government contends that so far as creditors were concerned, the assignment was fraudulent because it was not in writing and was not recorded. Section 513.17, Minn. Stat. Ann., states:

"Every assignment of a debt, unless the same be in writing and be filed with the clerk of the town or municipality in which the assignor resides, shall be presumed to be fraudulent and void as against his creditors, unless those claiming thereunder make it appear that it was made in good faith and for a valuable consideration: Provided, that this section shall not apply to debts evidenced by writing subscribed by the debtor, and delivered to the assignee at the time of the assignment thereof. Assignments required by this section to be filed need not be acknowledged."

However, as the Bank points out, this statute merely provides a rule of evidence. Telford v. Hendrickson, 1913, 120 Minn. 427, 139 N. W. 941. The presumption of fraud has been overcome here by a showing that the assignment was given in good faith and for a valuable consideration (the procurement of credit).

[Nature of Assignment]

Having found that the assignment was not rendered invalid by Section 513.17, Minn. Stat. Ann., we can proceed to consider further the nature of the assignment. In discussing the nature and effect of the Bank's assignment, some basic factors must be borne in mind. Quite obviously the Bank did not purchase Owatonna 's right to future payments from Underground. The Bank demanded an assignment as security. There never was any intention to grant or receive more than a security interest. Primarily, then, the Bank's interest is in the nature of a lien. The difference between an assignment and a lien is set forth in Springer v. J. R. Clark Co., 8 Cir., 1943, 138 Fed. (2d) 722, 726, where it states that "A lien is distinguished from an assignment in that it is a charge upon property, while an assignment creates an interest in property." Certainly, the Bank did not treat the moneys it received from Underground as though it had an immediate interest therein. The checks were deposited to Owatonna 's account even after the notes fell due. Regardless of what Owatonna may have told the Bank concerning holdbacks and extra work, the Bank's treatment of the funds is consistent only with a lienhold interest. In this regard the Springer case states, p. 726,

"If the intention of the parties to make an equitable assignment or to create an equitable lien arises by necessary implication from the terms of the agreement, construed with reference to the situation of the parties at the time of the contract, and by the attendant circumstances, such equitable right will be enforced by a court of equity against the fund."

From this the conclusion can be drawn that the Bank had a lienhold interest by virtue of its assignment.

["Perfected Lien" Standard Applied]

The question then arises as to whether or not the Bank falls within one of the privileged classes as contemplated by 26 U. S. C. A. §6323(a), which provides,

"(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 * * *."

If the Bank is one of those privileged by the statute, it must be either a pledgee or mortgagee. No serious argument has been advanced by the Bank that it is a pledgee, and no special consideration will be given to such a theory. It is urged, however, that the Bank is, in one sense, a mortgagee. That may be true. This does not mean, however, that the Bank is a mortgagee as contemplated in the statute. The Supreme Court has imposed a "perfected lien" standard upon lien interests that are recognized under this statute. United States v. White Bear Brewing Company, 350 U. S. 1010 [56-1 USTC ¶9440]; United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680]; United States v. City of New Britain, 347 U. S. 81 [54-1 USTC ¶9191]; United States v. Security Trust & Savings Bank of San Diego, 340 U. S. 47 [50-2 USTC ¶9492]. As counsel for the Government points out, development of the law along these lines is of recent origin. The most recent case is United States v. R. F. Ball Construction Co., Inc., 355 U. S. 587 [58-1 USTC ¶9327]. That case was initiated in the Western District of Texas as R. F. Ball Construction Co., Inc. v. Jacobs, W. D. Tex., 1956, 140 Fed. Supp. 60 [56-1 USTC ¶9514]. The case is similar to the one at bar, so a rather complete analysis and comparison will be helpful.

Ball procured a housing project contract in San Antonio and subcontracted the painting and decorating to Jacobs. On July 21, 1951, Jacobs applied to a bonding company for a performance bond. As collateral security for protection of the bonding company, Jacobs assigned in writing to the bonding company all percentages retained by Ball under the subcontract. The assignment was made as security not only for possible losses growing out of the San Antonio job, but also for payment of any indebtedness or liability "whether heretofore or hereafter incurred." Thereafter, on April 4, 1952, Jacobs obtained a similar bond with the same company on a different subcontract in Louisville , Kentucky .

On April 30, 1953, the holdbacks on the San Antonio job were finally determined to be $13,228.55. In May, June and September of 1953, the Government filed tax liens against Jacobs totaling approximately $17,000.00. Sometime thereafter, the bonding company's contingent liability on the Louisville job ripened into an actual liability, and the bonding company was required to pay out $12,971.88.

Not knowing to whom the $13,288.55 owing on the San Antonio job should be paid, Ball instituted an interpleader action to determine the rights of various creditors. The suit finally resolved itself into a dispute between the bonding company and the Government. The bonding company claimed that the assignment of the amount owing on the San Antonio job created a lien upon that fund which carried forward to the liability incurred by reason of Jacobs' default on the Louisville job. The bonding company contended that this lien placed it within the privileged categories of "mortgagee, pledgee, purchaser, or judgment creditor" under Section 3672 of the Internal Revenue Code of 1939 (now 26 U. S. C. A. §6323). The District Court was well aware of the Supreme Court decisions stating that liens, to be cognizable, must be more than inchoate and unperfected interests. Nevertheless, the District Court accepted the reasoning of the bonding company that the assignment as collateral security was a perfected contractual lien rather than the unperfected statutory type of lien which had theretofore been ruled upon by the Supreme Court.

The Court of Appeals affirmed the District Court in a per curiam decision, United States v. R. F. Ball Construction Co., Inc., 5 Cir., 1957, 239 Fed. (2d) 384 [57-1 USTC ¶9269]. The Supreme Court, however, reversed the Circuit Court in a five to four decision. The majority opinion treated the case summarily when it stated (also in a per curiam decision), at p. 587,

"The judgment is reversed. The instrument involved being inchoate and unperfected, the provisions of §3672(a), Revenue Act of 1939, 53 Stat. 449, as amended, 53 Stat. 882, 56 Stat. 957, do not apply. See United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]; United States v. City of New Britain, 347 U. S. 81, 86-87 [54-1 USTC ¶9191]. The claim of the interpleader for its costs is controlled by United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 [55-1 USTC ¶9136]."

This language clearly shows that the majority of the Court regarded the assignment as an inchoate and unperfected lien. The Bank here, however, points out that the assignment in the Ball case was made to secure a contingent or future indebtedness and that the assignment under consideration by this Court was given to secure a present and ascertained indebtedness. Admittedly, this is a distinguishing characteristic, but the distinction does not perfect an unperfected lien. Nor was the assignment to the Bank so definite as it contends. This is shown by the Bank's treatment of the moneys it did receive. The fact that the checks were made payable to the Bank is not particularly enlightening because at least one check was made so payable before the assignment, and conversely, one check after the assignment was made payable to Owatonna . The Government admits that the Bank may have obtained a perfected right to the payments it received and put into Owatonna 's checking account. These funds were at least reduced to possession by the Bank, but this is not true of the unpaid fund here in suit.

[Bank's Lien Unperfected]

The fact that the purported assignment here was given to secure a specified sum, and that the notes fell due on dates certain, relieved any lien which might arise of certain imperfections, but so far as the tax law is concerned, the lien itself remained unperfected, at least until some action was taken to enforce it. Furthermore, the matter of contingency is not limited solely to indefiniteness of time or amount. A lien interest, in and of itself, is indefinite. Contingency is the very basis of liens--if an obligor fails upon a primary obligation, the lienhold interest, though already in existence, becomes the basis of an enforcible right. The exact status of lienhold interests at any particular time always has been a difficult question. It is only proper, therefore, that the courts have erected the "perfected" standard to determine when the lien interest becomes cognizable in the federal tax lien law.

The Court is not particularly concerned with the fact that there are Minnesota decisions which may have recognized that oral assignments are valid and binding upon others than the immediate parties to the assignment. The question here is whether the Bank's lien interest satisfied the standards imposed by the decisions of the federal courts where the question of priority arises as between a government tax lien and a private unperfected lien. That the federal courts have the final say in federal tax lien matters is basic. United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138]. The oral assignment given to the Bank merely gave rise to an equitable right, but such right cannot be called "perfected" as against the lien of the United States . It is admitted that the Government had no notice of the Bank's alleged lien; in fact, no notice whatsoever was given by the Bank as to its oral assignment. The Bank, although it had ample opportunity to satisfy its lien, was content to rely solely upon its undisclosed lien to secure its indebtedness. It seems clear, therefore, that so far as the Government is concerned, the secret lien of the Bank remained inchoate and unperfected and lay dormant until after the tax lien became perfected. A majority of the court in the Ball case rejected the contention that an assignment as in the case at bar constitutes a mortgage within the meaning of Section 3672(a), Revenue Act of 1939. This Court must hold likewise here.

