Priority over Recorded Mortgage Page2

---

 

[54-2 USTC ¶9550]Macatee, Inc., Appellant v. United States of America , Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14840, 214 F2d 717, June 30, 1954

Appeal from the United States District Court for the Northern District of Texas.

Liens for taxes: Priority of creditors: Judgment creditor.--The government's lien for taxes against the taxpayer was perfected prior to the creditor's judgment, and therefore the United States was held to have a prior lien.

Assessment of taxes: Necessary demand.--A creditor of taxpayer claimed a lien prior to the government's lien for taxes because he alleged the government had not made a demand for payment after the assessment. The Circuit Court held that no such demand was necessary after assessment, and if it were essential it would relate back to the day of the receipt of the assessment list.

Liens: Civil action to enforce lien on property: Indispensable party defendant.--Taxpayer did not appear at the District Court proceeding in which the lien of the government for taxes was held prior to a creditor's lien, and a decree of foreclosure entered. The Circuit Court reversed the decree of foreclosure and held that the taxpayer should have his day in court to contest the government's lien. Under Code Sec. 3678(b) the taxpayer is a necessary party to such foreclosure proceedings.

Harry I. Freedman, Dallas , Tex. , for appellant. Dudley J. Godfrey, Jr., Ellis N. Slack, Special Assistants to the Attorney General, H. Brian Holland, Assistant Attorney General, Washington, D. C., John C. Ford, Assistant United States Attorney, Dallas, Tex., for Appellee.

Before STRUM and RIVES, Circuit Judges, and DAWKINS, District Judge.

RIVES, Circuit Judge:

Macatee, Inc. filed this action against the United States of America pursuant to the provisions of 28 U. S. C. A. 2410 to foreclose a lien on real property on which the United States also claimed a lien. The lien of Macatee, Inc. was a statutory attachment lien obtained by the issuance of a writ of attachment and levy thereof on September 15, 1952 , followed by return of the officers pursuant to Article 6662 of the Revised Civil Statutes of Texas. On April 24, 1953 , Macatee, Inc. obtained judgment in the attachment suit against A. W. Lagow in the sum of $6,505.49.

The United States asserted claims against A. W. Lagow for employment and social security taxes (Federal Insurance Contribution Act, see 26 U. S. C. A. 1400, et seq.). The pertinent facts concerning those claims may be most readily grasped from the following schedule:

                                                                            Date Collector

                                                                            gave notice of

                                                    Date of receipt         assessment and           Date of filing

                                                    by Collector of            made demand            notice of tax

                                               certified assessment         for payment on         lien with County

Amount               For period ending                        lists               taxpayer                    Clerk

$ 2,420.63         3rd Qtr. of 1951          May 19, 1952                 May 15, 1952           Sept. 23, 1952

$ 127.43           4th Qtr. of 1951          May 19, 1952                 May 15, 1952           Sept. 23, 1952

$19,516.57         2nd Qtr. of 1951          
Aug. 5, 1952
                 
July 31, 1952
          
Jan. 9, 1953

$20,463.61         3rd Qtr. of 1951          
Aug. 5, 1952
                 
July 31, 1952
          
Jan. 9, 1953

The district court found that the liens for taxes of the United States on the property of Lagow were superior to Macatee's attachment lien and ordered the property sold pursuant to 28 U. S. C. A. 2001, 2002, and the proceeds of sale to be paid into the registry of the court and distributed, first to the payment of court costs, second to the payment of the claims of the United States, third to the payment of the judgment to Macatee, Inc., and lastly the balance, if any, to A. W. Lagow.

[Government's Lien Prior]

Appellant's first contention is that, since its attachment lien was levied upon specific property of Lagow and notice of the writ and return filed with the County Clerk of Dallas County before the United States filed its notices of tax liens with the County Clerk , the attachment lien is superior to the liens of the United States . In considering this contention, we must assume that appellant's attachment lien created by Texas law was a choate lien under the laws of that State and was a specific and perfected lien under federal law. United States v. Liverpool & London & Globe Ins. Co., 5th Cir., 209 Fed. (2d) 684 [54-1 USTC ¶9132]. ¹ The relative priority of the liens here involved is then to be determined by applying the test of "the first in time is the first in right." United States v. New Britain, 347 U. S. 81; United States v. Liverpool & London & Globe Ins. Co., supra; United States v. Albert Holman Lumber Co., 5th Cir., 206 Fed. (2d) 685 [53-2 USTC ¶9545], rehearing denied 208 Fed. (2d) 113. Application of that test to the undisputed facts of this case establishes that the tax liens of the United States were first in time and, therefore, prior in right. The assessment lists as to the taxes due the United States were received by the Collector on May 19, 1952 and August 5, 1952 . Thereupon, under the provisions of Section 3671 of the Internal Revenue Code ² liens arose in favor of the United States and, under the provisions of Section 3670, such liens extended to "all property and rights to property, whether real or personal, belonging to such person." Macatee's lien could have arisen no earlier than September 15, 1952 , the date its suit was filed and the writ of attachment was issued. Accordingly, the liens for federal taxes arose before Macatee's attachment lien.

It is true that notices of the tax liens were filed by the Collector with the County Clerk on September 23, 1952 and January 9, 1953 , after the writ of attachment had been levied. The filing of such notices, however, was necessary to protect only against the persons named in the statute, 26 U. S. C. A. 3672, that is "as against any mortgagee, pledgee, purchaser, or judgment creditor." See United States v. Security Trusts & Savings Bank, 340 U. S. 47, 53 [50-2 USTC ¶9492] (concurring opinion of Mr. Justice Jackson); United States v. New Britain , 347 U. S. 81, 88. The notices of tax liens were filed with the County Clerk prior to the time Macatee reduced its claim against the taxpayer to judgment.

[Demand Not Necessary]

Appellant's second contention is that the only demands for payment by the Collector were made prior to the receipt of the assessment lists and were insufficient because, according to appellant's contention, the lien for unpaid taxes upon the property of a delinquent taxpayer does not arise in favor of the United States until the Collector makes demand for payment after he receives the assessment list. ³ The cases cited by the appellant sustain the proposition that a demand for payment of unpaid taxes is a condition precedent to the enforcement of a lien in favor of the United States upon the property of a delinquent taxpayer. It is true, also, that 26 U. S. C. A. 3655 requires the Collector to notify the taxpayer after he has received the list of taxes from the Commissioner. The purpose of requiring such a notice and demand is for the protection of the taxpayer. In Re Baltimore Pearl Hominy Co., 4th Cir., 5 Fed. (2d) 553, 555 [1 USTC ¶130]. It has little or no relation to determining priority of liens between the United States and other lien-holders. If a demand after receipt of the assessment list by the Collector is essential, the demand would relate back to the date of such receipt and the lien would take priority from that date. See 26 U. S. C. A. 3671, quoted in footnote 2, supra. Cf. Citizens National Trust & Savings Bank of Los Angeles v. United States , 9th Cir., 135 Fed. (2d) 527 [43-1 USTC ¶9426].

Appellant insists that, under Section 3670 of the Internal Revenue Code, 26 U. S. C. A. 3670, ⁴ the lien does not arise until the taxpayer has neglected or refused to pay the tax after demand. That section does not, however, require that the demand be made after the receipt of the assessment list. It requires only that the taxpayer be "liable" to pay the taxes and that he "neglects or refuses to pay the same after demand."

Appellant's argument seems to be based on the old theory of ad valorem taxation, that there must be a formal act of assessment before liability for a tax arises, 51 Am. Jur., Taxation, Section 647, Footnote 11. That does not generally hold true as to excise taxes, id. Section 649, Footnote 16. Chief Judge Hutcheson of this Court, when a district judge, wrote as follows concerning income taxes:

"As to the first question, while it is true that as to ad valorem taxes there must be a formal act of assessment by the officers, or board of officers, elected or appointed for that purpose, which must be made a matter of record before liability for a tax arises (26 R. C. L. Sec. 297), liability for income taxes arises, and in some sense it may be said that they accrue, at the time the gains, profits, and income passed into the hands of the recipient. The return is required in any case before the day of the levy, so that it is clear that the tax is due--that is, that the recipient of the gains, profits, and income is liable for it--before it is assessed, as the return is only to ascertain if the liability exists, and its extent. 26 R. C. L. Sec. 127." United States v. Proctor, D. C. So. Dist. Texas , 286 Fed. 272, 273-274.

The Court of Claims has noted more than once that "taxes may be and often are collected without assessment." Meyersdale Fuel Co. v. United States , Ct. Cl., 44 Fed. (2d) 437, 446 [1930 CCH ¶9633]; Muir v. United States, Ct. Cl., 3 Fed. Supp. 619, 621 [3 USTC ¶1120]; Pioneer Coal & Coke Co. v. United States, Ct. Cl., 14 Fed. Supp. 661, 669 [36-1 USTC ¶9267]. It has been observed that "the federal income tax system is based upon a theory of self-assessment. It is a basic principle of that system that a taxpayer is under a duty to correctly report his taxable income and to pay the proper amount of taxes due thereon." Welp v. United States , D. C. No. Dist. Iowa , 103 Fed. Supp. 551, 560 [52-1 USTC ¶9234]. That observation holds true as to the employment and social security taxes here involved and the taxpayer became liable for them prior to assessment and prior to the times the demands for payment were made on May 15, 1952 and July 31, 1952 . See Sections 1400, 1420, 1600, 1604 and 1605 of the Internal Revenue Code and Regulations 120, Sections 406.605 and 406.606. We conclude, therefore, that insofar as the determination of priorities of liens between the United States and the appellant is concerned, it was not essential that the Collector make demand for payment after he received the assessment lists.

[Taxpayer An Indispensable Party]

If there is cause for complaint for failure to give the notice required by 26 U. S. C. A. 3655, that cause belongs to the taxpayer. See In Re Baltimore Pearl Hominy Co., supra. We think that it was probably an inadvertence for the district court to decree foreclosure of the liens on the taxpayer's property in a proceeding to which the taxpayer was not a party. It may be that the liens far exceeded the value of the property, but the concluding sentence of the judgment directed the payment of any remaining balance of the proceeds of sale on foreclosure to the taxpayer. In any event, the fact that the taxes have now been assessed may not be conclusive that they are owing, and, before a decree of foreclosure, the taxpayer is entitled to his day in court. United States v. Acri, 109 Fed. Supp. 943, 944 [53-1 USTC ¶9104], affirmed 209 Fed. (2d) 258 [54-1 USTC ¶9225], certiorari granted May 24, 1954 . See 33 Am. Jur., Liens, Section 47. 26 U. S. C. A. 3678(b) ⁵ seems to us to make the taxpayer an indispensable party to a civil action to enforce a lien on his property. While the taxpayer's absence is not complained of by either of the parties to this appeal, we think it of such importance that it should be noted by this Court.

The judgment insofar as it determines priorities of liens between the parties is affirmed, but insofar as the judgment orders the property of the taxpayer sold for the satisfaction of the liens the judgment is reversed and the cause remanded for such further proceedings, if any, as are consistent with this opinion. The costs are taxed against the appellant.

AFFIRMED IN PART AND REVERSED IN PART AND REMANDED.

¹ It may be noted that the United States Supreme Court, on May 24, 1954, granted certiorari to review this decision and also in two similar cases, United States v. Acri, 6th Cir., 209 Fed. (2d) 258 [54-1 USTC ¶9225], and United States v. Scovil, Sup. Ct. So. Car., 78 S. E. (2d) 277; See 347 U. S.

² 26 U. S. C. A. Section 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."

³ In support of this contention the appellant cites the following authorities: Detroit Bank v. United States, 317 U. S. 329, 335 [43-1 USTC ¶9224]; United States v. Ettelson, 7th Cir., 159 Fed. (2d) 193 [47-1 USTC ¶9137]; Citizens State Bank of Barstow v. Vidal, 10th Cir., 114 Fed. (2d) 380 [40-2 USTC ¶9603]; MacKenzie v. United States, 9th Cir., 109 Fed. (2d) 540 [40-1 USTC ¶9229]; In, Re Baltimore Pearl Hominy Co., 4th Cir., 5 Fed. (2d) 553 [1 USTC ¶130]; The River Queen, D. C. E. Dist. Va., 8 Fed. (2d) 426; In Re Holdsworth, D. C. N. J., 113 Fed. Supp. 878 [53-2 USTC ¶9589]; United States v. Rosenfield, D. C. E. Dist. Mich., 26 Fed. Supp. 433 [39-1 USTC ¶9204]; United States v. Allen, Cir. Ct. Middle Dist. Tenn. , 14 Fed. 263; United States v. Pacific Railroad, Cir. Ct. E. Dist. Mo. , 1 Fed. 97; and provisions of Chapters 34, 35 and 36 of Title 26, Internal Revenue Code.

⁴ "Section 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."

⁵ 26 U. S. C. A. 3678(b):

"(b) Parties to proceedings. All persons having liens upon or claiming any interest in the property or rights to property sought to be subjected as aforesaid shall be made parties to such proceedings and be brought into court."

 

 

[57-2 USTC ¶9736]Mason City and Clear Lake Railroad Company, a Corporation, Plaintiff v. Imperial Seed Company, a Corporation; Donald L. Goranson, Receiver of the Property of Imperial Seed Company; Frank M. Halpin, District Director of Internal Revenue; Iowa Employment Security Commission; and The United States of America, Defendants

U. S. District Court, No. Dist. Ia. , Cent. Div., Civil No. 677, 152 FSupp 145, 6/10/57

[1954 Code Sec. 6323]

Lien for taxes: Priority over unrecorded chattel mortgage.--Although a landlord's lien for unpaid rent, bolstered by a chattel mortgage clause in the lease, arose before liability for the federal taxes in question was incurred, the Government's lien for taxes had priority over the unrecorded mortgage lien, even though notice of the Government's lien had not been filed. The Government as the holder of a claim for federal taxes has the status of a "creditor" under state statutes making unrecorded mortgages or deeds of trust void as to "creditors". Therefore, the entire proceeds of sale by the receiver of a quonset building erected by the taxpayer on leased land, and its machinery and equipment, are to be paid to the United States , since they are less than the tax claims. Under Iowa law, the building is personal property which may be the subject of a chattel mortgage.