Claim of Intervener Altman

It was in November, 1954, that the Government's assessment became perfected and the Government obtained a lien upon all of Owatonna 's property and "rights in property." It was not until February, 1955, that Altman performed any services as Owatonna 's attorney. Obviously, therefore, the Government's lien existed on all of Owatonna 's rights to any property from Underground before Altman performed any legal services in creating the fund in question. He never perfected any lien for such services as required by Section 481.13 of the Minnesota Statutes. However, he now asks the Court to declare an equitable lien on the fund prior to that of the Government's lien, which was perfected some months prior to the commencement of Altman's services. His position is that if the Government obtains the money on deposit, it will be the recipient of funds which were created by him, and in good conscience there should be paid over to him such part of such funds as represents the reasonable value of the legal services which he rendered. In passing it may be noted, though it is probably without any significance here, that when settlement was made in State Court whereby the fund was deposited with the Clerk, Altman in signing the stipulation of settlement which arranged for the deposit, made no reference to any claim for attorney's fees, nor did he indicate in the settlement stipulation that there were any other claimants to the fund except the Bank, the Government, and the Federal Mutual Insurance Company, whose claim was subsequently dismissed. Owatonna was still doing business when it proceeded to settle with Underground. That Altman was looking to Owatonna for payment for any services which he rendered seems evident. He first commenced a suit in State Court against Owatonna requesting $250.00 for the legal services which he rendered in obtaining the settlement in question. The advent of bankruptcy evidently caused him to pursue his alleged lien claim against the fund. But whatever equitable lien he may have had against the fund, it remained unperfected, and in fact it is in this proceeding that he seeks to have his lien perfected. It may be true as Judge Kalodner stated in Filipowicz v. Rothensies, 43 Fed. Supp. 619, 623, 624 [42-1 USTC ¶9300], that there is a "well recognized principle that an attorney has a lien on a fund which has been created as a result of his efforts in litigation." But the holding in the Filipowicz case cannot be followed. Until rendered specific and definite by a decree of a court, the attorney's lien remains unperfected and inchoate in so far as its status in a federal tax lien case is concerned. If laborers, mechanics and materialmen, who have rendered services in creating improvements on real estate and filed liens according to state law before the Government perfects its tax lien on such real estate, are nevertheless subordinated to the Government's tax lien, it is difficult to understand under what rationale this Court can elevate Altman's unperfected legal lien to one which is superior to the Government's perfected lien in this case. See United States v. White Bear Brewing Company, 350 U. S. 1010 [56-1 USTC ¶9440], reversing 227 Fed. (2d) 359 [55-2 USTC ¶9776]; United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680], reversing ( Miss. ) 79 So. 2d 474; United States v. R. F. Ball Construction Co., Inc., 355 U. S. 587 [58-1 USTC ¶9327].

The above may be considered the Court's findings of fact, and as conclusions of law the Court finds that the United States has a good and valid lien on said fund prior to the rights of the plaintiff and the intervener herein, and that the United States have judgment that it is entitled to said fund free and clear of any claim of the plaintiff and the intervener herein. Let judgment be entered accordingly.

An order directing the Clerk of the District Court of Dodge County, Minnesota, to pay and deliver said fund to the United States of America in accordance with said judgment may be presented.

Exceptions are allowed.

 

 

[58-2 USTC ¶9653]In the Matter of Projectron Corporation, Bankrupt

U. S. District Court, Dist. Mass., In Bankruptcy, Docket No. 66-57, 4/23/58

Lien for taxes: Priority over state tax liens: Bankrupt's property.--

The lien of the United States for unpaid income taxes had priority over the statutory general tax lien claims of the Massachusetts Division of Employment Security and of the Commissioner of Corporations and Taxation of Massachusetts to funds of the bankrupt taxpayer in the hands of the trustee in bankruptcy. The general tax liens of Massachusetts at the time they arose were not specific and perfected in that they did not attach to specific property. Accordingly, since the property of the bankrupt passed into the hands of the trustee in bankruptcy, subject to the lien of the United States , that lien could not be defeated by the liens of Massachusetts which were not perfected before bankruptcy.

Charles F. Barrett, Assistant U. S. Attorney, 1107 Federal Bldg., Boston, Mass., for U. S. George Broomfield, Assistant Attorney General, State House, Boston, Mass., for Mass.

Opinion

SMART, Referee in Bankruptcy:

This cause is before me for a determination of the priority of the tax lien claims filed by the District Director of Internal Revenue, Boston, Massachusetts, the Division of Employment Security, and the Commissioner of Corporations and Taxation of the Commonwealth of Massachusetts, to funds in the hands of the trustee which constitute the entire balance of the bankrupt's estate. The expenses of admin istration and wage claims, if any, have been paid. The trustee in bankruptcy is a mere stake-holder in this proceeding and has no interest in the funds in controversy and is not a party to this proceeding. There are insufficient funds remaining in the bankrupt's estate to satisfy all the taxing authorities' tax claims. All of the assets of the bankrupt estate consisted of personalty not reduced to possession by lien claimants prior to bankruptcy, and therefore postponed by section 67(c)(1) to expenses of admin istration and wage priorities specified in Clauses (1) and (2) of subdivision (a) of section 64 of the Bankruptcy Act. Proper tax lien claims were filed by the parties. The nature of the respective taxes is set out in the agreed statement of facts, which statement shall be considered the findings of fact by the Court and made a part hereof.

Issues Involved

The substantial questions for determination in this case are:

(1) Whether the statutory general tax liens of the Commonwealth of Massachusetts taxing authorities on personalty not reduced to possession are invalidated in bankruptcy under the provisions of section 67(c)(2) of the Bankruptcy Act (11 U. S. C. 107 c 2); and if they are not, then

(2) Whether or not the federal tax lien arising under the provisions of section 6321 of the Internal Revenue Code (26 U. S. C. 6321) is a superior lien and entitled to priority over the state-created statutory general tax liens of the Commonwealth of Massachusetts taxing authorities.

The statutory general lien claimed by the Commonwealth of Massachusetts Division of Employment Security arises under the provisions of section 16 of Chapter 151A of the General Laws of Massachusetts (Ter. Ed.).

The statutory general tax lien relied on by the Commissioner of Corporations and Taxation of the Commonwealth of Massa chusetts arises under the provisions of section 76 of Chapter 63 of the General Laws of Massachusetts (Ter. Ed.).

Neither section 67(c) nor any other provision of the Bankruptcy Act sets up an order of priorities among tax liens. See Collier on Bankruptcy, 14 Ed., Vol. 4, p. 242.

The representatives of the Federal Government have argued vigorously that the provisions of section 67(c)(2) of the Bank ruptcy Act (11 U. S. C. 107 c 2) invalidates these state-created statutory liens. This precise question is of novel impression in this district. So far as I can ascertain, no circuit court has had occasion to rule on this precise question.

Section 67 of the Bankruptcy Act (11 U. S. C. 107) was amended in 1952 by adding among other changes the language of section 67(c)(2) (11 U. S. C. 107 c 2). The new clause explicitly acknowledges that it constitutes a qualification of subdivision b, which validates all statutory liens as against the trustee if perfected within the time allowed by applicable lien law. A comparison of clauses (1) and (2) of subdivision (c) discloses that every lien that is subordinated by clause (1) is invalidated by clause (2) with the following exceptions:

(1) Statutory liens arising under federal rather than state law, including liens for taxes or debts owing the United States , or personalty unaccompanied by possession;

(2) Statutory liens arising under state law on personalty unaccompanied by possession, but accompanied by levy upon or sequestration or distraint of the property;

(3) Liens of distress for rent.

(See IV, Collier on Bankruptcy (14 Ed.).)

The representative of the Commonwealth of Massachusetts taxing authorities has argued that this section (11 U. S. C. 107 c 2) uses the word "debt" and was not intended to include state-created tax liens.

The word "debt" as defined in section 1(14) of the Bankruptcy Act (11 U. S. C. 1(14)) includes taxes. In re Ward (D. C. Colo. 1955) 131 Fed. Supp. 387; In re Mercury, Inc., (D. C. Calif. 1946) 68 Fed. Supp. 376, 382; see also Ingels v. Botler (C. C. A. 9th, 1938) Aff'd in Botler v. Ingels (1939) 308 U. S. 57.

The two cases cited by the Commonwealth holding the word "taxes" in bankruptcy proceedings does not mean a debt, are both Massachusetts state decisions and, of course, are not binding on a Federal Court.

[Federal Tax Lien Provisions]

However, the provisions of section 67(c)(2) are not controlling in this proceeding since the law is apparently well settled on the question of relative priority of federal tax liens. The federal tax lien arises under section 6321 of the Internal Revenue Code. This section provides:

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

The lien provided for by section 6321 is a specific and perfected lien as of the date of assessment, notice and demand having been duly made. United States v. Kings County Iron Works, Inc. (C. A. 2nd 1955) 224 Fed. (2d) 232 [55-2 USTC ¶9536]; United States v. City of Greenville (C. C. A. 4th 1941) 118 Fed. (2d) 963 [41-1 USTC ¶9381]; Cobb v. United States et al. (C. A. D. C. 1949) 172 Fed. (2d) 277 [49-1 USTC ¶9125]; United States v. Ettelson et al. (C. C. A. 7th 1947) 159 Fed. (2d) 193 [47-1 USTC ¶9137]; Metropolitan Life Insurance Company v. United States (C. C. A. 6th 1939) 107 Fed. (2d) 311 [39-2 USTC ¶9771], cert. denied 310 U. S. 630. The filing of notice of federal tax liens is not a prerequisite to the validity of the federal tax liens as between the Federal Government and other taxing agencies (In re Ann Arbor Brewing Company (E. D. Mich., 1952) 110 Fed. Supp. 111 at 116 [52-2 USTC ¶9509]. The federal tax lien arising under the provisions of section 6321 of the Internal Revenue Code (26 U. S. C. 6321) is valid against personalty of the bankrupt since a statutory lien is valid in bankruptcy, (section 67c of the Bankruptcy Act) even though postponed in payment to the debts specified in section 64a(1) and (2) of the Bankruptcy Act for wages and admin istrative expenses (section 67c(1) of the Bankruptcy Act, 11 U. S. C. 107).