C. Frederick Beck, Smith & Beck, Mason City , Ia. , for plaintiff. F. E. Van Alstine, United States District Attorney, Theodore G. Gilinsky, Assistant United States District Attorney, Sioux City, Ia., for defendant United States of America. Edward R. Boyle, Boyle and Schuler, Clear Lake , Ia. , for Donald L. Goranson, Receiver of Property of Imperial Seed Company.

Opinion

GRAVEN, District Judge:

The plaintiff Mason City and Clear Lake Railroad Company is an Iowa corporation operating an interurban electric railway in Cerro Gordo County , Iowa . It is the owner of a certain tract of land in that county which is approximately 600 feet in length and varying from around 500 feet to 300 feet in width. On September 12th, 1949 , the plaintiff and the Imperial Seed Company entered into a written lease as to that tract. Under that lease the premises were leased to the Imperial Seed Company for a term of ten years commencing as of September 1st, 1949 , at a rental of $175.00 per month. At the time the lease was entered into the Imperial Seed Company was in possession of the premises as the assignee of a lease between the plaintiff and one Rob ert Hayden. It had erected thereon a building designated as Building "B." That building also contained certain machinery and equipment which was owned by it. The building was a steel quonset type building forty feet by one hundred feet with a concrete floor. At the time the lease was entered into there was also situated on the premises a building designated as Building "A" which was owned by the plaintiff. The Imperial Seed Company is herein also referred to as the defendant Imperial Seed Company.

The defendant Imperial Seed Company paid the rent due under the lease up to April 1st, 1954 . It defaulted in the payment of the rent subsequently due. On July 19th, 1955 , there was due and owing the plaintiff as rent from that defendant the sum of $2,730.00. Sometime prior to July 19th, 1955 , one Lang commenced an action against the Imperial Seed Company in the District Court of Iowa in and for Cerro Gordo County . On July 19th, 1955 , an order was entered in that action finding that the defendant Imperial Seed Company was insolvent and appointing the defendant Donald L. Goranson as permanent receiver of all the assets and property of the company.

[Landlord's Lien]

The lease contains the following provision:

"The Lessee has constructed the building designated as Bldg. B on the annexed Plat at its own cost and expense with the consent and permission of Lessor and said building is and shall be considered for all purposes as personal property of the Lessee and may be removed from the premises at the termination of this lease, subject only to lien rights of the Lessor created by law or by this agreement. * * *"

Section 570.1, Code of Iowa 1954, provides as follows:

"A landlord shall have a lien for his rent upon all crops grown upon the leased premises, and upon any other personal property of the tenant which has been used or kept thereon during the term and which is not exempt from execution."

Section 570.2, Code of Iowa 1954, provides, in part:

"Such lien shall continue for the period of one year after a year's rent, or the rent of a shorter period, falls due."

The lien created by that Section is generally known and referred to as a landlord's statutory lien.

Paragraph 13 of the lease provides, in part, as follows:

"The Lessee covenants and agrees to pay promptly as the same become due all rent moneys and other sums which may from time to time be due from Lessee to Lessor under the terms hereof, and to strictly and literally keep and perform all the covenants, conditions and agreements herein contained made and to be kept and performed by said Lessee. It is further understood and agreed between the parties hereto that the Lessor shall have and is hereby given a first and valid lien on the building designated as Bldg. B on the annexed Plat and on all furniture and fixtures and all other personal property of the Lessee kept or used on the premises to secure the Lessor in the faithful performance by the Lessee of this covenant."

The lien given by that paragraph is what is generally known and referred to as a landlord's contract lien or landlord's chattel mortgage lien. A clause in a lease providing for such a lien is generally known and referred to as a chattel mortgage clause. In the present case the plaintiff's lease containing the chattel mortgage clause was not recorded.

[Tax Lien]

That defendant also became delinquent in the payment of state unemployment taxes. The Iowa Employment Security Commission filed liens for such taxes.

On August 5th, 1955 , the plaintiff commenced the present action in the District Court of Iowa in and for Cerro Gordo County . It made parties defendant to the action the Imperial Seed Company, Donald L. Goranson, Receiver of the Imperial Seed Company, Frank M. Halpin, District Director of Internal Revenue, and the Iowa Employment Security Commission. The plaintiff sought the enforcement of its statutory landlord's lien against Building "B" and the machinery and equipment contained therein. It also sought the foreclosure of the contract lien provided for in the so-called chattel mortgage clause of the lease against the same property. It also sought to have its lien on that property established as prior and superior to any liens or claims of any of the defendants. The United States of America was substituted as a party defendant in place of Frank M. Halpin, District Director of Internal Revenue. The defendant United States of America removed the case to this Court.

[Application of Proceeds of Receiver's Sale ]

On or about August 22d, 1955 , the defendant Donald L. Goranson as Receiver, pursuant to the order of the District Court of Iowa, sold the machinery and equipment contained in Building "B" at public auction free of liens and received therefor in excess of $2,200.00 net after the payment of costs incident to the sale. The order provided that all liens on that machinery and equipment so sold were transferred to the net proceeds of the sale. On or about December 21st, 1956, the defendant Donald L. Goranson as Receiver, pursuant to Court order of the District Court of Iowa in and for Cerro Gordo County, sold Building "B" free of liens and realized therefor in excess of $2,500.00 net after the payment of the costs incident to the sale. The order provided that all liens against the building were transferred to the net proceeds of the sale. Donald L. Goranson, as Receiver, now holds the net proceeds of the sale of the building and the machinery and equipment contained therein subject to the determination of this Court as to priority of liens. The controversy in this case is as to whether the claim of the defendant United States for taxes has priority as to the proceeds of the sale of the building and the machinery therein contained over the claim of the plaintiff for rent. The rights of those two parties in such proceeds are the same as they were to the property before the sale by the Receiver.

Section 556.3, Code of Iowa 1954, provides as follows:

"No sale or mortgage of personal property where the vendor or mortgagor retains actual possession thereof, is valid against existing creditors or subsequent purchasers without notice, unless a written instrument conveying the same is executed, acknowledged like conveyances of real estate, and such instrument or a true copy thereof is duly recorded by, or filed and deposited with, the recorder of the county where the mortgagor or vendor resides if he be a resident of this state at the time of the execution of the instrument; but if he be not such a resident then of the county where the property is situated at that time."

[Priority as Between Landlord's Lien and Tax Lien]

The Iowa Employment Security Commission did not appear and no proof was offered as to the status of its lien. The only question for determination is the question of priority as between the plaintiff and the defendant United States of America .

Section 191, Title 31, U. S. C. A. (R. S. Sec. 3466) provides as follows:

"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.

Section 6321, Title 26, U. S. C. A. 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, 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."

This statute was first enacted in 1866. 14 Stat. 107 (1866). It formerly appeared in the Internal Revenue Code as Section 3670. It is Section 6321 of the Internal Revenue Code of 1954.

Section 6322, Title 26, U. S. C. A. provides as follows:

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

In 1879 Congress enacted 20 Stat. 331 (1879). Under that enactment it was provided that the effective date for the priority of the Government's tax lien was the date the Collector of Internal Revenue received from the Commissioner of Internal Revenue an assessment list carrying the unpaid tax liability of the delinquent taxpayer. In enacting the Internal Revenue Code of 1954 Congress changed the effective date for the Government tax lien priority to the date the assessment is made. It has been pointed out that this change increases the hazard of secret liens as to parties not within the protection of Section 6323. Harold L. Reeve, "The Relative Priority of Government and Private Liens," 29 Rocky Mountain Law Review 167, 177 (February 1957). Section 6322 above set out formerly appeared in the Internal Revenue Code as Section 3671. It is Section 6322 in the Internal Revenue Code of 1954. The Internal Revenue Code of 1954 was approved on August 16th, 1954 , during the period involved in the present case. However, the change in the effective date of the Government tax lien priority is not of significance in the present case.

Section 6323, Title 26, U. S. C. A. provides, in part, as follows:

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

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

The Section in its original form was enacted by Congress in 1913. 37 Stat. 1016 (1913). It was intended to afford protection to those named in it against what in many cases amounted to a secret lien in favor of the Government. It formerly appeared as Section 3672 of the Internal Revenue Code. It appears in the form above set out as Section 6323 of the Internal Revenue Code. The Statute as originally enacted has been amended several times. The amendments are not of significance in the present case.

Section 335.11, Code of Iowa 1954, provides as follows:

"The notice of a lien for any tax in favor of the government of the United States , or any release of such lien, may be filed and recorded in the office of the county recorder in any county within which the property subject to the lien is situated. Such county recorder shall file, record, and index any such notice of lien or any release of the same without fee."

[Notice of Tax Lien Not Filed]

It does not appear that the liens asserted by the defendant United States of America were ever filed in the office of the County Recorder of Cerro Gordo County , Iowa , under the provisions of Section 335.11.

The defendant United States of America claims priority both under Section 191 of Title 31 and under Section 6321 of Title 26.

There is no claim or proof that the defendant United States of America had any actual notice of the chattel mortgage clause in the plaintiff's lease prior to the time the plaintiff commenced this action on August 5th, 1955 . There is no claim or proof that the plaintiff had any actual notice of any of the claims or liens of the defendant United States of America until shortly before it commenced this action on August 5th, 1955 .

[Landlord's Lien Not Recorded]

The plaintiff claims the sum of $1,855.00 of the proceeds by virtue of its statutory landlord's lien. It claims the sum of $2,730.00 under the so-called chattel mortgage clause of its lease. The sum of $1,855.00 claimed under its statutory landlord's lien is included in the sum of $2,730.00 claimed under the chattel mortgage clause of its lease. The difference is occasioned by the fact that under Section 570.2, Code of Iowa 1954, heretofore referred to, the statutory lien did not continue for the entire period for which the rent was unpaid. Under the Iowa law a landlord may enforce his statutory lien and contract lien in the same action. Mau v. Rice Brothers (1933), 216 Iowa 864, 249 N. W. 206. That was the procedure adopted by the plaintiff in the present case. The right to the statutory landlord's lien is not dependent upon a written lease. The lien arises out of the status of landlord and tenant. Where a landlord has a written lease providing for a contract or chattel mortgage lien in addition to his statutory lien, and his statutory lien covers the same period and the same property as his contract lien, the recording or non-recording of the lease is usually not of importance. Where, however, a landlord seeks to assert his contract lien against property not subject to the statutory lien as, for instance, exempt property, the question of recording or non-recording of the lease is of importance so far as subsequent purchasers or existing creditors are concerned. The recording or non-recording of the lease is also of importance where a landlord seeks to assert his contract lien against subsequent purchasers and existing creditors for rent for a period not covered by his statutory lien. In order for a landlord's contract lien to be valid against subsequent purchasers and existing creditors, it must be recorded as a chattel mortgage in accord with the provisions of Section 556.3, Code of Iowa 1954, relating to the recording of chattel mortgages. Sioux Valley State Bank v. Honnold (1892), 85 Iowa 352, 52 N. W. 244, 245.

A contract lien such as the plaintiff's is classified as a chattel mortgage under the Iowa Law. Evans v. Stewart (1954), 245 Iowa 1268, 66 N. W. 2d 442 [54-2 USTC ¶9643]. However, a state's characterization of a lien is not binding on the federal courts in cases involving conflicting claims of the United States . United States v. Acri (1955), 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 264 [55-1 USTC ¶9138]; United States v. Gilbert Associates (1953), 345 U. S. 361, 73 S. Ct. 701, 97 L. Ed. 1071 [53-1 USTC ¶9291]; United States v. Security Trust and Savings Bank (1952), 340 U. S. 47, 71 S. Ct. 111, 95 L. Ed. 53 [50-2 USTC ¶9492]; United States v. Waddill Co. (1945), 323 U. S. 353, 65 S. Ct. 304, 89 L. Ed. 294 [45-1 USTC ¶9126]. While the United States Supreme Court is not bound to follow the general well established rules of law as to what constitutes a chattel mortgage, yet until it speaks more clearly on the matter than it has so far it would appear that one should assume it would probably follow those rules. The reference to a lien as a contract lien would not seem to be of significance. All real estate mortgages and chattel mortgages are created by contract and constitute contract liens. A contract lien such as the plaintiff's is characterized as a chattel mortgage under well established rules of law. 14 C. J. S. Chattel Mortgages, Section 8. See also note 21 Iowa Law Review 109 (1935); United States v. Cargill (1st Cir. 1955), 218 Fed. (2d) 556, 559; United States v. Anders Contracting Co. (W. D. S. C. 1953), 111 Fed. Supp. 700, 702 [53-1 USTC ¶9412]. The provision in the plaintiff's lease in question created the relationship of chattel mortgagee and chattel mortgagor between it and the defendant Imperial Seed Company. As between the plaintiff and the defendant Imperial Seed Company, the provision in question created a valid chattel mortgage lien. The fact that a chattel mortgage creates a valid chattel mortgage lien between the parties to it is not determinative of its status as a valid lien with respect to third parties nor as to its priority in the case of conflicting claims to the property involved. Under the Iowa law, in order for a chattel mortgage lien to be valid against subsequent purchasers and existing creditors the mortgage must contain a sufficient description of the property purported to be covered by the mortgage. The description in a chattel mortgage is sufficient if it will enable third persons aided by the inquiries which the instrument suggests to identify the property. Iowa Savings Bank v. Graham (1921), 192 Iowa 96, 181 N. W. 771, 772. See also United States v. Fleming (N. D. Iowa 1946), 69 Fed. Supp. 252. The description in a chattel mortgage is sufficient if it directs the mind to facts or evidence from which one may ascertain or identify the mortgaged property with absolute certainty. Liscomb State Sav. Bank v. Akers (1924), 197 Iowa 706, 197 N. W. 890. In the present case the description is unusually specific. It describes a specified building and the machinery and equipment contained therein. The property described was non-fluctuating in character. Under the Iowa law in order for a chattel mortgage lien to be valid against subsequent purchasers and existing creditors without actual notice, it must under Section 556.3, Code of Iowa 1954, be recorded in the office of the County Recorder . That was not doen by the plaintiff in this case. The plaintiff did not take the property in question into possession or so far as the record shows ever attach the property.