The provisions of section 67b of the Bankruptcy Act that allow perfection of a lien after bankruptcy do not require of the federal tax lien any additional perfection other than that provided for in section 6321 of the Internal Revenue Code (26 U. S. C. 6321) since said section is the law under which the federal tax lien arises. The Internal Revenue Code does not require additional steps to be taken except as to mortgagees, pledgees, purchasers and judgment creditors.

The United States Supreme Court has had occasion to rule on the relative priority of the federal tax lien and competing statecreated tax liens on numerous occasions in cases analogous to the situation in the instant proceeding, but involving section 3466 of the Revised Statutes (31 U. S. C. 191). While this section is not applicable to bankruptcy proceedings, (See Davis v. Pringle (1925) 268 U. S. 315; In re Knox-Powell Stockton Company (C. C. A. 6th 1939) 100 Fed. (2d) 979 [39-1 USTC ¶9277]; United States v. Sampsell (C. C. A. 9th 1946) 153 Fed. (2d) 731 [46-1 USTC ¶9186]) nevertheless the cases decided involving section 3466 had analogous problems. In cases involving section 3466, it has never been held sufficient to defeat the federal priority merely to show a lien effective to protect the lienor against others than the Government, but contingent upon taking subsequent steps for enforcing it. Illinois v. Campbell (1946) 329 U. S. 362 at 374. If the purpose of the federal tax lien statute to insure prompt and certain collection of taxes due the United States from tax delinquents is to be fulfilled, a similar rule must prevail here. United States v. Security Trust and Savings Bank (1950) 340 U. S. 47 at 51 [50-2 USTC ¶9492].

With respect to tax liens of equal dignity, the applicable rule is "the first in time is the first in right". United States v. City of New Britain (1954) 347 U. S. 81 [54-1 USTC ¶9191]. That is to say, tax liens of the federal, state and local governments are superior to one another in the order in which they respectively became perfected. It is well ettled that "a tax lien imposed by a law of Congress cannot without the consent of Congress be displaced by later liens imposed by authority of any state law or judicial decision." Michigan v. United States (1942) 317 U. S. 338, 340. This is so because the "establishment of a tax lien by Congress is an exercise of its constitutional power to 'lay and collect taxes'. Article 1, section 8, of the Constitution. United States v. Snyder (1893) 149 U. S. 210. And laws of Congress enacted pursuant to the Constitution are by Article 6 of the Constitution declared to be 'the Supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding'." Michigan v. United States, supra. The issue thus is whether the state lien is perfected when the federal lien arises.

"But it is a matter of federal law as to whether a lien created by state statute is sufficiently specific and perfected to raise questions as to the applicability of the priority given the claims of the United States by an act of Congress. If the priority of the United States is ever to be displaced by a local statutory lien, federal courts must be free to examine the lien's actual legal effect upon the parties. A state court's characterization of a lien as specific and perfected, however, conclusive as a matter of state law, cannot operate by itself to impair or supersede a long-standing Congressional declaration of priority. Field v. United States, 9 Pet. 182; $2United States v. Oklahoma , 261 U. S. 253, 260; Spokane County v. United States , supra, [279 U. S.]." United States v. Waddill, Holland & Flinn, (1944) 323 U. S. 353, 356-357 [45-1 USTC ¶9126]. In practice this has come to mean that if a state court characterizes a lien provided by state law as inchoate, this characterization is practically conclusive; but if the state court characterizes such lien as perfected, the characterization, although entitled to weight, is not conclusive but is subject to examination by the federal courts. United States v. Security Trust and Savings Bank, supra, at 49.

[When Lien Perfected]

If a lien is to be characterized by the federal courts as perfected, "the lien must be definite, and not merely ascertainable in the future by taking further steps, in at least three respects as of the crucial time. These are: (1) the identity of the Lienor, United States v. Knott, 298 U. S. 544, 549-551; (2) the amount of the lien, United States v. Waddill Company, 323 U. S. at 357-358; and (3) the property to which it attaches, United States v. Waddill Company, supra; United States v. Texas, supra; New York v. Maclay, supra. It is not enough that the lienor has power to bring these elements, or any of them, down from broad generality to the earth of specific identity." Illinois v. Campbell (1946) 329 U. S. 362, 375. "Nor can the doctrine of relation back . . . operate to destroy the realities of the situation." United States v. Security Trust and Savings Bank, supra, at 50. It would seem, however, that to be adjudged perfected, a municipal lien need not have been perfected to the point where the lienor has possession or title; for the federal lien is perfected without either. United States v. Security Trust and Savings Bank, supra; U. S. v. Acri, 348 U. S. 211.

The General Laws of Massachusetts (1941), section 16 of Chapter 151A, provides that judgments recovered under any provisions of section 15 of Chapter 151A and overdue contributions with interest thereon or penalties assessed in lieu thereof shall until collected be a lien against the assets of the employer.

When the overdue contributions arise, however, the specific property to which this lien attaches has not been ascertained. Therefore the lien of the Division of Employment Security is not specific and perfected as to entitle it to priority over the federal tax lien. United States v. Waddill Co., supra; United States v. Texas, supra; New York v. Maclay, supra.

The lien provided the Commissioner of Corporations and Taxation by the General Laws of Massachusetts, Section 76, Chapter 63 (1954) arises when a corporation transfers assets after the tax has arisen. This lien also is not specific and perfected in that it does not attach to specific property.

The inescapable conclusion from the foregoing is that a federal tax lien is superior to a general statutory tax lien in Massachusetts if the federal tax assessment is made by the Internal Revenue Service before the Commonwealth of Massachusetts has taken steps to perfect its general lien against specific personalty in the hands of the taxpayer. Cf. Illinois v. Campbell, supra; United States v. Security Trust and Savings Bank, supra.

Finally, neither United States v. Sampsell (1946) 153 Fed. (2d) 731, 734 [46-1 USTC ¶9186], to the effect that there is nothing in the Bankruptcy Act or in the Internal Revenue Code directly providing for government priority over inchoate liens which antedate its own liens nor Adams v. O'Malley (1950) 182 Fed. (2d) 925, 939 [50-2 USTC ¶9349], to the effect that 11 U. S. C. 107 (subs. b and c) does not give statutory tax liens of the United States priority over statutory tax liens of a state, can stand in the light of United States v. Security Trust and Savings Bank, supra, holding that federal tax liens are superior to inchoate state-created liens.

While I feel that the philosophy of the Bankruptcy Act is that "the priority of statutory liens depends upon the time each attached and became choate", (U. S. v. Atlantic Municipal Corporation (C. A. 5th 1954) 212 Fed. (2d) 709 [54-1 USTC ¶9392]) and, ". . . except in situations where federal law has spoken priority among liens in bankruptcy is determined by the law of the state." (In the Matter of Quaker City Uniform Company, Inc., Bankrupt, (C. A. 3rd 1956) 238 Fed. (2d) 155) nevertheless I am constrained to follow the decisions of the United States Supreme Court in establishing the requirements that state liens must meet to be considered choate, as enunciated in Illinois v. Campbell, supra, at 375 and cited with approval in United States v. Security Trust and Savings Bank, supra.

[Conclusion]

I hold, therefore, that the property of the bankrupt passed into the hands of the trustee in bankruptcy, subject to the lien of the United States . That lien could be postponed to certain priorities in bankruptcy by virtue of the Bankruptcy Act, but it could be defeated neither by the trustees nor the liens of the Commonwealth of Massachusetts , which were not perfected before bankruptcy. I rule that the liens of the United States Government have priority over the liens of the Commonwealth of Massachusetts for the reasons hereinabove stated. It is unnecessary to rule on Question 1 in the agreed statement of facts. It is, therefore, ordered that the fund now in the hands of the trustee, and to the extent necessary, be first applied to the tax claims of the United States of America. The balance of the fund, if any, is to be turned over to the Commonwealth of Massachusetts.

[Referee's Opinion Affirmed]

WYZANSKI, District Judge: This case comes before me on a petition for review filed by the Commonwealth of Massachusetts and on the certificate of a Referee in Bankruptcy. The case has been excellently stated, the arguments well considered, and a conclusion rationally reached by Referee Smart in his seven page opinion.

As an inferior judge, I know that it sometimes gives pleasure to a lower court not merely to have its judgment affirmed, but its opinion accepted as the opinion of the higher tribunal. Bearing in mind these considerations I, on the basis of Referee Smart's opinion, affirm his conclusions and dismiss on the merits the petition for review.

 

 

[58-1 USTC ¶9485]United States of America, Plaintiff v. William Malter, Hilda Malter, New York Life Insurance Company, The Maccabees, Equitable Life Assurance Society of the United States, National Life Insurance Company, Continental American Life Insurance Company, Central Bank and Trust Company, Defendants

U. S. District Court, So. Dist. Fla., Miami Div., No. 7384-M-Civil, 4/2/58

[1939 Code Sec. 3670--substantially the same as 1954 Code Sec. 6321]

Priority of liens: Lien for taxes v. claims of assignee of life insurance policies: Notice of levy.--Taxpayer and a corporation to which he succeeded as transferee were found to have intentionally filed false and fraudulent tax returns over a period of years. The taxpayer assigned five insurance policies upon his life to a bank after the Government had properly filed notices of liens and had obtained waivers from the taxpayer extending the period within which it could bring court proceedings to collect the deficiencies. After the Government had served levies upon each of the insurance companies and had filed notice of levy upon the bank to which the policies had been assigned, the bank surrendered two of the policies to one of the insurance companies in exchange for their cash surrender values. The Court held that as the taxes owed by the taxpayer far exceeded the aggregate cash value of the five policies and as the Government's tax liens were superior to the bank's assignment liens which arose after the filing of notices of tax liens, the Government liens against the cash surrender values are entitled to be foreclosed.

James L. Guilmartin, United States Attorney, 234 Post Office Building , Miami , Fla. , for plaintiff. Shutts, Bowen, Simmons, Prevatt & Boureau, 800 First National Bank Building, Dixon, DeJarnette, Bradford & Williams, Ainsley Building, Pallot, Cassell & Marks, du Pont Bldg., and Morehead, Forrest, Gotthardt & Orr, 228 North East 2nd Avenue, all of Miami, Fla., for defendants.

Findings of Fact and Conclusions of Law

CHOATE, District Judge:

This cause having come on before the Court, sitting without jury, on the 24th day of February, 1958, and the Court, having heard the evidence, and examined the exhibits, and being fully advised in the premises thereof, hereby enters the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. This action was brought at the request and authorization of the Commissioner of Internal Revenue and under the direction of the Attorney General of the United States pursuant to the provisions of Sections 7401 and 7403, Internal Revenue Code of 1954.

2. Defendants William Malter and Hilda Malter reside in the Southern Judicial District of Florida. Defendants New York Life Insurance Company, The Maccabees, National Life Insurance Company, and the Continental American Life Insurance Company are corporations licensed to do business and doing business in the Southern Judicial District of Florida, and the defendant Central Bank and Trust Company is a banking corporation, having its principal place of business in Miami, Florida.

3. On February 10, 1958 , Summary Judgment of dismissal was entered in favor of Defendant Equitable Life Assurance Society of the United States .

4. On March 3, 1950 the Commissioner of Internal Revenue of the United States assessed income taxes against William Malter for the taxable years 1942, 1943, 1944, 1945, and 1946 in the amounts as follows:

1942 ....         $1,180.21

1943 ....          3,065.70

1944 ....          7,888.45

1945 ....            393.28

1946 ....             48.23

 

These assessment lists were received by the then Collector of Internal Revenue on March 6, 1950. Within ten days after the receipt of the above assessments, the then Collector of Internal Revenue gave notice and made demand on William Malter for payment of the taxes as assessed. The aforementioned assessments against William Malter were made pursuant to a determination by the Commissioner that William Malter had filed a false or fraudulent return with intent to evade taxes or filed no return.

5. Notices for Federal tax liens for the amounts as assessed above were filed with the Clerk of the Circuit Court, Dade County, Miami, Florida, on August 30, 1950.

6. The Sunshine Kosher Market, Inc. became indebted to the United States of America for corporate income taxes and excess profits taxes for the years 1943, 1944, and 1945 and the period January 1, 1946 to June 10, 1946.

7. On February 18, 1948, the Commissioner of Internal Revenue made an assessment of $1,759.32 against William Malter, as transferee of the Sunshine Kosher Market, Inc., which amount represented unpaid corporate income taxes of the Sunshine Kosher Market, Inc. for the taxable year 1943. The assessment list was received by the appropriate Collector of Internal Revenue on February 20, 1948. Within ten days thereafter notice was given and demand made on William Malter as transferee for the payment of the above assessment. Notice of Federal tax lien for the amount assessed above was filed on February 25, 1948, with the Clerk of the Circuit Court, Dade County, Miami, Florida.

8. On March 3, 1950, the Commissioner of Internal Revenue made assessments against William Malter, as transferee of the Sunshine Kosher Market, Inc., for corporate income and excess profits taxes due from the Sunshine Kosher Market, Inc., in the following amounts and for the type of tax and period indicated:

                                                            Amount

Type of Tax                          Tax Period           Assessed

Corporate Income ....              1944                 $ 6,536.61

Excess Profits ......              1944                  15,987.86

Corporate Income ....              1945                   8,358.79

Excess Profits ......              1945                  54,495.77

Corporate Income ....        1/1/46 to 6/10/46              721.04

 

The assessment lists were received by the then appropriate Collector of Internal Revenue on March 6, 1950. Within ten days thereafter, notice was given and demand made on William Malter as transferee for the payment of the amounts assessed above. Notice of liens for Federal taxes in the amounts assessed above were filed on August 30, 1950 with the Clerk of the Circuit Court, Dade County, Miami, Florida.

9. The transferee assessments made against William Malter for the years 1944 and 1945 were made pursuant to a determination by the Commissioner that the Sunshine Kosher Market, Inc., filed false or fraudulent returns for those years with intent to evade taxes.

10. All of the assessments made against William Malter for his personal income taxes and made against him as transferee of the Sunshine Kosher Market, Inc., remain unpaid.

11. Within the time for collection of the assessments made against William Malter individually and as transferee of the Sunshine Kosher Market, Inc., William Malter executed Tax Collection Waivers, Form 900, extending the period during which a proceeding in court for collection could be brought for each of the individual or transferee assessments to December 31, 1961. These waivers were signed by Malter in July 1955, and April, 1956.

12. William Malter, prior to July 2, 1954, was the owner of certain life insurance policies each of which had a cash surrender value. The name of the issuing company, the policy number and the face amount of each policy are set out as follows:

                                               Policy              Fact

Issuing Company                                Number            Amount

National Life Insurance Company ....           785764         $5,000.00

                                               708813          2,000.00

New York Life Insurance

Company ............................         12952096          2,500.00

Continental American Life

Ins. Company .......................           105130          2,000.00

The Maccabees ......................          1677541          5,000.00

 

Hilda Malter was the beneficiary of the aforesaid policies.

13. On July 2, 1954, William and Hilda Malter executed assignments of each of the above policies to the Central Bank and Trust Company.

14. Prior to the institution of this action, representatives of the Internal Revenue Service served levies on each of the insurance companies with whom William Malter was insured as listed in paragraph 12, requesting that each insurance company pay over the cash surrender value of each policy William Malter had with that individual insurance company. None of the levies were honored.

15. On August 1, 1955, a notice of levy was served upon the Central Bank and Trust Company for all property or rights to property belonging to William Malter, and surrender of each insurance policy assigned by William and Hilda Malter was demanded. Final demand was served upon the Central Bank and Trust Company on November 30, 1955. Neither the levy nor the final demand was honored by the Central Bank and Trust Company.

16. Each assessment atainst William Malter individually and as transferee of the Sunshine Kosher Market, Inc. was timely made.

17. This suit for taxes as it pertains to each assessment against William Malter individually and as transferee of the Sunshine Kosher Market, Inc. was timely brought.

18. William Malter is indebted to the United States of America in the total amount of the assessments, more specifically in the total sum of $100,435.26, plus interest on each assessment until paid.

19. Insurance policies numbered 708813 and 785764, issued by National Life Insurance Company, were surrendered by defendant Central Bank and Trust Company, subsequent to notice of levy, to the insurer in exchange for their then cash value of $1,108.00.

20. The cash surrender values of the other policies in question are as follows:

                                       Policy          Cash Surrender

Issuing Company                        Number                   Value

New York

 Life Insurance                               $ 601.96, as of

Company ....................         12952096            Feb. 1, 1958

                                                        741.50, as of

The Maccabees ..............          1677541            Mar. 8, 1958

Continental American                                  1,071.14, as of

Life Ins. Company ..........           105130           
Feb. 24, 1958

Conclusions of Law

1. The Court has jurisdiction of the parties and the subject matter herein.

2. The United States of America has a lien for Federal taxes in the amount of $100,435.26 upon all property, personal and real, and rights to property and specifically the cash surrender values of each policy of life insurance issued on the life of William Malter, specifically policies 785764 and 708813 issued by the National Life Insurance Company; policy 12952096 issued by the New York Life Insurance Company; policy 105130 issed by the Continental American Life Insurance Company; and policy 1677541 issued by the Maccabees; and that these liens for taxes are superior to the assignment lien of the Central Bank and Trust Company; and that the United States is entitled to have its liens for Federal taxes against the cash surrender values of these life insurance policies or their proceeds foreclosed.

3. The sums of money due plaintiff are greatly in excess of the cash surrender value of the aforesaid policies. The defendant bank's interest arose subsequent to the filing of notice of tax lien, and it appears from the record that valid waivers were filed tolling the statute of limitations.

4. The United States of America is entitled to a deficiency judgment against William Malter in the total amount of the assessments remaining unsatisfied after the foreclosure of the Government's lien against the cash surrender values and the application of such proceeds against the tax liabilities of William Malter, plus interest on each assessment remaining unsatisfied until paid.