In this case the plaintiff held a statutory landlord's lien against the building and the machinery and equipment contained therein. It also held an unrecorded chattel mortgage executed September 12th, 1949 , against the same property. The defendant United States of America first had actual notice of the plaintiff's liens on August 5th, 1955 , when this action was brought. At that time the Government had already acquired tax liens against the building and the machinery and equipment contained therein totalling approximately $16,000.00. As heretofore noted, the total claim of the Government is in the sum of $38,820.13. The balance of approximately $22,000.00 was the subject of tax liens filed after August 5th, 1955 . The Government asserts its claim to the proceeds in question under the priority statute (Section 191) and under the tax lien statute (Section 6321) and as an existing creditor without notice as to $16,000.00 of its lien claims under Section 556.3 Code of Iowa 1954. Since the proceeds in question are much less than $16,000.00, the status of the balance of the claim of the Government is not a significance.

There are excellent discussions on the priority of claims of the United States in two fairly recent law review articles and in one very recent law review article. An article by Professor Frank Kennedy of the College of Law of the State University of Iowa entitled "The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale Law Journal 905, (May 1954); an article by Paul E. Anderson of the California Bar entitled "Federal Tax Liens--Their Nature and Priority," 41 California Law Review 241 (Summer 1953); an article by Harold L. Reeve of the Chicago Bar entitled "The Relative Priority of Government and Private Liens," 29 Rocky Mountain Law Review 167 (February 1957).

[Tax Lien Has Priority]

It is clear that the claim of the plaintiff based on its statutory landlord's lien is inferior to that of the Government under the priority statute. United States v. Waddill Co. (1943), 323 U. S. 353, 65 S. Ct. 304, 89 L. Ed. 294 [45-1 USTC ¶9126]. it is also clear that the claim of the plaintiff is inferior to the claim of the Government under the tax lien statute. United States v. Scovil (1955), 348 U. S. 218, 75 S. Ct. 244, 99 L. Ed. 271 [55-1 USTC ¶9137]. See also United States v. White Bear Brewing Company (1956), 350 U. S. 1010, 76 S. Ct. 646, 100 L. Ed. 871 [56-1 USTC ¶9440].

In contests for supremacy between federal tax claims and statutory liens the latter have fared badly in the United States Supreme Court in recent years. How badly they have fared is strikingly pointed out in the article by Harold L. Reeve, supra. In that article (p. 168) he states that during the last ten years twelve cases involving the question of such supremacy have come before the United States Supreme Court. That author further states, p. 169:

"The Government has won all twelve cases, a remarkable record. The cases involve a number of different aspects of the problem of establishing the supremacy of the federal lien for unpaid taxes over a number of kinds of liens with which the federal statutes do not specifically deal. In these cases, the United States has prevailed in contests for priority as against attachment, garnishment, landlord's liens, mechanic's lien, municipal real estate tax liens, and city water rent liens."

The author or page 170 sets out the following schedule of cases:

Section 3466 referred to in the schedule is the same Section referred to herein as Section 191. Section 3670 referred to in the schedule is the same Section referred to herein as Section 6321. It is noted that all of the liens involved in those cases were non-contractual or statutory liens and they did not involve contractual liens coming within the provisions of Section 6323.

The claim of the plaintiff based upon its contract lien gives rise to several questions. In the case of Evans v. Stewart (1954), 245 Iowa 1268, 66 N. W. 2d 442 [54-2 USTC ¶9643], the Iowa Supreme Court held that a landlord's contract lien similar to the contract lien of the plaintiff had priority over the claim of the Government based on both the priority statute (Section 191) and the federal tax lien statutes (Sections 6321, 6322, and 6323). The Government did not file a petition for a writ of certiorari to the United States Supreme Court so it is not known whether that holding of the Iowa Supreme Court is in accord with the thinking of the United States Supreme Court. It would seem that this Court does not necessarily have to assume that the lien involved in that case prevailed only because the United States Supreme Court did not get its hands on it. There is a difference between the situation in this case and the situation in the case of Evans v. Stewart, supra. In that case the plaintiff's lease was properly and promptly recorded in the office of the County Recorder several years before the claims of the Government arose. The Iowa Supreme Court in its opinion seems to have placed importance on that fact. In this case the plaintiff's lease was never recorded. Before considering that phase, reference will be made to certain broader phases.

[Landlord as a Mortgagee]

In Section 6323 Congress attempted to give a measure of protection to mortgagees, pledgees, purchasers and judgment creditors against Government tax liens. The protection afforded by that Section has been somewhat eroded by judicial construction. In contests between the Government and those holding liens not within the scope of Section 6323, the United States Supreme Court has greatly broadened the scope of Section 191, the priority statute. The twelve cases heretofore listed indicate that in such contests the Government prevailed whether it based its claim on the priority statute or on Section 6321, the tax lien statute. In the present case, so far as the plaintiff's statutory landlord's lien is concerned, the Government, as heretofore noted, relies for priority upon both the priority statute and the tax lien statute. The cases referred to show that it is entitled to prevail under either statute.

The twelve cases referred to all dealt with statutory liens not within the provisions of Section 6323. Government priority was largely attained by means of the "specific and perfected" rule. Intimations have been made and the fear has been expressed that the United States Supreme Court might apply the "specific and perfected" rule now being applied to statutory liens to consensual or contractual liens such as mortgages. The result of such an application of that rule could be that Government claims for taxes which were not in existence at the time of the taking of a valid mortgage would have priority over it. See Kennedy, supra, footnote 141, page 930. The United States Supreme Court has not as yet so held. However, it is noted that in a comment appearing in 39 Iowa Law Review 189, 194 (1953), the writer, after referring to the standards of specificity and perfectedness set up by the United States Supreme Court in the case of Illinois ex rel. Gordon v. Campbell (1946), 329 U. S. 362, 67 S. Ct. 340, 91 L. Ed. 348, makes this observation:

"Although the suggestion may occasion surprise, it does not appear that a mortgage prior to foreclosure can meet the standards prescribed in Illinois ex rel. Gordon v. Campbell , even though recorded."

In the case of Bank of Wrangell v. Alaska Asiatic Lumber Mills, Inc. (D. C. Alaska 1949), 84 Fed. Supp. 1 [49-1 USTC ¶9312], the Court had before it among other matters the question of the priority of the Government claim for taxes under Section 3466 (the priority statute) over an unforeclosed real estate mortgage held by a bank.

The Court stated on page 2: "Incredible as it may seem, the question whether a mortgage lien is entitled to priority over the United States under this statute has not yet been decided by the Supreme Court." The Court with some dubiousness granted priority to the bank on its real estate mortgage. To hold that Government claims for taxes could attain priority under the "specific and perfected rule" over a valid real estate mortgage even though the tax debt arose subsequent in time to the creation of the mortgage would seem to have catastrophic consequences for fiduciaries, banks, pension funds and other investors investing funds in first mortgage loans.

Although a party is prima facie one of the parties named in Section 6323, he may nevertheless be held by the United States Supreme Court to be without the scope of that Section on the ground that he does not in fact have the status that Congress intended to embrace. The United States Supreme Court might well refuse to grant priority to Government tax claims over conventional mortgages and yet grant priority to such claims over leases containing chattel mortgage clauses because they have certain features which are not present in the conventional mortgage loan.

In the case of United States v. Waddill Co., supra, the United States Supreme Court found a number of infirmities in the statutory landlord's lien therein sought to be enforced. In footnote 88 on page 919 of the article by Professor Kennedy, supra, he makes this observation, "Thus, while the landlord's lien urged unsuccessfully in Waddill was statutory, a contractual landlord's lien is ordinarily vulnerable to the same infirmities." Thus, it could be that the United States Supreme Court might hold that a chattel mortgage given to a landlord to secure rent which was promptly recorded was nevertheless inferior to a claim of the Government for federal taxes subsequently accruing.

In this connection it is noted that Internal Revenue Service, Rev. Rul. 56-592, dated November 19th, 1956 , having to do with the status of a "trust mortgage" executed for the benefit of the taxpayer's unsecured creditors, reads, in part, as follows:

"Section 301.6323-1 of the Income Tax Regulations provides that the determination whether a person is a mortgagee, pledgee, purchaser, or judgment creditor entitled to the protection of section 6323(a) of the Code [1954 Internal Revenue] shall be made by reference to the realities and the facts in a given case, rather than to the technical form of terminology used to designate such a person. Thus, a person who is in fact and in law a mortgagee, pledgee, or purchaser, will be entitled to the protection of section 6323(a), even though such person is otherwise designated under the law of a state, such as the Uniform Commercial Code.

* * *

"Under the decisions in the Gilbert and Scovil cases, the terms 'purchaser' and 'judgment creditor' are restrictively interpreted and only those 'purchasers' and 'judgment creditors' who are within the ordinary and usual meaning of those terms are held to be entitled to the protection granted by section 6323 of the Code.

"The same is equally true with respect to the term 'mortgagee.' Thus, an indenture such as herein considered, although purporting to be a mortgage and designated or labeled a 'trust mortgage' does not contain the essential characteristics of a conventional mortgage and is not within the purview of section 6323 of the Internal Revenue Code of 1954."

[Mortgage Execution v. Recording]

The lease giving the plaintiff a chattel mortgage lien was, as heretofore noted, not recorded. Section 6323 provides that the tax lien imposed by Section 6321 shall not be valid "against any mortgagee" until notice thereof has been filed. Section 6323 makes no reference to the matter of recording. On its face it would appear that Section 6323 only requires that the mortgage be executed before the notice of federal tax lien has been filed. In the present case the lease containing the chattel mortgage clause was executed years before the claims on which the Government's tax liens are based came into existence. The provisions of Section 6323 are lacking in clarity as to the matter of recording. The Courts are not in agreement as to whether under Section 6323 a mortgage has to be recorded in order to be entitled to the priority given a mortgage in that Section. Some Courts are of the view that a mortgage has to be recorded in order to be afforded such priority. In re F. MacKinnon Mfg. Co. (7th Cir. 1928), 24 Fed. (2d) 156, 158; Underwood v. United States (5th Cir. 1941), 118 Fed. (2d) 760, 761 [41-1 USTC ¶9296]; Exchange Nat. Bank of Tulsa v. Davy (N. D. Okla. 1936), 13 Fed. Supp. 226, 228 (dictum) [36-1 USTC ¶9053]. In the case of United States v. Anders Contracting Co. (W. D. S. C. 1953), 111 Fed. Supp. 700 [53-1 USTC ¶9412], it was held that an unrecorded conditional sales contract had priority over a subsequently filed Government tax lien. In the case of R. F. Ball Construction Company v. Jacobs (W. D. Tex. 1956), 140 Fed. Supp. 60 [56-1 USTC ¶9514], there was involved an instrument which the Court held to constitute a mortgage. The instrument was not recorded. The Court held that it had priority over a subsequently filed Government tax lien. There were other holdings in the case. On appeal the trial court was affirmed in a short per curiam opinion. United States v. R. F. Ball Construction Company (5th Cir. 1956), 239 Fed. (2d) 384 [57-1 USTC ¶9269]. The status of the particular holding in that case is somewhat uncertain due to the fact that on May 24th, 1957 , the United States Supreme Court granted the Government's petition for a writ of certiorari.

Under Section 556.3, Code of Iowa 1954, heretofore set out, an unrecorded chattel mortgage is invalid as to "existing creditors or subsequent purchasers without notice." It is clear that in the present case the Government does not have the status of a subsequent purchaser. There is then presented the question as to whether it has the status of an "existing creditor" under the provisions of Section 556.3. In the case of In re Lewis' Estate (1941), 230 Iowa 694, 298 N. W. 842, 137 A. L. R. 562, the Iowa Supreme Court stated (p. 845 N. W.):

"This court has uniformly held that the term 'existing creditors', as used in the statute, means general creditors, who have, by execution or attachment, levied upon the mortgaged property, or otherwise acquired a lien thereon, without notice of the mortgage on the part of the creditor, or of the levying officer."

The burden of proof as to notice is upon the party claiming under an unrecorded mortgage. Botna Valley State Bank v. Greig (1918), 182 Iowa 662, 166 N. W. 104.

[Government as a Creditor]

It has been held that the Government as the holder of a claim for federal taxes has the status of a "creditor" under state statutes making unrecorded mortgages or deeds of trust void as to "creditors." Underwood v. United States (E. D. Tex. 1939), 37 Fed. Supp. 824 [41-2 USTC ¶9514], affirmed (5th Cir. 1941), 118 Fed. (2d) 760 [41-1 USTC ¶9296]; Edmundson v. Scofield (S. D. Tex. 1950), 92 Fed. Supp. 91 [50-1 USTC ¶9318].