 

 

[57-2 USTC ¶9945]In the Matter of Proceedings Supplementary to Judgment, United States of America , Judgment-Creditor v. Morris Saslavsky, alias Edward Morris, Judgment-Debtor

U. S. District Court, So. Dist. N. Y., Ci. 3-201, 160 FSupp 883, 10/1/57

[1939 Revenue Act Sec. 276--comparable to 1954 Code Sec. 6502]

Lien for taxes: Extension of period of limitations: After-acquired property.--Taxpayer made no income tax returns for the years 1922 through 1929, and paid no taxes for those years. In 1936 the Commissioner assessed the taxes due from him and forwarded the assessment list to the Collector for the taxpayer's district. Notice and demand for payment were made. The instant suit was brought against the taxpayer in 1939. Default judgment was entered against the taxpayer. A third party was retained by the taxpayer in 1944 to attempt to compromise the tax claims of the United States and the State of New York . This third party collected $24,000 from taxpayer's former partner to be applied toward the compromises after deducting their fees for services rendered in obtaining the sum. The present supplementary proceeding is the Government's application for a turn-over order directing the third party to turn the balance of the amount over to it. The third party claims a lien for services rendered in attempting to compromise the tax claims. The court, in granting the turn-over order, held that the Government's lien, created in 1936, was extended by its judgment in the instant suit in 1939, and attached to after-acquired property of the taxpayer. Its lien therefore attached to the sum in question when it came into existence, which was prior to the third party's performing the services for which it claimed its lien.

Paul W. Williams, United States Attorney, for plaintiff. Harper & Matthews, 70 Pine Street , New York , N. Y., for defendant.

Memorandum

CASHIN, District Judge:

This is a motion by the Government, as judgment-creditor, for a turn-over order in accordance with New York Civil Practice Act §794, directed to Harper & Matthews, as third parties.

The judgment-debtor failed to make returns or pay income taxes for the years 1922 through 1929. On November 7, 1936 , the Commissioner of Internal Revenue assessed the taxes due from the judgment-debtor and forwarded the assessment list to the Collector of Internal Revenue for the Third District, in which District the judgment-debtor then resided. Although no direct evidence was presented that the assessment list was ever forwarded to the Collector, it is found that such action was taken, since the complaint in the action pleads notice and demand for payment pursuant to the assessment on November 9, 1936 . It will be presumed that the Collector, acting in his official capacity in making the demand, had in his possession the assessment list upon which the demand was based. United States v. Ettelson, (7 Cir. 1947), 159 Fed. 2d 193, 195-196 [47-1 USTC ¶9137]). The instant suit was brought on April 5, 1939 and default judgment entered on July 22, 1939 . The judgment was not filed or docketed in any of the offices of the State of New York duly qualified to accept such filing or docketing.

In 1944, the third party firm was retained by the judgment-debtor to attempt to compromise the judgment in the instant suit as well as a judgment obtained by the State of New York for delinquent taxes owing to that sovereignty. In order to obtain funds to be offered in compromise, the third parties instituted suit for an accounting against a former partner of the judgment-debtor and obtained a settlement in said suit of $24,000.00. After remunerating themselves for their fee and disbursements in obtaining the judgment, pursuant to an attorneys' charging lien, the third parties, on behalf of the judgment-debtor, offered the balance of the fund pro rata to the state and federal governments in compromise of their respective judgments for delinquent taxes. The State accepted the offer but the Government, after protracted negotiations rejected it.

On January 7, 1957 , the Government obtained an order for the examination of the third parties in supplementary proceedings. In lieu of examination the Government accepted a letter from the third parties stating that the funds sought herein, in the amount of $14,771.94, were being held by them for the account of the judgment- debtor. The present application for a turnover order was thereafter made. The third parties assert an attorneys' retaining lien for the services rendered in effecting the compromise of the State tax claim and attempting to effect compromise of the Federal tax claim. The Government, the third parties and the judgment-debtor have agreed that, in the event it is determined that the third parties possess a lien superior to any rights of the Government, the Court may determine the amount of the lien.

The lien which the Government asserts herein was created by Section 613 of the Revenue Act of 1928 (now §§ 6321, 6322, 6323 of Title 26 U. S. C. A.). The receipt by the Collector of the assessment list gave rise to a lien in favor of the Government upon "all property and rights to property, whether real or personal, belonging to (the taxpayer)." With the exception of mortgagees, purchasers or judgment creditors, the lien was effective without the necessity of notice thereof being filed in any office.

A lien in favor of the Government therefore arose between November 7, 1936 and November 9, 1936 . This lien attached not only to existing assets of the debtor (in this case none) but also to any after acquired interests. Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449]. The possibility of the lien attaching to after acquired property would, however, become ineffective within six years from date of its arising if no further action were taken. (§276, Revenue Act of 1936, now 26 U. S. C. A. §6502). An intervening step was, however, taken within the six year limitation period. The Government instituted the instant suit against the taxpayer and obtained judgment in personam against him. The narrow issue presented in this case is whether this intervening step was effective to extend the period within which the lien could attach to after acquired property of the judgment-debtor for the life of that judgment. Section 276 of the Revenue Act of 1936, insofar as is relevant herein, reads as follows:

"(c) Collection after assessment. Where the assessment of any income tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court, but only if begun (1) within six years after the assessment of the tax, * * *".

Here, "a proceeding in Court" was instituted within the six year period. The words of the Statute apparently, therefore, contemplated an extension of the possibility of the lien attaching to after acquired property. This contemplation has been judicially recognized and enforced Investment and Securities Co. v. United States (9 Cir. 1944), 140 Fed. (2d) 894 [44-1 USTC 9210]. (See also United States v. Ettelson, supra, where, although the point was not specifically considered in the Appellate Court decision, the District Court's holding in 67 Fed. Supp. 257 (ED Wisc. 1946) [47-1 USTC ¶9158] in accordance with the Investment and Securities Co. v. United States was inferentially affirmed.) The institution of the instant suit, therefore, extended the possibilities of the attaching of the Government's tax lien for so long as the judgment in personam would have efficacy. The funds in question are concededly property of the judgment-debtor to which the lien could attach. The lien, therefore, attached as soon as the fund came into existence and any services rendered by the third parties which would give rise to the attorneys' retaining lien cannot act to make such lien superior to the lien of the Government.

Accordingly, the motion of the judgment-creditor is granted and the third parties are ordered to turn over to the Clerk of the United States Court for the Southern District of New York the fund in question in the amount of $14,771.94.

 

 

[57-2 USTC ¶9918]United States of America , Plaintiff v. Josephine E. Jacobs, Administratrix of the Estate of Michael S. Jacobs, Deceased; Twentieth Century Sporting Club, Incorporated, Defendants

U. S. District Court, Dist. N. J., Civil No. 254-56, 155 FSupp 182, April 1, 1957

On motion of defendant Josephine E. Jacobs, Administratrix of the Estate of Michael S. Jacobs, Deceased, for summary judgment.

[1939 Code Sec. 3671--substantially changed in 1954 Code Sec. 6322]

Collection proceedings: Levy against indebtedness owing by deceased officer-stockholder to his corporation: Running of state statutory periods of limitation as a bar against recovery by the United States government.--This action was instituted against the admin istratrix of the estate of the deceased principal stockholder and president of the Twentieth Century Sporting Club, a New York corporation, which had been organized in the decedent's lifetime to promote boxing matches, and to which the decedent (and his estate following his death) was indebted in the amount of $154,701.71, representing the balance due of loans made to him by his wholly owned and controlled corporation in his lifetime. Decedent's corporation had been indebted for Federal income and other Federal taxes, for the taxable years 1946 and 1948, in the aggregate amount of $134,706.12, of which a balance remained unpaid in the amount of $94,733.57 and this action was instituted to recover such amount from the decedent's admin istratrix, a resident of New Jersey, as the debtor of decedent's corporation in the amount indicated. Assessment lists were received by the District Director for the Upper Manhattan district on July 11, 1952 and on March 23, 1953 and, by means of execution on a levy, the balance owing to the Government was reduced to the said amount of $94,773.57, sought to be collected in this proceeding. The defendant made a motion for summary judgment, alleging that the claim was barred by both the New York and New Jersey respective statutes of limitation which in both instances were restricted to six years with respect to contractual obligations. The Court denied the motion and, with reference to the various contentions made by the parties to this proceeding, held as follows: (1) State statutory periods of limitation do not apply to the United States government, except where the government is attempting to assert a derivative right, or a right received by assignment, under which conditions the government can have no greater right than its assignor had on the date as of which its lien became effective, under 1939 Code Sec. 3671, being the date when the assessment lists were received by the local Director. Such dates, under the facts of this case, were July 11, 1952 and March 23, 1953, or after the running of the six-year statutory period of limitation of both states, except with respect to a sum of some $38,000.00 borrowed but not repaid by decedent after July 11, 1946; (2) Under the decisions of the New York courts, which were held to be controlling as to the substantive rights of the parties, the mere fact that the decedent had signed a Federal income tax return of his corporation, including a balance sheet indicating the amounts of the loans owing by him to it, did not constitute such an unambiguous and definite acknowledgement of the indebtedness as would toll the running of the six-year period of limitations applicable to contractual obligations in New York State; (3) Similarly, under the decisions of the New York courts, no equitable estoppel arose which would preclude the decedent (or his estate following his death) from pleading the bar of the statute of limitations; (4) Notwithstanding the above points, in relation to the six-year periods of limitation with respect to contractual obligations in effect in both states, the Court, nevertheless, dismissed defendant's motion for summary judgment, having determined that the law of the forum, namely, New Jersey, was controlling as to whether a cause of action instituted in that forum was barred by any applicable period of limitation in effect in such state and having found further that under the provisions of New Jersey Corporation law, loans by a corporation to an officer thereof were prohibited and, if such loans were made, liability for the repayment thereof by assenting officers continued until such liability had been discharged and was not barred by the running of the six-year period of limitation applicable generally to contractual obligations or by any other period of limitation.

Wise and Wise (Archibald A. Patterson, William T. Wichman, of counsel), for Josephine E. Jacobs, for the Motion. Chester A. Weidenburner, United States Attorney, George J. Rossi, Assistant United States Attorney, Charles K. Rice, Assistant Attorney General, Andrew D. Sharpe, Jerome S. Hertz, Department of Justice, Washington, D. C., for U. S., contra.

Opinion

FORMAN, Chief Judge:

In the first count of the complaint in this case, as amended, the plaintiff, the United States of America, alleges that the Commissioner of Internal Revenue assessed the defendant, Twentieth Century Sporting Club, Incorporated, a New York corporation (hereinafter called Twentieth Century), on July 3, 1952, for the deficiency in its 1946 income, excess profits and declared value excess-profits taxes in the amount of $21,086.92, and $100,118.83, plus interest, and on February 19, 1953, for a like deficiency in the amount of $13,500.87 for the year 1948, plus interest, or an aggregate of $134,706.12; that the said defendant Twentieth Century is entitled to credit for $39,973.05 collected against the said assessments by virtue of plaintiff's tax levy, leaving a balance due of $94,733.57 together with interest; and that the late Michael S. Jacobs, prior to his death was, and his estate, of which the defendant Josephine E. Jacobs is admin istratrix, now is, indebted to the said defendant Twentieth Century in the sum of $173,701.71, which debt is subject to the tax liens arising out of the said assessments on defendant Twentieth Century's property and rights to property in the sum of $94,733.57, as aforesaid.

In the second count of the complaint, in the form of an amendment thereto, the plaintiff alleges that during and after the period 1943 to 1947 the said Michael S. Jacobs was a shareholder and an officer and director of the defendant Twentieth Century; that during the said period 1943 to 1947 the defendant Twentieth Century made a series of loans to him totaling $173,701.71 that the said Michael S. Jacobs in his capacity as an officer and director of the defendant Twentieth Century knew and assented to the making of the said loans on which there is, as alleged, a balance of $154,701.71 still due; that the assessments and levies were made on the defendant Twentieth Century, as described in the first count of the complaint, leaving an unpaid balance of $94,733.57 still due and owing by Twentieth Century; that under the provisions of the New York Stock Corporation Law, Section 59, the said Michael S. Jacobs was, and his estate now is, personally liable for the corporate tax debt, which debt arose prior to the repayment of the above-mentioned loans; that the liability of the estate of Michael S. Jacobs to the plaintiff United States is direct and not derivative and that it is not barred from asserting such liability under the New York statute by any state statute of limitations.

Plaintiff demands that the merits of all claims and liens upon the alleged debt of Michael S. Jacobs be finally determined and that the court order a distribution according to the findings of the court in respect to the interest of the parties herein.

The defendant Josephine E. Jacobs, Administratrix of the Estate of Michael S. Jacobs, deceased, in probate proceedings pending in the Monmouth County (New Jersey) Surrogate's Court, contends in her motion for summary judgment that the debts alleged to be owing from Michael S. Jacobs and his estate to Twentieth Century are barred by the statute of limitations; that the United States has no greater rights with respect to these alleged debts than the defendant Twentieth Century, and that the Exhibits "C-1" to "C-8", inclusive. debts prior to the expiration of six years from the respective dates on which they were incurred.

For the purpose of this motion the parties have stipulated facts as noted in the margin hereof. ¹

The plaintiff resists the defendant's motion on the ground that on July 11, 1952 and March 23, 1953, the dates for which the plaintiff's liens for taxes arose, the decedent Michael S. Jacobs, was indebted to Twentieth Century and such debt was enforceable under the New York law.

Exhibit "A" referred to in paragraph 3 of the stipulation (Note 1) is a ledger account of Twentieth Century with Michael S. Jacobs in which he is debited with 16 items aggregating $170,000, under dates and amounts as follows:

Date                         Debits

1943

April 19 .......         $20,000.00

May 12 .........          10,000.00

1944

September 6 ....          10,000.00

1945

March 23 .......           9,000.00

March 23 .......           1,000.00

August 28 ......          12,000.00

December 4 .....          10,000.00

1946

May 1 ..........          10,000.00

May 7 ..........          25,000.00

July 9 .........          20,000.00

July 10 ........           5,000.00

July 22 ........           3,000.00

September 6 ....          10,000.00

December 21 ....           9,000.00

1947

January 4 ......         $10,000.00

August 9 .......           6,000.00

 

He is also credited on this sheet with items as follows:

                            Credits

1947

January 2 ......         $ 1,646.40

January 9 ......             813.20

January 13 .....             813.20

January 22 .....             813.20

January 29 .....             823.20

February 3 .....             823.20

February 10 ....             823.20

April 22 .......          12,444.40

 

For the purpose of this motion each of the above listed debits is to be regarded as a loan from Twentieth Century to Michael S. Jacobs.

Twentieth Century was a service organization for the promotion of prize fighting and the decedent Michael S. Jacobs and his wife were respectively president and vice president and sole stockholders, with the work of the corporation mainly effected by Michael S. Jacobs.

Plaintiff claims a right to collect from the Jacobs' estate the tax debt which Twentieth Century owes, by virtue of assuming Twentieth Century's position as creditor to Michael S. Jacobs. Here, the six year statute of limitations to recover on contract obligations is the same in both New Jersey and New York. Since the plaintiff was suing for recovery on a derivative claim of a contract obligation between Twentieth Century and Michael S. Jacobs, the plaintiff assumed Twentieth Century's claim with all its infirmities, including any barring by the statute of limitations. See Guaranty Trust Co. of N. Y. v. United States, 304 U. S. 126 (1938).

Plaintiff alleges that the United States , when asserting sovereign or governmental rights, is not subject to state statutes of limitations. Defendant, however, counters withGuaranty Trust Co. v. United States, supra, to the effect that even the sovereign can be barred by a state statute of limitations when it acquires property or rights to property by assignment, and quotes the Court as saying, at page 142:

"* * * Proof, under a plea of limitation, that the six-year statutory period had run before the assignment offends against no policy of protecting the domestic sovereign. It deprives the United States of no right, for the proof demonstrates that the United States never acquired a right free of a pre-existing infirmity, the running of limitations against its assignor, which public policy does not forbid."

Defendant further buttresses his contention that the sovereign is subject to the bar of the statute, when its claim is derivative, by citing State v. Standard Oil Co., 5 N. J. 281 (1950), aff'd 341 U. S. 428 (1951), for the proposition that the sovereign, acting on a derivative right, cannot revive claims already barred by the New Jersey statute of limitations.

However, the principle reflected by these cases goes no further than to hold that claims already barred by the state statute of limitations at the time when the government acquired its rights to the claim, are as effectively barred to the government as to anyone else. But this is radically different from any implication that a state statute of limitations operates with equal indifference against governmental rights to assert a derivative claim, and the rights of private parties. For the truth of the matter is that the running of a state statute of limitations is suspended at the moment when the government acquires the claim, or right, to the property. At the moment of acquisition, it acquires its property right with all the infirmities attached thereto, including the bar of the statute. But if the statutory period has not expired at the time of acquisition, the statutory time ceases to run.

As the United States Supreme Court held in United States v. Nashville, C. & St. L. R. Co., 118 U. S. 120, 125 (1886):

"* * * They (the United States) take such (negotiable) paper subject to all the equities existing against the person from whom they purchaseat the time when they acquire their title; and cannot therefore maintain an action upon it, if at that time all right of action of that person was extinguished, or was barred by the statute of limitations." (Italics supplied.)

And in United States v. Summerlin, 310 U. S. 414 (1940) [40-2 USTC ¶9633], the Court stated, on pages 416, 417:

"It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights. (Cases cited.) * * * .

"* * * When the United States, becomes entitled to a claim, acting in its governmental capacity, and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement."

The running of the statute against the Jacobs' debt to Twentieth Century was suspended when the District Director of Internal Revenue received the tax assessment against Twentieth Century, under section 3671 of Title 26 U. S. C., which is the section applicable to the instant case and provides as follows:

"Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

The time when received by the collector has been held to mean the date when the assessment list, signed by the Commissioner of Internal Revenue, has been received in the office of the collector of the district in which the property was situated. Old Colony Insurance Co. v. Lampert, 129 Fed. Supp. 545 (D. C. N. J. 1955) [55-2 USTC ¶9628], aff'd 227 Fed. (2d) 520 (3rd Cir. 1955) [56-1 USTC ¶9121]; In re Victor Brewing Co., 54 Fed. Supp. 11 (D. C. Pa. 1944) [44-1 USTC ¶9173], aff'd 326 U. S. 265 (1945) [45-2 USTC ¶9449]; Citizens State Bank of Barstow, Tex. v. Vidal, 114 Fed. (2d) 380 (10th Cir. 1940)[40-2 USTC ¶9603].