The taxes in question in the present case become due at the time the Imperial Seed Company was required to file its tax returns and from that time on the Government was a creditor of the Imperial Seed Company. Hartman v. Lauchli (8th Cir. 1956), 238 Fed. (2d) 881, 887 [57-1 USTC ¶9571], certiorari denied, May 20th, 1957 , -- U. S. --, 77 S. Ct. 1048, -- L. Ed. --. Until those taxes were assessed the Government had the status of an unsecured creditor. The assessment of those taxes gave the Government a lien against all the property of the Imperial Seed Company. The Government acquired liens against the property in question totalling approximately $16,000.00 before it had notice of the plaintiff's unrecorded mortgage lien. As to the taxes secured by those liens, the situation of the Government was that of a creditor who had acquired liens upon property included in an unrecorded mortgage without notice of such mortgage.

In the case of In re Lewis' Estate, supra, the Iowa Supreme Court stated (p. 845 N. W.) that "existing creditors" under Section 556.3 means general creditors who by execution or attachment levied upon the mortgaged property "or otherwise acquired a lien thereon" without notice. The Iowa Supreme Court has not purported to limit the application of Section 556.3 to creditors who have secured liens upon the mortgaged property by judicial process.

In the case of Edmundson v. Scofield (S. D. Texas 1950), 92 Fed. Supp. 91 [50-1 USTC ¶9318], there was involved a Government tax lien and a Texas statute which rendered unrecorded mortgages void as to "creditors" of the mortgagor. In order to have the status of a "creditor" within the purview of that statute it was necessary that the creditor acquire a lien upon the property included in the unrecorded mortgage. In that case the Government had acquired a tax lien against the property involved. The Court held that such lien gave the Government the status of a "creditor" under the Texas statute.

In the recent case of Schneider v. O'Neal (8th Cir. May 14th, 1957 ), -- Fed. (2d) --, there was involved the question of the right of a trustee in bankruptcy to attack a transaction under Section 70 of the Bankruptcy Act. In the opinion Judge Sanborn stated as follows: "While it is unquestionably true that the trustee stood in the shoes of the bankrupt, it is equally true that he stood in the overshoes of the creditors * * *" In the present case by a combination of circumstances the Government stands in the "overshoes" of an "existing creditor" under Section 556.3 as to its tax liens acquired against the property in question before it had notice of the plaintiff's unrecorded mortgage. In the present case the building which was described in the plaintiff's unrecorded lease was considered as personal property by the parties to the lease. It is so considered by this Court.

[Failure to Record Mortgage Was Fatal]

It is the holding of the Court that because of the nonrecording of the lease containing the chattel mortgage clause the claim of the Government to the proceeds of the sale of the property involved is prior and superior to the claim of the plaintiff.

Judgment will be entered adjudging and decreeing that the claim of the Government to the net proceeds of the sale of the building and to the net proceeds of the sale of the machinery and equipment contained in it is prior and superior to the claim of the plaintiff. As permitted by Rule 52 of the Federal Rules of Civil Procedure, it is hereby ordered that this opinion shall constitute the findings of fact, conclusions of law, and order for judgment in this case.

 

 

[53-2 USTC ¶9534] Rob ert Brown, Plaintiff v. W. Wright Holland , Director, Defendant, and United States of America , Intervenor

In the District Court of the United States for the Middle District of Georgia, Athens Division., Civil Action No. 227, July 31, 1953

Priority of U. S. tax liens: Unrecorded mortgage: State law controlling.--Where a notice of tax lien was filed by the United States on September 24, 1952, and on November 5, 1952, a warrant for distraint was levied on taxpayer's automobile for payment of the taxes, it was held that an instrument securing a mortgage indebtedness on such property, executed and delivered by taxpayer to plaintiff on June 16, 1952, was superior to and had priority over the tax lien under the laws of Georgia, and must prevail, notwithstanding that the mortgage was not recorded until November 14, 1952.

Edwin Forston, Athens , Ga. , for plaintiff. Frank O. Evans, U. S. Attorney, and Joseph H. Davis, Assistant U. S. Attorney, both of Macon Ga. , for defendant and intervenor.

Order and Judgment of the Court

CONGER, District Judge:

On June 16, 1952 , Weyman Sims executed and delivered to Rob ert Brown a written instrument which has been called both a bill of sale to secure debt and a mortgage, which instrument was given to secure a note of $550.00. The instrument was recorded November 14, 1952 , in the office of the Clerk of the Superior Court of Clark County, Georgia.

[Precedence of Filing]

On September 22, 1952, the Commissioner of Internal Revenue made an assessment for income taxes for the years 1946 to 1951, inclusive, for $44,553.60, including penalties and interest, and on September 24, 1952, there was filed, pursuant to Section 3672(a)(1) of the Internal Revenue Code, in the office of the Clerk of the Superior Court of Clark County, Athens, Georgia, a notice of tax lien covering said assessment for said years. Pursuant to a warrant for distraint against Weyman Sims, regularly issued, said warrant was levied on November 5, 1952 , on a 1949 Oldsmobile sedan, which is the same property and Oldsmobile set forth and described in the mortgage or security deed from Weyman Sims to Rob ert Brown.

By agreement, said automobile was sold under the levy aforesaid, and brought the sum of $642.50, and it was further agreed that the authority and rights of liens of the respective parties follow the fund derived from the sale of the automobile sold under the levy and embraced in the mortgage.

Rob ert Brown is claiming the proceeds from the sale of said automobile by virtue of the instrument which he held and heretofore described. The United States is claiming the fund under its tax lien, and to be applied as a credit on Weyman Sims' tax assessment.

[State Law Controls]

The respective rights of the parties and the priority of liens are to be governed and determined by the State law. U. S. v. Gwinnett, 165 Fed. (2d) 149; 26 U. S. C. A., Sections 3672, 3710(a).

The notice of tax lien was filed with the Clerk of the Superior Court of Clark County on September 24, 1952 , and the levy on the automobile was made pursuant to a warrant for distraint on October 6, 1952 , and the written instrument between Sims and Brown was not recorded until November 14, 1952 . Under the Georgia law, Code Sections 67-109 and 67-1305, being codifications of the Act of August 27, 1931 , mortgages or bills of sale, even though unrecorded, are superior in rank to subsequent liens created by law. Mackler v. Lahman, et al., 196 Ga., 535; Evans Motors of Georgia, Inc., v. Hearn, 53 Ga. App., 703; Cairo Banking Company v. Citizens Bank, 63 Ga. App. 690.

[Conclusion]

I find and hold that the lien of Rob ert Brown is superior to that of the United States and that the plaintiff, Rob ert Brown, is entitled to the fund derived from the sale of the automobile, or so much thereof as is required to satisfy his claim.

WHEREFORE, IT IS ORDERED AND ADJUDGED that the United States of America, having possession of the funds derived from the sale of the automobile, pay to the Clerk of the Court out of and from said funds the cost of this proceeding, and pay over to Rob ert Brown the sum of $550.00, and that the remainder be applied as a credit on the tax lien of the United States.

 

 

[52-2 USTC ¶9441]Plains Motors, Inc., a corporation, and General Credit Corporation, a corporation, Plaintiffs v. Frank G. Clark, Collector of Internal Revenue for the State of Wyoming, Defendant

In the District Court of the United States for the District of Wyoming, Civil Action No. 3432, June 24, 1952

Lien for taxes: Validity against mortgagee.--A mortgage was junior to a federal tax lien where the tax lien was filed prior to the time that the mortgage was on record and on file, and it was not established that the appropriate agent of the government had knowledge of the mortgage when the tax lien was filed.

Loomis & Lazear, Cheyenne , Wyoming , for plaintiff. J. J. Hickey, United States Attorney, Cheyenne , Wyoming , for defendant.

Court's Remarks from the Bench

THE COURT: In this case in which the evidence was taken yesterday, No. 3432, Plains Motors versus Clark, I believe I can save time for both counsel and the Court if I give a brief statement of what I consider the facts to be that are undisputed up to this time. If I am incorrect, counsel can subsequently correct me but by this method I think counsel will be relieved of going over ground that perhaps is not necessary. I have refreshed my recollection somewhat by reviewing the memorandum I filed on the application for a preliminary injunction as to what the situation is. As I understand it, one Blomburg bought an automobile from the plaintiff sometime in April and gave a mortgage on that automobile which was subsequently assigned to the General Credit Company. I think the manner in which the assignment took effect is really immaterial here as to who made out the papers and so on, whether the assignment was made before they were filled in or afterwards there is some dispute about that but I think it is an immaterial factor in the situation which arises here. That mortgage was entrusted to an agent of the plaintiff to put on record after a license had been secured by the mortgagee but it seems I think a fair inference from the evidence that that matter of recording the mortgage was entrusted to the mortgagee himself, Blomburg, and was never placed of record at that time. Subsequently, Blomburg became delinquent in his taxes and there was considerable controversy with him by one of the agents of the Internal Revenue Department and several visits made. The record seems to show that the mortgage was never recorded until sometime in February, 1951. The original transaction having taken place sometime in April, 1950. The matters in dispute are principally the question about the filing of the lien and whether it became effective or not. Now, upon that proposition I take it there is no controversy on the proposition of law that if a legitimate mortgage is on record and on file prior to the time that a tax lien is filed, that the tax lien is junior to that mortgage. The other element which enters into it is to whether or not an agent of the government has knowledge of a mortgage which is not filed it binds the government. I take it there may be some dispute as a matter of law as to that situation but I took the position originally that the government is bound by the same rule that private parties are bound by. I think that is a fair and sensible way to conclude it. I do not ask the District Attorney to assume and respect that position except as it may be embarrassing for him to do so but I believe the government must deal fairly with the situation the same as they have to do between themselves so we will assume for the purposes of this case that if the knowledge of the mortgage, unrecorded mortgage and existing mortgage was known to an agent of the government having the matter in charge and who had general supervision and control over the matter of filing the tax lien, that would be notice to the government and be binding upon the government the same as though--that would be the equitable position between private litigants. So we are brought down to the situation in this case which is crucial. I think it is a fact that the lien, so-called tax lien was filed by the government January 3, 1952, and there was no mortgage--the mortgage given by the Blomburg's was not on file in the County Clerk's office at that time and, therefore, the tax lien ordinarily would become superior to that--become superior to that of the mortgage unless knowledge was on the part of the revenue agent. That brings us down purely to the question of fact what the evidence tends to show here and which is the stronger proof offered by the testimony as to when the conversation took place between the mortgagee, original mortgagee Mr. Peters, and the revenue agent Matheson. And it is a question of where the stronger proof lies in that particular. Now, gentlemen, if I have omitted anything that is material in the facts leading up to this proposition, why, you call my attention to it if you think there are any material facts. It leaves us in this proposition, I thought by discussing these facts this way, it would relieve counsel in making argument of anything except argument on the proposition of greater strength of the testimony whether knowledge was imputed to the government agent as to the date the conversation took place. If counsel thinks of anything else that should be--if not, if you desire now to discuss the matter of the evidence as to its substantial character showing whether or not this knowledge was imparted to the government agent before the tax lien was filed, I will hear you. If you want to submit it without argument, it is satisfactory, of course.

(Whereupon, arguments were made by Mr. Lazear and Mr. Hickey.)

[Court's Conclusions]

THE COURT: The evidence in this case as to dates was not exactly as clear as the Court would like to have it upon which to base a decision. The testimony of the plaintiff as to the date is indeed very hazy. He can't fix any date except to say it was sometime the latter part of December 1950 when the conversations were alleged to have taken place when Matheson was in the office of the Plains Motors. They attempt to justify their position by recalling certain instances which they have in mind as to a certain person being in town or leaving town or something like that which was not entirely satisfactory to fix the date, which is the crucial point in a case of this kind. Likewise there may be some discrepancy in the testimony of the defendant's witnesses as to dates. But I am inclined to think that while the testimony of the revenue agent, the witness Matheson, was not as clear as it might have been and he was somewhat confused when he testified positively that his records show that he had interviews with Blomburg and made certain collections and so forth at certain dates starting in November and extending through December twenty-second and at the time he was on sick leave and he did not see the Blomburgs again until he saw Mrs. Blomburg on January fourth, I think. I am inclined to think we have got to give certain credit to that sort of testimony and perhaps they referred to that in connection with the fact that he exhibited a report to his superior officer at that time which confirmed these dates and all particulars and also the meeting on January fourth which indicated I think very strongly that there was no conversation in regard to this car until that time. If we do not give credit to an officer's report of that kind, there is no showing he is attempting to conceal anything or defraud anybody, the reports of our official agents of the government would be virtually of no avail and they are supposed to be correct. The inference is that they report correctly their activities in this respect. And the mere fact that he did not record on January fourth any conversation with Peters is not material because he was not interviewing Peters but he did report his conversation on that date about the car. Then we have the additional situation that the other revenue agents when they were talking about filing the lien or notice to collect these taxes did look at the records and finding that cars of Blomburg had been mortgaged ran it down and found they had been released and it was that time that the lien was filed on January third. I think all those elements indicate a procedure on the part of the government agents that in fairness attempted to do their duty and they should be given due credit for it. As to the other proposition Mr. Hickey argued as to the legal rights I think it is a controversial one. I put in my memorandum which was simply one that ruled on an application for temporary injunction, preliminary injunction a general citation which was found in one of the texts which I am very anxious to consider to be the law. I did not run it down and counsel did not refer to it any further and inasmuch as it was an application for preliminary injunction it was not necessary to investigate it further at the time particularly but I think there is a certain doubt about it. I have known for sometime that as far as the government is concerned an agent can do no wrong and a lot of other things he can't do that in any way binds his principal. I think the law is contrary to that but from the standpoint of the Sovereign I suppose it is for protection that some sort of law of that kind shall likewise be interpreted along that line. I think on the whole I shall have to hold in this case, regardless of the disputed testimony, that the testimony of the defendant agents based upon their official reports made at that time during that period must be recognized and that the finding of the Court must be for the defendant in this case and the temporary injunction will be dissolved and the car surrendered to the government for the proceedings which have been instituted for the sale for delinquent taxes. This is a Court tried case but if there is no objection, the remarks of the Court are considered findings of fact and conclusions of law to relieve you of the necessity of preparing such findings and conclusions unless you elect to do so which you may submit later and a judgment may be entered in favor of the defendant. Do you desire any particular form of judgment Mr. Hickey?