Section 3670 of Title 26 U. S. C. provides as follows:

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

On the date when the first assessment list was received by the District Director on July 11, 1952, in the amount of $121,205.75 plaintiff acquired a lien against Jacobs for all moneys borrowed (and not repaid) by Jacobs from Twentieth Century subsequent to July 11, 1946. This would represent a maximum of $38,000. Conversely, all moneys borrowed (and not repaid) by Jacobs from Twentieth Century prior to July 11, 1946 were barred from recovery by the statute of limitations.

Plaintiff, though acquiring the claim against Jacobs derivatively and suing in a contract action on debt, is suing in its own sovereign and governmental capacity to collect taxes, and a state statute of limitations will not be permitted to bar the sovereign from recovery against its will. The policy supporting this view is the protection of "public revenues from loss resulting from the inadvertence or neglect of public employees". Eureka Printing Co. v. Div., etc., Dept. of Labor & Industry, 21 N. J. 383, 387, 388 (1956). As the New Jersey Supreme Court went on to say, there is nothing, or course, to prevent the government from enacting legislation making itself subject to a limiting period. In the case at bar, plaintiff is subject to a limiting period which it has imposed on itself. This limiting period for recovery, whether by levy or proceeding in court for taxes due it, is six years after the lien arises--the date on which the assessment is received by the local District Director. This is provided for by 26 U. S. C. §276(c) in the following language:

"Where the assessment of any income tax imposed by this chapter has been made within the period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court, but only if begun (1) within six years after the assessment of the tax, * * *."

Here, both levy (see Eiland v. United States, infra) and court proceedings have been instituted within the six year period following the tax assessment on July 11, 1952, so that plaintiff had not been barred by its own statutory limitation.

Defendant contends that plaintiff's filing of a notice of lien on April 11, 1953 with the County Clerk of Monmouth County, New Jersey (defendant's home county) created no new rights in plaintiff, and that the latter, at best, acquired its rights to the Jacobs' property only after notice was given to Mrs. Jacobs in September 1953, at which time recovery on any and all of the Jacobs' debt to Twentieth Century would have been barred by the six year state statute of limitations. However, this completely ignores the claim to the Jacobs' property which arose on the receipt of the tax assessments on July 11, 1952. The effect of the failure to serve notice of lien on Mrs. Jacobs lies only in the danger that any payment on the debt which Mrs. Jacobs might have made to Twentieth Century before receipt of notice of lien, would bar recovery from her by plaintiff up to the amount so paid. The operation and effect of liens and notices on debts owed by a third party is excellently set out in the case of United States v. Eiland, 223 Fed. (2d) 118 (4th Cir. 1955) [55-1 USTC ¶9487], which dealt with a comparable situation. There, the United States, prior to a taxpayer's bankruptcy, had served a notice of a tax lien on taxpayer's debtor. The trustee in bankruptcy objected that the failure to file a notice in the county court defeated the rights of the United States, despite the levy and notice served on the debtor of the bankrupt. In overruling the objection the court said:

"It should be noted in the first place, that what we are dealing with here is, not a levy upon corporeal property, where the property is left in the possession of the bankrupt to serve as a basis for credit, but a levy upon an indebtedness with service of notice upon the debtor, the effect of which is to transfer to the United States the right to receive payment of the indebtedness up to the amount of the tax. A lien for taxes upon failure to pay on demand is provided for by 26 U. S. C. §3670; and this lien arises upon deposit of the assessment list with the Director, 26 U. S. C. §3671. Where taxpayer neglects or refuses to pay the taxes due, 26 U. S. C. §3692 by levy upon all property and rights to property of taxpayer except such as is specifically exempted by 26 U. S. C. §3691, which has no application here. Upon such levy, it becomes the duty of the debtor to pay the indebtedness levied upon, up to the amount of the tax, to the Director, 26 U. S. C. §3710. * * *

"There can be no question, we think, but that the lien for taxes provided by the statute can be asserted against intangible property such as a debt. (Cases cited.) And we think it equally clear that the proper way to assert the lien is by levy and notice such as was served here. * * *

"A creditor ordinarily perfects a lien upon a debt by attachment and garnishment with service of notice thereof upon the debtor. (Cases cited.) When this has been properly done, the effect thereof is to give to the attaching creditor a lien upon the indebtedness for the amount necessary to satisfy the judgment rendered in the proceedings in his favor. The effect of the federal taxing statutes to which we have referred is to create a statutory attachment and garnishment in which the service of notice provided by statute takes the place of the court process in the ordinary garnishment proceeding. * * *." (Italics supplied.) 223 Fed. (2d) at pp. 120, 121.

Speaking further of the filing of such liens in the United States court and county offices, the court went on to say:

"* * * and it would be unreasonable to apply their provisions to debts, since debtors could not be expected to search the clerk's office before paying a debt, to see whether or not tax liens had been filed against their creditors, nor could banks be expected to make such search before honoring checks drawn on deposits. With respect to such intangible property entirely different provisions are needed and have been made by the taxing statutes. Prior to levy and notice, the debtor may discharge his debt by payment to the creditor, whatever may have been filed in the clerk's office; thereafter it may be discharged as to the amount of the tax, only by payment to the Director. 26 U. S. C. §3710(b)." 223 Fed. (2d) at p. 122.

The effect of the serving of notice on Mrs. Jacobs in September 1953, therefore, was a levy upon her property, but a lien had existed since July 11, 1952. As stated earlier, however, this gave the plaintiff a claim only on the unsatisfied debts incurred since July 11, 1946, an amount subject to further proof, but appearing to be no more than $38,000. All unsatisfied debts incurred prior to July 11, 1946 were effectively barred by the six year state statute of limitations on contract obligations, under this theory.

Plaintiff next argued that there was an acknowledgement of the indebtedness by Michael S. Jacobs that took it completely out of the statute of limitations because of the several repayments made between January 2 and April 22, 1947, as set out above, and because in May of 1946 Michael S. Jacobs signed and filed as corporate president an income tax return for the year ending February 28, 1946, on behalf of Twentieth Century, with an accompanying corporate balance sheet in which there was included a heading "Notes and Accounts Receivable" under which there was an amount representing the net loans or advances from Twentieth Century to Michael S. Jacobs. Similar tax returns with accompanying data were filed for subsequent years, including February 28, 1950. Plaintiff contended that this case came precisely within the decision of In re Meyrowitz' Estate, 114 N. Y. S. 2d 541 (Surrogate Court 1952), which does have some points of similarity with the one at bar. There, too, the decedent had been a resident of New Jersey; his will was probated in New Jersey; the corporation which sued the estate was one in which the decedent Meyrowitz had been president, director, and a controlling stockholder; decedent had borrowed money from the corporation and the latter was seeking to recover; and beneficiaries under his will resisted recovery on the ground that the time limitation in the statute had run. The court found that the statute of limitations had not expired because of the acknowledgement of the debt by the decedent, and the existence of a mutual, open and current account.

But, in finding acknowledgement, the court had before it not only the bookkeeping records and financial statements accompanying the tax returns, but also an affidavit which the decedent made for a state inheritance tax proceeding in which he swore that he personally owed the indebtedness to the corporation. While Jacobs did sign the 1946 return and Mrs. Jacobs signed the 1950 return, the returns for the intervening years were signed by an employee of Twentieth Century. Plaintiff's contention that the bar of the statute was lifted by acknowledgement of the debt by Michael S. Jacobs' signature is not persuasive. It is well established by New York law (and New York law is substantively controlling), that acknowledgment must be clear, specific, unambiguous, and consciously made in recognition of the entire debt. Crowe v. Gleason 141 N. Y. 489. This test is hardly met by pointing to Michael S. Jacobs' signature on a single corporate tax return. Other tax returns signed by his wife and another officer of the corporation cannot be considered to be Michael S. Jacobs' acknowledgment. Nor does the bare record of payment, without more, meet the test. Adams v. Olin, 140 N. Y. 150, 160.

Plaintiff also contends that the estate of decedent Michael S. Jacobs should be equitably estopped from raising the bar of the statute. The theory is advanced because of the complete domination of the corporation by Michael S. Jacobs and the virtual total identification of the corporate entity with Michael S. Jacobs. In support of this contention, plaintiff again cites the case of In re Meyrowitz' Estate, supra, and quotes the following language:

"* * * It would be contrary to fundamental principles of equity and justice if one in charge of a corporate enterprise could borrow its funds, continuously report the loans as due from him and then avoid payment by pointing to his failure to sue himself or to some ambiguity in his acknowledgment. * * *." 114 N. Y. S. 2d at p. 547.

Although this language is strong and clear, it borders on dictum because fundamentally the case was decided on other grounds, namely acknowledgment and the existence of a mutual, open, and current account. Moreover, the quoted language in the opinion of the surrogate court, though well-reasoned, must be weighed in the light of the opinion of the Second Circuit Court of Appeals in the case of Rieser v. Baltimore and Ohio Railroad Company, 228 Fed. (2d) 563 (1955). In theRieser case, a diversity suit, the court expressly commented on the strictness of New York law, but found that it was controlled by the decisional law of the New York courts which would not support a tolling of the statute on equitable grounds. The Rieser case was a suit by creditors of the defunct Alton Railroad Company against the Baltimore and Ohio Railroad Company for moneys allegedly owed to Alton by the Baltimore and Ohio because of the latter's mismanagement during a period when the Baltimore and Ohio was in complete control of Alton. The court there said, at page 565:

"True, while it remained under the domination of B & O, its sole stockholder, Alton, in practical terms, as virtually B & O's slave, could not have brought suit against B & O. But, under the New York statute of limitations as construed by the New York courts, the period of that domination did not suspend the running of the statute. * * *."

And in a footnote to the above, the court commented on the strict interpretation given to the statute by the New York courts, in the following manner:

"This interpretation, out of line with the interpretations of similar statutes in many other jurisdictions, seems harsh and inequitable. But, of course, we must abide by what the New York courts say its statutes mean." 228 Fed. (2d) at p. 565.

Of course the complete control of Twentieth Century by Michael S. Jacobs and the impracticability of the idea that his corporation, Twentieth Century, would sue him for payment of loans made to him impels one to draw aside the "corporate veil". But in the Rieser case the court ruled against succumbing to such temptation. It negates the plaintiff's proposition that the decedent, Michael S. Jacobs, would be barred from invoking the statute of limitations had Twentieth Century sued him for the indebtedness.

So, if this case is ruled by a six year statute of limitations, there appears to be no theory advanced by the plaintiff whereby it can overcome defendant's motion for summary judgment now seeming to encompass the bulk of the debt which was incurred prior to July 11, 1946.

In claiming that the cause of action is barred by the statute of limitations, the defendant admin istratrix indicates that the question of forum would not appear to be a factor of major significance to any of the parties concerned in this case, for both New York and New Jersey has six-year statutes of limitations on contract obligations, the applicable New York statute being the Civil Practice Act, §48, ² and in New Jersey, N. J. S. A. 2A:14-4. ³ She also claims that the above New York statute of limitations (six years) is applicable to liabilities created by the provisions of the New York Stock Corporation Act, §59. ⁴

Regardless of the consequences of the New York statute of limitations, I am constrained to the opinion that the New Jersey statute of limitations rules this case.

Although the law of the state where the cause of action arises governs the substantive rights of the parties, the law of the forum decides whether the cause of action is barred by its own statute of limitations "though (the) action is not barred in the state where the cause of action arose." Restatement, Conflict of Laws, §603; Goodrich, Conflict of Laws, p. 240 (3rd Ed. 1949). And, "if action is not barred by the statute of limitations of the forum, an action can be maintained, though action is barred in the state where the cause of action arose." Restatement, Conflict of Laws, §604.

"It is well settled that * * * it is the law of the forum which * * * controls." Florida Wholesale Drug v. Ronson Art Metal Works, 110 Fed. Supp. 573, 574 (D. N. J. 1953); Gordon v. Loew's Incorporated, 147 Fed. Supp. 398, 411 (D. N. J. 1956). "The remedy is regulated by the state where the action is brought." Jaqui v. Benjamin, 80 N. J. L. 10 (Err. & App. 1910); McClellan v. F. A. North Co., 14 N. J. Misc. 760 (Sup. Ct. 1936), aff'd 118 N. J. L. 168;Leek v. Wieand, 2 N. J. Super. 339, 350 (Ch. Div. 1949).

The forum being a federal court sitting in the District of New Jersey, the state law which governs the applicability of the statute of limitations is that of New Jersey . See Austrian v. Williams, 198 Fed. (2d) 697, 700 (1952).

The statute in New Jersey which is similar to the New York Stock Corporation Act, Section 59, is N. J. S. A. 14:8-10 (formerly §48 of the New Jersey Corporation law) which reads as follows:

"Loans to stockholders and officers prohibited.

"No corporation shall loan money to a stockholder or officer thereof. If any such loan be made the officers who make it, or assent thereto, shall be jointly and severally liable, to the extent of such loan and interest, for all the debts of the corporation until the repayment of the sum so loaned."

In the case of Cole v. Brandle, 127 N. J. Eq. 31 (E. & A. 1939), in which the opinion of the Court of Chancery below was adopted, the court discussed section 48 as follows:

`* * * I regard section 48 as a remedial and not a penal statute; it is authority for an action for damages forbreach of a fiduciary duty. Stated generally, it is not unlawful for corporate officers to make loans of corporate funds, but by statute the legislature has forbidden such loans to be made to stockholders and has said that disregard of such prohibition will expose the officers making or assenting to such loans, to a civil liability for such portion of the loans as may be found necessary to protect creditors. In other words, the statute requires corporate officers to replace funds they loan wrongfully, to the extent necessary to repair the damage resulting from their wrongful acts (Cases cited), so that section 21 [the two and one year limitations for actions on penal statutes] of the statute of limitations is not applicable. Neither is liability sought to be fastened on defendants for a simple debt, but for a special sort of obligation created by a special statute and it istherefore a debt on a specialty, to which section 1 of said statute [the six year statute of limitations--now N. J. S. A. 2A:14-1] does not apply (cases cited) and it is to be noted that section 48 of the corporation act provides that liability of the officers shall continue "until the repayment of the sum so loaned.'"" (Italics supplied.) 127 N. J. Eq. at pp. 38, 39.

It might be inferred from the above language that the court was invoking that provision of the New Jersey statute of limitations which applies a 16 year period to "specialties". ⁵ But this is negated in the case of Miller v. Board of Chosen Freeholders, Hudson County, 10 N. J. 398 (1952), wherein that court approved the conclusions of Chief Justice Beasley in Elsasser v. Haines, 52 N. J. L. 10 (Sup. Ct. 1889) to the effect that the words "obligation" and "specialty", as used in the statute of limitations, import an instrument under seal for the payment of money. A close reading of the quoted language in Cole v. Brandle, supra, reveals that the court characterized the obligation in that case as a "debt on a specialty". This was the use of the word "specialty" in a loose sense, as referred to in the case of Elasser v. Haines, supra, page 24. However, it is to be noted that the court in the Cole case avoided classifying the obligation as a 16 year specialty, and simply held that it was not subject to either the two or one year or the six year limitation. It called particular attention to the provision that liability of the officers shall continue "until the repayment of the sum so loaned." See also Cowenhoven v. Freeholders, 44 N. J. L. 232 (Sup. Ct. 1882). The tenor of the decisions of the New Jersey courts was recently reiterated in State v. Atlantic City Electric Co., 23 N. J. 259 (1957), wherein it was said:

"* * * The proper rule appears to be that the running of the statute of limitations is suspended only when the liability is dependent solely upon statutory provisions. E.g., Miller v. Board of Chosen Freeholders, supra; * * *." 23 N. J. 259, at p. 270.

It is the view in New Jersey that no common law cause of action lies in a creditor of a corporation to enable him to recover from an officer of the corporation who assented to the lending of corporate funds. See Cole v. Brandle, supra, at page 38. ⁶ It follows that the statutory liability involved in the case at bar rests on no common law ground for recovery. It is true that in this case a creditor-debtor relationship existed between the plaintiff and Twentieth Century on the one side, and between Twentieth Century and Michael S. Jacobs on the other, but the liability created by statute is wholly independent of any creditor-debtor relationship which might arise between plaintiff and Michael S. Jacobs as a result of assignment or lien. For the statute imposes liability upon Michael S. Jacobs not as a borrower of corporate funds, but only as an officer of a corporation who made or assented to the loan.

It is our interpretation of State v. Atlantic City Electric Co., supra, page 270, that "liability * * * dependent solely on statutory provisions" means that the statutory cause of action must have no counterpart or base rooted in a common law cause of action, but does not preclude other or alternative avenues or theories of recovery.

To support its thesis that the present action is barred by the New York six year statute of limitations, defendant admin istratrix points to the case of Braman v. Westaway, 60 N. Y. S. 2d 190 (1945), wherein loans were made by a Delaware corporation in violation of Delaware corporation law. In Braman, a suit brought more than six years after the loans were made was dismissed although section 36 of the Delaware Corporation Law created an "unlimited" duration of liability. Section 36 of the Delaware Corporation Law reads as follows:

"No corporation created under this Chapter shall make any loan of money to any officer of such corporation * * * and if such loan be made, the officer or officers who make it or assent thereto shall be jointly and severally liable until repayment of the sum so loaned with interest * * *." (Italics supplied.)

We note, of course, the striking similarity between section 36 of the Delaware Corporation Law, and its counterpart in New Jersey , N. J. S. A. 14:8-10, regarding liability "until repayment". The court in Braman dismissed the case even though it were to regard the Delaware statute as creating liability of unlimited duration. This was done on the basis that section 13 of the New York Civil Practice Act provides that where a cause of action arises outside New York, an action cannot be brought in the courts of New York after the expiration of the time limited by the laws either of New York or of the state or country where the cause of action arose. Since New York had a six year statute of limitations governing such actions, the action was barred.

However, the important and relevant principle here involved is that the Braman case concerned a cause of action arising outside of New York and in a jurisdiction allowing a longer period of limitations ( Delaware ), but brought in New York . Since the statute of limitations of the law of the forum is applicable, the New York six year statute of limitations was applied.

The principle involved in the case at bar, therefore, is the same, though the facts be practically reversed. Here, the cause of action arose in New York (with its six year statute of limitations), but was brought in New Jersey, with its longer statute of limitations, and so New Jersey being the forum, its statute of limitations governs.