MR. HICKEY: I will prepare one and submit it to counsel.

THE COURT: Perhaps that will be better.

MR. HICKEY: I will submit it to counsel before I submit it to the Court.

THE COURT: Very well.

 

 

[50-1 USTC ¶9318]W. L. Edmundson, Jr., Plaintiff v. Frank Scofield, Collector of Internal Revenue, et al., Defendants

In the United States District Court, Southern District of Texas, Houston Division, Civil Action No. 5043, 92 FSupp 91, May 2, 1950

Government's lien for taxes: Priority over unrecorded assignment.--At the time the Government's lien was impressed upon taxpayer's property for withholding and employment taxes due, there was no unsatisfied lien of record. A mortgage assignee's unrecorded assignment was absolutely void against the Government's lien, the assignee having failed to protect his security.

Strong, Baker & Compton (John L. Compton), of Houston , Texas , for plaintiff. Brian S. Odem, U. S. Attorney, and William R. Eckhardt, Assistant U. S. Attorney, of Houston, Texas, for defendant Frank Scofield. McGregor & Sewell (Ben Sewell), of Houston , Texas , for defendant Daniel E. Bruhl.

Before: HON. FRED C. CONNALLY.

Memorandum:--This action was instituted in the District Court of Harris County, Texas by the Plaintiff, seeking an injunction to restrain the Defendant Scofield, Collector of Internal Revenue, from seizing or selling certain machinery and other personal property of Texas Die Casting Corporation, taxpayer. Plaintiff likewise sued one Daniel E. Bruhl, seeking recision of a contract, or damages in tort, allegedly arising from the events hereinafter set out. The action was removed to this Court by the Collector, under Section 1442 of Title 28, U. S. C. A.

[Withholding and Employment Taxes Due]

There is little dispute as to the facts. Texas Die Casting Corporation (hereinafter referred to as the taxpayer) was indebted to the United States for withholding and employment taxes; and on April 1, 1949 , the Collector filed with the County Clerk of Harris County, Texas, a notice of tax lien covering same. On June 6, 1949 , the Collector seized the machinery and chattels described as:

1 M55a Die Caster H 162 A Zinc

1 Die Caster M55A H 108A Zinc

1 Die Caster AD 56 110 Aluminum

3 Ejector Boxes for Die Casters

1 AGM zinc furnace type A60, Ser.-1016

1 Pyrometer hereinafter referred to as "Van Horn Mortgage Property"

1 Harvill Zinc Die Caster, HD3A1 Motor 12601 hereinafter referred to as "Bruhl Mortgage Property"

1 Udylite-Mallory Standard Electro Plater hereinafter referred to as "Kinney Mortgage Property"

1 Willmington Compressor Model 1/5280, Serial #2107007 hereinafter referred to as "Holder Equipment Co. Property"

1 Wagner 5 HP Electric Motor

1 G. E. Motor for large tumbling BBL 3/4 HP

1 Westinghouse 3/4 HP Electric Motor 1180039A hereinafter referred to as "Electric Motors"

1 Van Dorn Molder, Model #1 Serial 432

3 100 Cu. Ft. Air Tanks

1 Small Custom Built Tumbling Barrel

69 Paper boxes of 300 6 x 6 x 1 sash lock boxes

50 Paper boxes addressed to Tri-Products Co., Inc., St. Louis , Mo. , containing sash locks

1 Large Custom Built Tumbling Barrel

1 High speed riveting hammer hereinafter referred to as "Admittedly Taxpayer's Property"

The Plaintiff Edmundson alleges that he owns or has a lien prior to that of the Government in the said chattels, and alleges that he will be irreparably injured unless the Collector is restrained from selling the property.

[Assignment of Note and Mortgage Not Recorded]

Prior to August 8, 1947, the taxpayer was indebted to the Defendant Daniel E. Bruhl in the amount of $4,600.00, evidenced by a certain promissory note in that amount secured by a chattel mortgage upon the die caster, herein referred to as the Bruhl mortgage property. The chattel mortgage was duly filed by Bruhl with the County Clerk of Harris County, Texas, in compliance with Article 5490 of the Revised Civil Statutes of this state. On August 8, 1947 , the Defendant Bruhl assigned the note and mortgage to the Plaintiff Edmundson, as evidenced by written assignment. Edmundson did not file this assignment for record in compliance with the above mentioned statute, and such assignment had never been placed of record prior to the date of trial. The assignment of this note and chattel mortgage was accompanied by a sale of a large block of stock of the taxpayer corporation from Bruhl to Edmundson, and the entire transaction was handled through an escrow agent (one of the large banks of this city). Bruhl executed a release of the note and chattel mortgage which, according to his testimony, he delivered with the note, mortgage and related papers to the escrow agent. Edmundson testified that he never received or saw the release; but by some means, not here disclosed, it was placed in the hands of the County Clerk . On being placed of record, and in absence of the recording of the assignment from Bruhl to Edmundson, the records of the County Clerk of Harris County showed the note to be satisfied and the chattel mortgage released.

The cause of action which the Plaintiff alleged against Bruhl was predicated on the proposition that after making the assignment to the Plaintiff, Bruhl had executed the release and himself placed it of record, thus tortiously causing loss of the Plaintiff's security. When the undisputed evidence showed that Bruhl had not placed the release of record but had delivered it to the escrow agent, the Plaintiff conceded that he had made no case against Bruhl, and the action against this Defendant was dismissed at the conclusion of the evidence. Simultaneously with the purchase of the note, mortgage, and corporate stock from Bruhl, Plaintiff acquired all of the other outstanding stock of the taxpayer corporation and from that time forward was the dominant factor in its operation. He put large sums of his own monies into the corporation and purchased equipment, met its pay roll, and made other advances for its benefit. On November 5, 1947 , the Board of Directors of taxpayer corporation adopted a resolution providing that all monies advanced by the Plaintiff, and all monies that might thereafter be advanced by him, to the corporation, be repaid as quickly as funds were available to the corporation for that purpose.

Van Horn Mortgage Property

In connection with the chattels described as the Van Horn mortgage property, the evidence showed that the Van Horn Company held a series of notes of the taxpayer, secured by chattel mortgage on such property. These notes were paid by the Plaintiff from his personal funds. They were stamped "paid" by the Van Horn Company. A release of the mortgage was executed by the Van Horn Company, reciting that the mortgage was fully satisfied. None of these notes were endorsed in favor of, or assigned to, the Plaintiff. I find that Plaintiff had no lien upon any of this property, but held only an unsecured claim against the taxpayer for the amount of this advance.

Kinney Mortgage Property

Substantially the same may be said concerning the transaction surrounding the Kinney mortgage property. On November 12, 1947 , Plaintiff, out of his own funds, forwarded check to the holder of a note secured by the property in question marked "payment in full of balance on note . . .". The note was not endorsed or assigned to Plaintiff but was forwarded to him by the holder. I make the same finding in connection with this property as was made concerning the Van Horn mortgage property.

Holder Equipment Company Property

This item was purchased in its entirety with the Plaintiff's own funds after he became interested in the taxpayer corporation. No vendor's lien was reserved by the seller, nor was any mortgage executed by the taxpayer in favor of the Plaintiff. My finding is the same concerning this property as that involving the Van Horn and Kinney mortgage properties.

Admittedly Taxpayer's Property

At the time of trial, the Plaintiff admitted that each of these items was owned in its entirety by the taxpayer, and Plaintiff claimed no interest therein.

Electric Motors

Among the items of machinery seized by the Collector were the several electric motors. The evidence shows without dispute that these motors were never purchased by the taxpayer but belong to the Plaintiff. He owned and used them (and many others) in other businesses in which he was engaged, and installed such motors in the taxpayer's plant from time to time. Frequently an exchange was made between the Plaintiff's stock and those in use by the taxpayer. Despite the fact that the taxpayer carried such items on its own books and claimed depreciation on them, I find that these motors at all times were the personal property of the Plaintiff, and the taxpayer had no interest therein.

Bruhl Mortgage Property

Article 5490, Revised Civil Statutes of this state, reads in part as follows:

"Every chattel mortgage, deed of trust, or other instrument of writing, intended to operate as a mortgage, or lien upon personal property, and every transfer thereof which shall not be accompanied by an immediate delivery and be followed by an actual and continued change of possession of the property mortgaged, pledged, or affected by such instrument, shall be absolutely void as against the creditors of the mortgagor or person making same, as against subsequent purchasers and mortgagees or lien holders in good faith, unless such instrument, or a true copy thereof, shall be forthwith deposited with and filed in the office of the county clerk. . . ." (Italics supplied.)

The "creditors" referred to in the statute are creditors who have acquired some character of lien upon the property, as distinguished from general creditors (see the many annotations to Art. 5490, Vol. 16, p. 212, Vernon's Ann. Civ. Stat.). The United States acquired such lien when it followed the statutory procedures provided therefor, (Title 26, U. S. C. A., §3670, et seq.).

At the time the Government's lien was impressed upon the property, there was no unsatisfied lien of record. The Bruhl mortgage appeared to have been released. The Plaintiff could have protected himself simply by placing his assignment of record. When he failed to do so, he must have realized that it lay within the power of Bruhl to release the mortgage of record. Through some instrumentality which the evidence does not disclose, this very contingency came to pass. His unrecorded assignment is absolutely void against a lien creditor, as is the Government here. Having failed to take the most obvious and simple precautions to protect his security, he cannot seek the aid of a court of equity to protect it for him.

I conclude that Plaintiff is entitled to an injunction restraining the Defendant from selling the electric motors, but nothing else.

The foregoing Memorandum is adopted as Findings of Fact and Conclusions of Law. Clerk will notify counsel who will present appropriate decree.

 

 

[58-2 USTC ¶9774] United States of America , Appellant v. Halton Tractor Company, Inc., a Corporation, and Wes Durston, Inc., a Corporation, Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 15,396, 258 F2d 612, 7/23/58, Affirming and remanding District Court, 56-2 USTC ¶9857

[1954 Code Sec. 6323]

Lien for taxes: Payment by third parties in order to recover seized property.--Sellers of equipment on conditional sales contracts reacquired the equipment when the buyer was unable to pay for it. Later, the property was seized by the United States for taxes due from the buyer. The sellers paid the taxes in order to recover the property. The court holds that the sellers had prior liens and may recover the taxes paid by them to the extent that they were not recouped through sales of the equipment. The case is remanded in order to determine the amount of one seller's recovery through later sale of the equipment.

Charles K. Rice, Assistant Attorney General, Helen Buckley, A. F. Prescott, George F. Lynch, Department of Justice, Washington, D. C., Lloyd H. Burke, United States Attorney, San Francisco, Calif., for appellant. Henry M. Jonas, Roy A. Sharff, San Francisco , Calif. , for appellees.

Before STEPHENS, POPE and HAMLEY, Circuit Judges.

[Recovery of Taxes Paid for Another]

POPE, Circuit Judge:

Halton Tractor, Inc., a corporation, here called Halton, and Wes Durston, Inc., a corporation, here called Durston, both filed actions seeking to recover, as wrongfully collected, sums which they paid to the Collector of Internal Revenue, for social security and withholding taxes owing by one Lloyd H. Watson. In each case judgment was for the plaintiffs [56-2 USTC ¶9857] from which the United States has appealed.

Prior to January, 1948, Watson, a contractor, had purchased from each of these corporations, various items of heavy machinery including tractors, scrapers and land levellers. To secure payment of the balance of the purchase price on such equipment, Watson had executed a conditional sales contract dated March 13, 1947 to Durston, and a conditional sales contract dated April 19, 1947 , to Halton. He also executed under date of March 24, 1947 , a chattel mortgage to Morris Plan Company describing certain other similar equipment, given to secure payment of a note for $47,100. ¹ Surston assigned its conditional sales contract to C. I. T. Corporation, guaranteeing payment thereof.

On September 16, 1947 , Watson was indebted to the United States for withholding and social security taxes in the sum of $9777.97. On that date the Government filed in the local county recorder's office its notice of tax lien against Watson. On September 29, 1947, pursuant to a request by Watson that Halton refinance his loan from Morris Plan so as to provide smaller payments over a longer period, Halton paid the balance due under the Morris Plan mortgage and on October 2, following, took a new chattel mortgage to itself covering the equipment described in the Morris Plan mortgage and a few additional items of equipment belonging to Watson. In November or December of that year, Watson notified Halton and Durston that he was in default upon all these obligations. He then moved all of the equipment, here mentioned, including that purchased from Durston, to Halton's yards at Los Banos , California .

It appears that in the dealings with the Government or its agents, which followed, Edward H. Halton, President of Halton Tractor Company, acted not only on behalf of Halton but on behalf of Durston as well. These negotiations or dealings occurred in the month of January, 1948. At that time, Francis J. Reilly, a deputy collector of Internal Revenue, purported to seize all the machinery and equipment referred to as the property of Watson. He attached to each piece of machinery a tape on which was a written statement that it was "Property of the United States Government (Notice of Seizure)", and informed both Halton and Durston, through Halton, that he intended to proceed to sell the machinery and equipment to satisfy the indebtedness of Watson to the United States . The trial court found that Reilly then informed both plaintiffs that their claimed rights to the machinery were inferior to the rights of the United States under the latter's lien; that believing this statement to be true, and to save themselves from financial loss and to prevent the loss from sale of machinery and equipment, Halton paid to the United States the sum of $5877.97 and Durston paid the sum of $3900 (making the total sum of $9777.97 above mentioned). The court also found as follows: "VII. That at all times prior to and at the time of the payment of said sum of money by plaintiff to defendant, it believed that if said Francis J. Reilly proceeded to sell said equipment as he threatened, the same would be taken from the possession of plaintiff by the purchasers at such sale and forever lost to plaintiff. VIII. That said Francis J. Reilly, at said times prior to the payment of said sums of money by plaintiff to the defendant, informed plaintiff, and plaintiff believed that the only method by which plaintiff could proceed to protect its rights in the situation was by paying to the Department of Internal Revenue the amount of said taxes due from said Lloyd H. Watson and then file a claim for refund from the United States of America upon the ground it had paid the taxes due from someone else, to-wit, Lloyd H. Watson."

After these payments had been made, Halton and Durston proceeded to repair and recondition the machinery and equipment and sold it at retail prices realizing what they could from it. Each plaintiff duly filed its claim for refund of the aforesaid sums in the office of the Collector of Internal Revenue. The claims were rejected and these suits followed.

Upon this appeal the Government makes three contentions:

1. That the plaintiffs cannot recover because they volunteered to pay the taxes in question to obtain a release of the Government's lien, and in the absence of proof of payment under duress, (which it says was not present), recovery cannot be had;

2. Plaintiffs collected from their sales of the machinery sufficient sums to make them whole and having suffered no loss they cannot maintain these actions; and

3. That the Government's tax lien was superior to the lien of Halton Tractor Company.

In the court below the two cases were consolidated for trial and the appeals from the two judgments were argued together and presented in the same briefs. The questions raised here can be understood more readily if we treat each case separately, and since the appeal from the judgment in favor of Durston presents fewer questions than does the other case, we shall deal with that one first.

The Appeal from the Judgment for Durston

As indicated above, when Durston paid the Government the $3900, its primary interest in the conditional sales contract covering the equipment sold by it was as guarantor of the paper which had been assigned to the C. I. T. Corporation. Later, in March, 1948, as the contract was in default, Durston was required to and did pay the amount then due on it or $30,100, and thus repurchased the contract. In August, 1948, Durston moved the equipment to Los Angeles where he reconditioned it and thereafter sold it for a total of $30,500. It had expended something over $1000 in replacing missing tires and parts. Thus Durston was out $30,100, the amount paid C. I. T. Corporation, plus $1000, or more. It is thus apparent that so far as Durston is concerned, it was then still out all of the sum it had paid on the Watson taxes.

[Prior Lien]

It is also clear that Durston's interest in the equipment was at all times superior to the Government's claim of lien. Its rights stem from the conditional sales contract of March 13, 1947 , and the Government's tax lien could not apply prior to its filing on September 16, thereafter. When Durston paid the $3900, it paid a sum for which it was in no manner responsible and which it was not required to pay in order to enforce its own claim against the property. To this extent this was a sum the Collector had "wrongfully collected" within the meaning of Sec. 3772(a)(1), Int. Rev. Code, 1939, ² Parsons v. Anglim, 9 Cir., 143 Fed. (2d) 534, 536 [44-2 USTC ¶9377]. ³

[Showing of Duress Unnecessary]

The trial court met the Government's claim that recovery of this sum could not be had by Durston because the payment had been a voluntary one by treating that payment, as well as the payment by Halton, as one made under duress. The court's opinion states: "In view of these facts it is the opinion and conclusion of this Court that plaintiffs paid Watson's taxes under duress, since they acted under an immediate and urgent necessity to prevent a seizure of their property." Plainly the court regarded its findings, here quoted, as facts disclosing payments under duress. Its formal conclusions so stated.

If this question were one necessary to a decision of this case we would have no difficulty in holding that a finding of duress could not be said to be clearly erroneous. Here the deputy collector had undertaken to seize the equipment on which Durston had its lien by pasting stickers on each piece declaring it to be the property of the United States . From Durston's point of view, it was required to yield to the demand implicit in this unlawful seizure or else risk losing the opportunity to sell and liquidate the property in an orderly manner. A forced sale by the Government, as threatened, would have resulted in substantial loss to Durston whose one chance of getting out whole or anywhere near it was to recondition the property and sell it at retail. Under presently recognized rules of law duress may arise from "business compulsion". See Thompson v. Deal, (CADC) 92 Fed. (2d) 478, 484, quoted in a footnote in Richfield Oil Co. v. United States, 9 Cir., 248 Fed. (2d) 217, 222; see also annotation, "Relaxation of the common law rule regarding recovery of voluntary payment", 75 A. L. R. 658; and the discussion in Swift Company v. United States, 111 U. S. 22, 29, quoting from Maxwell v. Griswold, 10 How. 242-256, as follows: "Now it can hardly be meant, in this class of cases, that to make a payment involuntary, it should be actual violence or any physical duress. It suffices, if the payment is caused on the one part by an illegal demand, and made on the other part reluctantly, and in consequence of that illegality, and without being able to regain possession of his property, except by submitting to the payment."

Under the rules previously laid down by this court, and its interpretation of the language of Sec. 3772, previously mentioned, proof of duress, as such, was wholly unnecessary here. Sub. (b) of Sec. 3772, provides: "Such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress." It would be difficult to find language more clear than this.

In Parsons v. Anglim, supra, this court had occasion to apply that section under circumstances which cannot be distinguished from those present in Durston's case. There the plaintiff, whose deceased husband had owed taxes for certain years from 1918 to 1927, paid the amount owing by the husband when she learned that the Commissioner was examining her husband's books with a view to determine a tax liability to the United States. She was advised that sooner or later it would be demanded that she pay the taxes and that if she paid them before a certain date she would save a substantial sum. After payment she filed claims for refund and then sued to recover the amount claimed. Calling attention to the provision of Sec. 3772(b) that recovery could be had regardless of whether the amount of tax had been paid under protest or duress, this court proceeded to consider the trial court's holding that plaintiff could not recover because she paid the tax voluntarily and without threat, demand or coercion. It held that unless the moneys were voluntarily paid to the Collector, in the sense that they were intended to be donations by the person who paid for the benefit of the person who owed the taxes, the absence of coercion would be immaterial. The court said (p. 537): "It is obvious that it is the volition of intent to donate which is determinative." ⁴ (p. 537): "Here, in a sense, the moneys are 'voluntarily paid' to the Collector, but it cannot be said that they are paid as a donation for the benefit of the original tax debtor."

It is clear that the holding in that case was that since the wife did not owe the taxes, and since they could not be collected from her or her property, the Collector in receiving her checks "wrongfully collected the taxes"; that the absence of coercion or duress on the part of the Collector, or the fact that payment was made on plaintiff's own volition, was wholly immaterial so long as it could not be said that the payment was made as a donation for the benefit of the original tax debtor.

It seems to us plain that the purpose of the provision making the showing of the protest and duress unnecessary was to indicate the Government's attitude that it would not insist upon retaining moneys which it had received when it had no right to collect them. "A fine sense of honor had brought the statute into being." Moore Ice Cream Co. v. Rose, 289 U. S. 373, 379 [3 USTC ¶1100]. ⁵

The findings of the trial court are fully supported by evidence that the payment by Durston was not intended for the benefit of either Watson or the Government. It follows that under the authority of Parsons v. Anglim, supra, and the plain language of Sec. 3772(b), supra, Durston was entitled to the judgment which he recovered below.

The Appeal from the Judgment for Halton

As previously indicated Halton paid to the United States the sum of $5877.97. This amount was paid under circumstances identical to those under which Durston, as stated above, paid its $3900. With respect to Halton's payment of this sum, the appellant makes the same argument it did with regard to Durston, namely, that Halton was a volunteer and, as such, it cannot now recover.

For the same reasons heretofore stated in dealing with Surston's appeal we reject this contention.

[Subrogation]

The Government urges some additional points on this appeal to which we now turn. It is contended that the Government's lien for taxes owed by Watson was superior and prior to the mortgage lien. As stated, Halton held a conditional sales contract covering a portion of the machinery and equipment. This was dated April 19, 1947 . There is no claim here that the Government's lien was superior to that. Other portions of the equipment were described in the earlier chattel mortgage from Watson to Morris Plan Company; this was dated March 24, 1947 and duly recorded on March 29. It secured a loan of $40,000. There is no question but that the lien of that chattel mortgage, being earlier in point of time, was prior to the Government's lien for taxes. United States v. New Britain , 347 U. S. 81, 85 [54-1 USTC ¶9191].

The evidence shows, however, that at some time in September, 1947, apparently shortly after the Government's notice of tax lien against Watson had been filed, Watson went to Halton stating that he was delinquent in his payments to Morris Plan and that the latter had threatened to foreclose. He asked Halton if it would help him out by financing or buying the Morris Plan mortgage and entering into another deal with him whereby his payments would be extended over a longer period of time. Watson explained that he had a new construction contract which should produce enough funds to enable him to pay the mortgage. Mr. Halton testified that he made an agreement with Morris Plan by telephone that "I would put up the amount of the mortgage at our bank and the bank would handle an exchange of our money to them and the mortgage to us. And this we did." There was no written assignment of the Morris Plan mortgage. Halton received delivery of the mortgage papers through the Bank of America upon his payment of $25,930, the balance owing to Morris Plan. On October 2 following, Watson executed a new chattel mortgage to Halton covering the same equipment and machinery described in the Morris Plan mortgage; it also described some additional items of property,--an automobile and truck and four fuel tanks which we shall have occasion to refer to later. The mortgage was given to secure a promissory note in the sum of $28,000.

The position of the Government is that the execution of this new note and mortgage constituted a novation which operated to wipe out the former Morris Plan mortgage and that with respect to the property therein described Halton's liens did not arise until October 2, 1947 , after the date when the Government's lien was filed. Hence, it is contended, with respect to that equipment and machinery, the Government in fact had a prior lien and was entitled to receive and collect the sums paid by Halton.

The trial court found that at the time the deputy collector made his demands on Halton, Halton was the owner of the Morris Plan mortgage. It is not apparent from the findings whether the court based this determination upon its belief that the Morris Plan mortgage was in fact assigned to Halton. It is Halton's contention here that apart from any actual assignment the facts and circumstances of the case show that Halton was entitled to be subrogated to the rights of the Morris Plan under its mortgage.

The holding of the trial court that Halton was entitled to claim priority under the Morris Plan mortgage must be sustained. We are of the opinion that the trial court would have been justified in finding under the evidence here that the Morris Plan mortgage was in fact assigned, though informally, to Halton. Apart from that, however, it is clear that the circumstances here were such that Halton had the right to claim subrogation even in the absence of an assignment.

The facts in this case are almost precisely the same as those in the case of Potter v. United States, (D. C. R. I.), 111 Fed. Supp. 585 [53-1 USTC ¶9323]. That case is useful here because of its clearly reasoned exposition of the rules relating to the right of subrogation, and because it collects and cites most of the leading federal cases bearing upon this question. It states the general rule as follows: "A person under no obligation who undertakes by agreement with an obligor to pay the latter's debt, with the understanding that he will have the same or equivalent security to that held by the original creditor, and subsequently pays that obligation, will be subrogated to the rights of the original creditor, provided that the entire transaction places no innocent third party in a position more unfavorable than that in which he originally stood." (p. 588)

In this case, as in that one, the would-be subrogee had no knowledge at the time it took its later mortgage that there was any claim or lien for taxes due the Government from the mortgagor, although in both cases notice of the lien had been filed. In the Potter case the court noted that the understanding that the recipient of the new mortgage would have a first lien was evidenced by a warranty in the mortgage that the property was free and clear of encumbrances. Precisely the same warranty was in the October 2 mortgage here. Here, also, all of the circumstances of the dealings between Halton on the one hand, and Watson and Morris Plan, on the other, lead to but one possible inference,--that Halton understood it was to have the same security as that which Morris Plan had.

In the leading case of Burgoon v. Lavezzo, (C. A. D. C.) 92 Fed. (2d) 726, the court discussed at great length the authorities bearing upon the right to subrogation under circumstances similar to those present here. It noted a diversity of opinion in various jurisdictions but concluded that the federal cases "clearly reflect the rule requiring liberal application of the doctrine of subrogation." The court proceeded to uphold the claim of subrogation in the case before it. That case is plain authority to support Halton's claim for suborgation here.

The so-called "liberal" application of the doctrine of subrogation found in the federal decisions is one which we may properly apply here without considering whether Halton's rights to claim subrogation ought to be judged by California law rather than by federal law. ⁶ Both the statutory and decisional statements of the law in California , with respect to the right of subrogation under these circumstances, are fully as liberal as that expressed in the federal decisions. ⁷

[Sufficiency of Refund Claim]

The Government claims that Halton cannot rely upon subrogation because neither the rule applicable thereto, nor the Morris Plan mortgage, was mentioned in the claim which Halton filed with the Collector. The applicable regulation, Sec. 29.322-3, provides that: "The claim must set forth in detail and under oath the ground upon which a refund is claimed and facts sufficient to apprise the Commissioner with the exact basis thereof." In its claim Halton simply said: "That certain tractors and equipment belonging to Halton Tractor Company, Merced, California, were levied upon by the U. S. Treasury Department," etc., and that "In order to prevent distraint of the property owned by the Halton Tractor Company, the sum of $5,877.97 was paid to the Collector," etc.; that payment was made in order to prevent the sale of the equipment, "although Halton Tractor Company, a California corporation, was never itself liable for those taxes," etc.; and that Halton claimed refund because the taxes were paid involuntarily.

In our view the grounds stated by Halton for refund were clear. It was not obliged to set forth legal theories in filing its claim. The regulation is designed to apply to claims which are often prepared by laymen not learned in the law. The claim as filed here sufficiently apprised the Commissioner as to the exact basis thereof.

[Computation of Loss]

Finally it is contended that Halton may not recover here because it has suffered no loss in that it has recouped the amount of the taxes which it paid through sales of the repossessed equipment. What Halton did was to repair and recondition the machinery and equipment adding parts where needed and then sell the various items at retail. This required a period of approximately one-year and Halton used its sales organization in the effort to find buyers and to dispose of the equipment. As of the last of January, 1948, there was due Halton on the conditional sales contract, $14,594.06; there was then due on mortgage, $23,000. ⁸ Interest on those sums at that date were $351.78 and $562.27. Halton expended upon repairs of machinery and equipment, $6,517.37. The total of these sums is $45,025.48. It may be said that Halton was "in" that amount on account of machinery as of that date. Thereafter he proceeded to sell and the sales produced $57,807.97.

Included in those sales were six items which were not covered in the Morris Plan mortgage but which had been added in the October 2 mortgage from Watson to Halton. These were a Chevrolet and a Ford automobile and four Diesel fuel tanks with wagons. It is obvious that with respect to these six items of newly mortgaged property the Government's lien took precedence over Halton's claim. For the purpose of this computation we deduct the sales price received for the six items mentioned, $3,024.10, from the total cash received, $57,807.97, leaving a balance of $54,783.87, which is the gross sum realized by Halton from the sale of the machinery and equipment as to which it had liens prior to that of the Government.

In computing what it received as a result of these sales, Halton charges an item of $7,931.25, consisting of "Sales Department Operating Expenses", that is to say, what it called a proportion of the expense of its organization, including salesmen, incurred in making the retail sales of the machinery and equipment here involved. This Halton contends was a normal cost of accomplishing sales of equipment at retail. It also charged to the transaction interest on the amounts owing on the mortgage and conditional sales contract from January 31, 1948 to the date that the equipment was sold, amounting to $1,935.27. When these last two items of costs are charged or added to $45,025.48, above mentioned, they make a total of $54,892.00, or a sum in excess of the $54,783.87, previously mentioned as the proceeds from the sale of the items to which Halton had priority.

The trial court filed an opinion prior to the making of its formal findings in which it expressed the view that these several items of expense incurred by Halton were properly charged by him. We think that in this the trial judge was correct; the charge for interest would appear to be proper under the principles which underlie Jefferson Standard Life Ins. Co. v. United States, 9 cir., 247 Fed. (2d) 777 [57-2 USTC ¶9925]. Cf. United States v. Lord, 155 Fed. Supp. 105 [58-1 USTC ¶9181].

The costs of repairs and sales organization expenses are proper charges under the terms of the conditional sales contract and Morris Plan mortgage. The conditional sales contract provided that "Upon default . . . the Company may at its option . . . retake possession of the equipment sold, ending all rights of the purchaser under this contract . . . and . . . resell . . . upon such terms and in such manner as the Company may determine. . . . The Company shall deduct all expenses for retaking and selling such equipment. . . ." (Italics ours) The Morris Plan mortgage also authorized resale and reimbursement to the mortgagee, "for all costs and charges incurred or expended by it. . . ."

Assuming as we have here that the total amount derived from the sales of equipment on which Halton had first claim was the amount stated above, it is apparent that those proceeds were not sufficient to reimburse Halton for any part of the taxes which he had paid to the United States . However, one fact which was not covered by the trial court's finding cannot be overlooked by us here: As noted above, the six items described in the October 2 mortgage, but not covered by the Morris Plan mortgage or conditional sales contract, were subject to the Government's prior lien. These were sold for $3,024.10. As to those items the Government should have been allowed credit against the amount for which Halton had judgment. Or, put another way, it can be said that when Halton paid the United States, $5,077.97, [$5,877.97] such portion of that as represented the proceeds of the six items was actually due the United States, and only the overplus was an amount wrongfully collected by the Collector.

There is one other respect in which we find the record here deficient. As previously noted, Halton paid Morris Plan when it took over that mortgage $25,930, which was the amount then owing to Morris Plan and which thereby became owing to Halton. The October 2, 1947 , mortgage was given to secure the sum of $28,000. Whether this means that at that time Halton advanced to Watson an additional $2,070, or whether it was intended to cover some portion owing on the conditional sales contract, or whether it was simply a round figure, picked by the parties for convenience at the time, we cannot ascertain. Halton's office manager testified that as of January 31, 1948 , there was $23,000 principal owing on the mortgage. He testified first that this was the amount owing on the Morris Plan mortgage and later corrected himself to say that it was the amount owing on the October 2 mortgage. It is evident that payments had been made since Halton paid the Morris Plan Company. How these payments were or should be credited as between the October 2 and the Morris Plan mortgage, this record does not show.

A problem similar to this arose in the case of Potter v. United States, supra, and the court there indicated, correctly, we think, that in calculating the right of subrogation it must be allowed in respect only to the amount owing upon the old mortgage. Since in any event the Halton judgment must be remanded to the court below for the purpose of calculating the proper amount of credit, as above indicated, to be applied against Halton's claim for refund, the court upon such remand will have an opportunity, by taking additional testimony if necessary, to ascertain the amount owing to Halton on the date mentioned on the Morris Plan mortgage, and to recalculate the recovery here on the basis of any new figure that might be thus ascertained.

It will also be appropriate for the court to ascertain whether the amount to be credited against the taxes paid by Halton should be the full sums received at the retail sales of the six items, that is to say, $3,024.10, or whether that sum should be reduced by the amount expended by Halton in the repair of some of the six items, or further reduced by any amount appropriately chargeable as "Sales Department Operating Expense."

The judgment in favor of Wes Durston, Inc., is affirmed.

Upon the appeal from the judgment in favor of Halton Tractor Company, Inc., that cause is remanded for further proceedings in the court below consistent with this opinion.

¹ The mortgaged property included Caterpillar tractors. Whether they were purchased by Watson from Halton does not appear. Halton was distributor for Caterpillar tractors in that area.

² "Sec. 3772. Suits for refund--(a) Limitations (1) Claim. No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner, according to the provisions of law in that regard and the regulations of the Secretary established in pursuance thereof."

³ This case is annotated at 154 A. L. R. 159

⁴ The court said (p. 536) "We believe the Collector 'wrongfully collected' the taxes as that term is used in 26 U. S. C. A. Int. Rev. Code, Sec. 3772(a)(1), (b), when he accepted appellant's tendered checks with knowledge of the fact that she did not owe the taxes. The protest that she did not owe them in the communication making the tender of the checks and claims for refund if the checks were accepted, refute the contention that she was volunteering a donation of her husband's taxes to the government."

⁵ In support of its contention that a "voluntary" payment cannot be recovered, appellant relies upon the same cases which this court distinguished in Parsons v. Anglim, supra, (footnote 1 thereof). Cf. with Clift & Goodrich v. United States, 2 cir., 56 Fed. (2d) 751 [1932 CCH ¶9149], one of those cases, the later case of Cloister Printing Corporation v. United States, 2 cir., 100 Fed. (2d) 355 [38-2 USTC ¶9603], where is noted the effect of the enactment of the 1924 statute which is now Sec. 3772(b).

⁶ Cf. Commissioner v. Stern, 357 U. S. 39 [58-2 USTC ¶9594], and United States v. Bess, 357 U. S. 51 [58-2 USTC ¶9595], (both decided June 9, 1958 ), with United States v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191]. In United States v. Gregory-Beaumont Equipment Co., 8 cir., 243 Fed. (2d) 591, the court applied Arkansas law in supporting a claim of subrogation so as to sustain priority of a mortgagee against a Government crop loan mortgage.

⁷ The California statutes are quoted and the leading California decisions cited in Stein v. Simpson, 27 Cal. 2d 79, 230 P. 2d 816, 820, a case in which subrogation was denied. In Simon Newman Co. v. Fink, 206 Cal. 143, 273 P. 565, 566, the California rule was stated as follows: "The general rule respecting the rights of persons who advance money to pay off incumbrances is stated in 27 American & English Encl. of Law (2d Ed.) at page 247, as follows: 'One who advances money to pay off an incumbrance on realty at the instance of either the owner of the property or the holder of the incumbrance, either on the express understanding, or under circumstances from which an understanding will be implied, that the advance made is to be secured by a first lien on the property, is not a mere volunteer; and in the event the new security is for any reason not a first lien on the property, the holder of such security, if not chargeable with culpable and inexcusable neglect, will be subrogated to the rights of the prior incumbrancer under the security held by him, unless the superior or equal equities of others would be prejudiced thereby, and to this end equity will set aside a cancellation of such security, and revive the same for his benefit.'"

⁸ Which mortgage it was we discuss later.

 

 

[55-1 USTC ¶9427]Louis Brown v. General Laundry Service, Inc., et al.

In the Superior Court of Connecticut, Harford County., File No. 89569, 113 A2d 601, April 4, 1955

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

Lien for taxes: Priority: City taxes v. federal taxes: First in time, first in right.--Following the rule laid down by the U. S. Supreme Court that the first in time is the first in right, the Court ordered that the priority of the liens of the City of New Britain for general taxes and water assessments and the liens of the United States for withholding, FICA, and unemployment taxes be determined according to the order in which their respective tax liens attached to the property and became choate. The U. S. tax liens attached and became choate at the time the assessment list was received in the office of the collector of internal revenue.

Camp, Williams & Richardson, New Britain , Conn. , for the plaintiff. Adrian W. Maher, United States District Attorney, and Edward J. Lonergan, Assistant United States District Attorney, for United States of America. Nair & Nair, of New Britain, Conn., for defendants William G. Dunn and Tingue Brown & Co. Harold Koplowitz, of New Britain, Conn., for City of New Britain.

Memorandum of decision on motion of United States of America for determination of priority, judgment and distribution, and on motion of city of New Britain for determination of priority

RYAN, Judge:

This action was instituted to foreclose the first and second mortgages on New Britain real estate of the General Laundry Service, Inc. A judgment of foreclosure by sale was rendered by the Superior Court on June 22, 1951 . Pursuant thereto the property was sold for $27,500. In addition to the proceeds of the sale of the mortgaged property, a receiver of rents reported collection of $571.24, making a total of $28,071.24 available for distribution. The court by its supplemental judgment dated December 18, 1951, ordered distribution to the respective parties in order of their priority as follows: To the committee and others for the expenses of the sale, $1761.09; to the city of New Britain for general taxes due on the foreclosed premises on the lists of 1946 to 1950 inclusive, $3075.07, and water assessments, $512.64, a total of $3587.71; to Louis Brown, the plaintiff, holder of the first and second mortgages, the sum of $15,319.35; to William G. Dunn of New Britain, holder of a judgment lien, the sum of $2017.18; to the United States of America for (1) federal insurance contributions, the assessment lists on which were received on various dates in 1949 and 1950, (2) federal unemployment contributions for the year 1948, the assessment list of which had been received on June 26, 1950, and (3) withholding taxes, the assessment lists of which had been received on various dates in 1948, 1949 and 1950, a total of $8475.13.

[ U. S. Appealed]

The United States of America appealed to the Supreme Court of Errors, claiming that the tax and water liens of the city of New Britain did not take precedent of the claims of the United States of America for taxes. The city of New Britain entered into a stipulation of facts with the federal government and filed a brief and argued the case in the state Supreme Court. Neither the plaintiff nor any other defendant participated in the appeal either as appellant or appellee. The judgment of the Supreme Court was affirmed by the Supreme Court of Errors. Brown v. General Laundry Service, Inc., 139 Conn. 363 [53-1 USTC ¶9272]. On writ of certiorari, the judgment of the Connecticut court was reviewed by the Supreme Court of the United States . United States v. New Britain , 347 U. S. 81 [54-1 USTC ¶9191]. The Supreme Court vacated the judgment of the Connecticut Supreme Court of Errors and remanded the case to have determined the order of the various liens asserted in accordance with the opinion.

The liens in question are statutory. The pertinent language of the statutes involved follows.

Section 1853 of the General Statutes: "The interest of each person in each item of real estate, which shall have been legally set in his assessment list, shall be subject to a lien for that part of his taxes laid upon the valuation of such interest, as found in such list when finally completed. . . ." It goes on to provide that the lien shall exist from the first day of October or other assessment date of the municipality in the year previous to that in which the tax shall have become due "and, during its existence, shall take precedence of all transfers and incumbrances, in any manner affecting such interest in such item, or any part of it."

Section 758 provides that water rates, if not paid when due, shall constitute a lien upon premises served, which lien shall take precedence over all other liens or incumbrances except taxes.

[Code Provisions]

Section 3670 of the Internal Revenue Code:

"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."

Section 3671 of the Internal Revenue Code:

"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."

Section 3672 of the Internal Revenue Code:

"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; or (2) With clerk of district court. In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law authorized the filing of such notice in an office within the State or Territory. . . ."

[Rules Laid Down by U. S. Supreme Court]

The Supreme Court laid down the following rules which this court is obliged to follow in determining the order of priority of the various liens asserted: (1) The first in time is the first in right. (2) The priority of each statutory lien contested must depend on the time it attached to the property in question and became choate. (3) A lien becomes choate when the identity of the lienor, the property subject to the lien, and the amount of the lien are established. (4) Federal tax liens are general and become choate at the time the assessment list is received in the office of the collector of internal revenue. (5) In the instant case, certain of the city's tax and water-rent liens attached to the specific property and became choate prior to the attachment of the federal tax liens. It is obvious that certain others became choate after the federal tax liens attached. (6) The United States is not interested in whehter the state or its political subdivisions receive taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal liens. There is nothing in the language of §3672 of the Internal Revenue Code to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interest set out therein.

The United States of America is, therefore, entitled to share only in the excess of the amount necessary to pay the plaintiff mortgagee and the judgment lienor, William G. Dunn. After deducting the judgment debt of the plaintiff mortgagee, the expenses of the sale and the amount of the judgment lien, there is on hand for distribution in which the federal government may share, the sum of $8,973.62.

[Claims of City and U. S.]

The parties are in agreement on the amounts of all the statutory liens involved; the time when the liens for water rent became choate; the time when the liens of the federal government for withholding, federal insurance contribution and unemployment taxes attached to the property and became choate upon the receipt of the assessment list for such taxes by the collector of internal revenue; the assessment dates of the real estate taxes of the city; and the fact that the tax rate of the city of New Britain is not established by the city's common council until the third Wednesday of the January following the assessment date (i.e. no earlier than January 15 or later than January 21 in any year). The city still claims that the assessment date, October 1, is the crucial one for the tax liens, but it is quite apparent that the amount of the lien cannot be established until the tax rate is set in January. Only when this is done does the lien become choate. Our own Supreme Court of Errors regarded them as inchoate. Brown v. General Laundry Service, Inc., 139 Conn. 363, 372 [53-1 USTC ¶9272]. The liens for water rates attached when due.

The total claim of the federal government in the sum of $8,475.13 cannot be paid. Nor can the full amount due the city, $3,587.71, be paid unless the city is entitled to priority over the judgment lienor, William G. Dunn. This defendant makes the following claims: (1) The supplemental judgment of this court of December 18, 1951 , was a final judgment. (2) There was no general appeal by any party from the final supplemental judgment of this court. (3) There was no motion for rehearing by this court within the time permitted by our statutes or rules of practice. (4) There was no defense to the complaint interposed by any party and no motion for trial of any issues. (5) The appeal to the Supreme Court of Errors was limited to the dispute as to the order of priority as between the United States of America and the city of New Britain with respect to the amounts set out to them, exclusive of the amount set out and ordered paid to the judgment lienor. (6) The judgment lienor was not made a party to the appeal. (7) The judgment of the Supreme Court of Errors was limited to the question, presented by the appeal, of whether the tax liens of the United States or of the city of New Britain had priority with reference to the total amount set out to them. (8) The judgment lienor was not made a party to the proceedings before the Supreme Court of the United States . No service was ever made on him of the petition for writ of certiorari, nor was any motion ever presented by either the United States or the city of New Britain to cite him in, (9) The judgment of the Supreme Court of the United States was limited to the question presented as to the order of priority between the United States and the city of New Britain respecting the amounts set out to them. (10) The remand was similarly limited to the question presented. (11) The order of priority of liens other than those of the United States of America and the city of New Britain was determined by the supplemental judgment of this court of December 18, 1951 and is res judicata. (12) The city of New Britain is estopped by the doctrine of res judicata and its laches from further proceedings.

All parties to the supplemental judgment were afforded the opportunity to participate in the appeal. It is true that a judgment in favor of one of two defendants and against the other, upon a severable cause of action ex contractu, if not appealed from by the plaintiff becomes final as between him and the successful defendant, although the losing defendant does appeal; nor does the successful defendant become a party to such appeal. Donnarumma v. Korkin, 97 Conn. 223. There the cause of action was severable. In the instant case the trial court gave first priority to the liens of the city of New Britain in full. Any change made by the decree of an appellate court in the order of priority as to any party must, of course, affect the remaining parties to whom distribution was ordered by the supplemental judgment. The city of New Britain was not an appellant but an appellee. It would have been quite content to accept the amount due it without further litigation. To hold that because the defendant Dunn remained silent and inactive while the city was opposing the claim of the federal government he is now in a position to prevent the city from collecting the full amount of its claim would be unsound and unrealistic. So far as state law is concerned, it is clear that with the exception of a portion of the liens of the federal government, the liens of the city take precedence over any incumbrance on the property irrespective of the time at which the incumbrance might have attached. This means that the city may resort to the proceeds from the sale of the property which the previous supplemental judgment applied to payment of the judgment lien, and if it becomes necessary, the mortgage indebtedness. "This is the inevitable result of the application of the Act of Congress and of the state law." Samms v. Chicago Title & Trust Co., 349 Ill. App. 413.

[Order of Priority]

The court finds that there is due from the defendants to parties in this action, upon the incumbrances designated in order of their priority, sums as follows:

LIENOR                           LIEN            PERTINENT DATE            AMOUNT

New Britain

         Water              
December 1, 1947
 .......            $ 4.19

New Britain

         Taxes              
January 15-21, 1948
 ....            628.57

U. S.               Withholding        
April 26, 1948
 .........            357.07

New Britain

         Water              
June 1, 1948
 ...........              6.13

U. S.               Withholding        
October 22, 1948
 .......          1,152.90

New Britain

         Water              
December 1, 1948
 .......              4.51

U. S.               Withholding        
January 14, 1949
 .......            991.60

New Britain

         Taxes              
January 15-21, 1949
 ....            598.75

U. S.               Withholding        
April 27, 1949
 .........          1,038.14

U. S.               Withholding        
May 27, 1949
 ...........          1,002.29

New Britain

         Water              
June 1, 1949
 ...........              5.74

New Britain

         Water              
June 1, 1949
 ...........             96.10

U. S.               F. I. C.           
June 20, 1949
 ..........            212.76

U. S.               Withholding        
August 29, 1949
 ........            885.45

U. S.               Withholding        
November 28, 1949
 ......          1,000.65

New Britain

         Water Rent         
December 1, 1949
 .......              5.76

New Britain

         Water Rent         
December 1, 1949
 .......            122.39

U. S.               F. I. C.           
December 16, 1949
 ......            245.48

New Britain

         Taxes (in part)    
January 15-21, 1950
 ....            615.12

                                       TOTAL ..................         $8,973.62

 

This would give the United States of America the sum of $6,886.34 and the city of New Britain the sum of $2,087.28, leaving a balance due the city of $1,500.43. It is therefore necessary to resort to the proceeds of the sale of the property which had been applied in the previous supplemental judgment of this court to the judgment lien of William G. Dunn.

The clerk of the court has in hand the sum of $10,990.80 after payment of expenses of $1761.09. Upon payment to the clerk of the court of a judgment fee of $10, he shall pay the remainder of said proceeds as follows:

United States of America

 .........         $ 6,886.34

City of 

New Britain

 ..............           3,587.71

William G. Dunn, c/o Attorney

Israel
 Nair, 

New Britain

 .........             506.75

TOTAL ............................         $10,980.80

 

Recapitulation:

Expenses ....................         $ 1,761.09

Judgment fee ................              10.00

United States of America

 ....           6,886.34

City of 

New Britain

 .........           3,587.71

Louis Brown .................          15,319.35

William G. Dunn .............             506.75

                                      $28,071.24

Sale

 Price ..................         $27,500.00

Rents recd. .................             571.24

                                      $28,071.24

 

Judgment may enter accordingly.

 

 

[54-1 USTC ¶9191] United States of America , Petitioner v. City of New Britain , Connecticut , et al.

In the Supreme Court of the United States , No. 92. October Term, 1953, 347 US 81, 74 SCt 367, February 1, 1954

On writ of certiorari to the Supreme Court of Errors of the State of Connecticut .

Federal and municipal tax liens: General v. specific liens: Priorities.--The fact that municipal liens for real estate taxes and water rents were specific, while federal liens for unpaid withholding and social security taxes were general, did not of itself give the city priority. Nor was the city entitled to priority merely because it was not established that the debtor was insolvent. Priority depended upon the time each lien attached to the property and became choate. The fact that under federal law the federal liens were subordinate to a recorded mortgage, and that under state law the municipal liens were entitled to priority over the mortgage, did not give the municipal liens priority over the federal liens.

Rob ert L. Stern, Acting Solicitor General, H. Brian Holland, Assistant Attorney General, Marvin E. Frankel, Ellis N. Slack, A. F. Prescott, Harry Baum, for petitioner. William S. Gordon, Jr., Harold Koplowitz, Frank R. Kennedy, for respondents.

MR. JUSTICE MINTON:

The question presented by this writ involves the relative priority of statutory federal and municipal liens to the proceeds of a mortgage foreclosure sale of the property to which the liens attached.

Two mortgages on the real property of a corporation located in the City of New Britain, Connecticut, were foreclosed by judgment sale in the Superior Court of Hartford County , and a gross sum of $28,071.24 was realized. Against this fund, there were claims of some $31,000, including expenses of the sale, the two mortgages, a judgment of record, and various statutory liens asserted by the City and by the United States . The federal liens, securing unpaid withholding and unemployment taxes and insurance contributions totaling $8,475.13, were created by §3670 of the Internal Revenue Code. ¹ They arose at the times the assessment lists were received in the office of the Collector of Internal Revenue for Connecticut ² on various dates between April 26, 1948, and September 21, 1950. The City's liens, which attached to the specific real estate sold in the total sum of $3,587.71, are for delinquent real-estate taxes and water rent. The real-estate taxes became due on various dates in 1947 through 1951, the liens attaching in each case as of October 1 or other assessment date of the prior year; ³ the water-rent liens arose upon failure to pay ⁴ and date from December 1, 1947, to June 1, 1951.

[Effect of State Lien Law]

A Connecticut statute provides that real-estate tax liens "shall take precedence of all transfers and incumbrances" in any manner affecting the property subject to the lien. ⁵ Another state law gives the water-rent liens "precedence over all other liens or incumbrances except taxes" on the property subject to the liens. ⁶ The funds available for distribution being insufficient to pay all claimants in full, the Superior Court directed that the expenses, the City's liens, the mortgages, the judgment lien, and the United States' liens be paid in that order. The United States appealed from the judgment insofar as the statutory liens of the City were given priority over those of the United States . The Supreme Court of Errors of Connecticut affirmed, 139 Conn. 363, 94 A. 2d 10 [53-1 USTC ¶9272], and we granted certiorari, 346 U. S. 809.

We are here dealing with several statutory liens, some owned by the City and some by the Federal Government, on real estate. The Supreme Court of Errors stated that the City's liens were specific and perfected. Such characterization of a lien by the State is not, of course, conclusive against the Federal Government. United States v. Security Trust & Savings Bank, 340 U. S. 47, 49 [50-2 USTC ¶9492]; Illinois v. Campbell, 329 U. S. 362, 371. However, we accept the holding as to the specificity of the City's liens since they attached to specific pieces of real property for the taxes assessed and water rent due. The liens may also be perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established. The federal tax liens are general and, in the sense above indicated, perfected. But the fact that one group of liens is specific and the other general in and of itself is of no significance in these cases involving statutory liens on real estate only. United States v. City of Greenville , 118 Fed. (2d) 963, 964 [41-1 USTC ¶9381]. A mortgage is a specific lien, yet "[a] statutory lien is as binding as a mortgage, and has the same capacity to hold the land so long as the statute preserves it in force." Rankin v. Scott, 12 Wheat. 177, 179.

[Priority of Liens]

Thus, the general statutory liens of the United States are as binding as the specific statutory liens of the City. The City gains no priority by the fact that its liens are specific while the United States ' liens are general. Obviously, the State cannot on behalf of the City impair the standing of the federal liens, without the consent of Congress. Michigan v. United States, 317 U. S. 338, 340 [43-1 USTC ¶9225]; United States v. Oklahoma, 261 U. S. 253, 260; United States v. Snyder, 149 U. S. 210, 214. On the other hand, the federal statutes do not attempt to give priority in all cases to liens created under the paramount authority of the United States . The statute creating the federal liens here involved, I. R. C., §3670, does not in terms confer priority upon them.

When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing the United States , whether secured by liens or otherwise, by §3466 of the Revised Statutes, 31 U. S. C. (1946 ed.) §191. In that circumstance, where all the property of the debtor is involved, Congress has protected the federal revenues by imposing an absolute priority. ⁷ Where the debtor is not insolvent, Congress has failed to expressly provide for federal priority, with certain exceptions not relevant here, ⁸ although the United States is free to pursue the whole of the debtor's property wherever situated. The State, having a lien only upon property within its boundaries, may not reach beyond the state line to fasten its lien upon other property. The record does not establish that the taxpayer in this case was insolvent.

[Time When Liens Attached]

It does not follow, however, that the City's liens must receive priority as a whole. We believe that priority of these statutory liens is determined by another principle of law, namely, "the first in time is the first in right." As stated by Chief Justice Marshall in Rankin v. Scott, supra:

"The principle is believed to be universal, that a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds, unless the lien be intrinsically defective, or be displaced by some act of the party holding it, which shall postpone him in a Court of law or equity to a subsequent claimant." 12 Wheat., at 179.

This principle is widely accepted and applied, in the absence of legislation to the contrary. 33 Am. Jur., Liens, §33; 53 C. J. S., Liens, §10b. We think that Congress had this cardinal rule in mind when it enacted §3670, a schedule of priority not being set forth therein. Thus, the priority of each statutory lien contested here must depend on the time it attached to the property in question and became choate.

The United States in claiming priority for all its liens relies heavily on two recent cases from this Court, United States v. Security Trust & Savings Bank, supra, and United States v. Gilbert Associates, 345 U. S. 361 [53-1 USTC ¶9291]. We do not think they are inconsistent with our decision in this case.