memorandum opinion and conclusions of law reveals the fallaciousness of
the premise on which the argument is based. In its memorandum opinion
the court stated:
to the Government's contention that the lien has now attached to the
proceeds of the insurance policies to the extent of their cash surrender
value as of the date of the taxpayer's death, this Court, with due
respect to eminent authority to the contrary [presumably the Behrens
case], does not agree with the theory."
Conclusion of Law No. 3 reads as follows:
lien of the United States for taxes assessed against Carl Hoper, which
during his life attached to the cash surrender value of the insurance
policies owned by him, did not survive his death."
is hardly necessary that we point out that these are not findings of
fact, but are conclusions of law whose correctness is a matter on which
this court must exercise its independent judgment.
liability in this case is based upon the disallowance of a family
partnership by the Commissioner. Income derived from the partnership's
business activities, which otherwise would have been taxable to certain
limited partners, was attributed to the taxpayer. Except for the
allowance of the tax claim against the estate of the taxpayer by the
Probate Court of Cook County, Illinois, there has never been a judicial
determination of the legality of the Commissioner's action and the
resulting tax liability. The defendants in the proceeding below sought
to show the validity of the partnership for federal tax purposes, but
the District Court upheld the government's contention that by reason of
the allowance of the tax claim against the taxpayer's estate by the
Probate Court the claim is res judicata. Defendants have not
cross-appealed from this determination nor have they questioned its
correctness or argued that it is erroneous, but have proceeded here to
argue the merits of the tax claim. Needless to say, they have put the
proverbial cart before the horse. The District Court, in view of its
determination that the doctrine of res judicata precluded inquiry
into the merits of the tax claim, never reached the merits, and
obviously the merits never will be reached unless the District Court was
in error. The government, evidently as confused as we are by the
obliqueness of defendants' argument, has not tried to support the
District Court's holding on this point. Thus this court does not have
the benefit of respective counsel's argument and briefs on the question
of the applicability of the doctrine of res judicata to the facts
of the instant case.
of defendants, although dependent upon the government's tax lien, is
based fundamentally upon the existence of a tax liability on the part of
the taxpayer. If the defendants can prove that the taxpayer had no tax
liability, it would follow that the asserted lien is without foundation
in fact or in law and that the government could not succeed in this
action. However, we agree with the District Court that the determination
by the Probate Court of the personal tax liability of the
decedent-taxpayer precludes consideration anew of the merits of his
liability. Cf. Maryland Casualty Co. v.
, Ct. Cl., 32 Fed. Supp. 746 [40-1 USTC ¶9452].
June 8, 1948
, a proof of claim for the income taxes in question was filed in the
taxpayer's estate. The claim was disputed and the estate was represented
in the proceedings by the same counsel representing defendants in the
instant case. The claim was allowed in full on
January 24, 1952
, and the balance of assets in the amount of $3,560.72 remaining after
the payment of
istrative expenses was paid to the government in partial satisfaction of
the $43,091.98 tax claim.
of a claim against a decedent's estate in the Probate Court is a
judgment, and the adjudication of allowance is final and conclusive on
the parties as to the matters in dispute unless the judgment is reversed
or set aside on appeal or review. United States v.
, N. D. Ill., 26 Fed. Supp. 237; Sinnickson v. Perkins, 137
Ill. App. 10, aff'd 231
492, 83 N. E. 194. Since no appeal was taken and the time therefor has
expired, the decree has become final and cannot be collaterally
attacked. Moore v. Sievers, 336 Ill. 316, 168 N. E. 259; People
for use of Stough v. Danforth, 293 Ill. App. 280, 12 N. E. 2d 227.
Defendants in their capacity as beneficiaries of the life insurance
policies are successors in interest of the taxpayer to the extent of the
cash surrender values. There is therefore in this situation the
requisite privity and defendants are consequently bound by the judgment
of the Probate Court determining the taxpayer's liability and they took
the cash surrender values subject to this liability. First National
Bank v. Commissioner of Internal Revenue, 7 Cir., 112 Fed. (2d) 260
[40-1 USTC ¶9472], certiorari denied 311
reasons set forth above, that part of the judgment of the District Court
holding that the decedent-taxpayer's tax liability is res judicata
is affirmed, and that part of the judgment holding that the tax lien did
not attach to the cash surrender value of the insurance policies in the
hands of the beneficiaries is reversed and the cause remanded for
further proceedings consistent with this opinion
part, REVERSED in part ANDREMANDED.
United States of America
, Appellant v. L. C. Chapman, et al., Appellees
U. S. Court of Appeals, 10th Circuit, No. 6108, 281 F2d 862, 7/29/60,
Reversing District Court, 59-1 USTC ¶9182
[1954 Code Sec. 6323]
Tax liens: Priority of claims to interpleaded funds: Construction of
state law.--Under Oklahoma law laborers and materialmen had an
equitable right to payment from funds due a contractor on a public
improvement in preference to general creditors and their claims had
preference over the Federal tax lien since under Oklahoma law the
contractor-taxpayer had no property or property rights to the funds
retained by the interpleader to which the Federal tax lien could attach
except to the extent that the retained funds exceeded the labor and
material claims. The Federal tax lien took preference over the claim of
the assignee Finance Company since it was not a purchaser within the
meaning of Section 6323 of the 1954 Code, but was a lienor whose lien
was inchoate and imperfected at the time of the filing of the Federal
[1954 Code Sec. 6323]
Tax liens: Allowance of attorney's fees and costs in interpleader.--Even
though the material and labor liens took preference over the Federal tax
lien the attorney fees and costs of the interpleader may not be paid out
of the funds impressed with the Federal tax lien. The inviolability of
the Federal tax lien did not inure to the benefit of the labor and
material claimants and they must bear the costs of the interpleader.
Schmeidler, Department of Justice, Washington, D. C. (Abbott M. Sellers,
Acting Assistant Attorney General, Lee A. Jackson, A. F. Prescott,
George F. Lynch, Department of Justice, Washington, D. C., Paul W.
Cress, United States Attorney, Leonard L. Ralston, Assistant United
States Attorney, Oklahoma City, Okla., with him on brief), for
appellant. Walter J. Arnote (James B. Bratton, John A. Allford, with him
on brief), for McAlester Finance Corp. Granville Tomerlin, Oklahoma
City, Okla. (T. H. Eskridge, Tulsa, John F. Butler, Joe W. Whitten,
Oklahoma City, Okla., T. L. Blakemore, Winfrey D. Houston,
ert M. Murphy, Russell E. Moss, with him on brief), for Labor and
BRATTON, LEWIS and BREITENSTEIN, Circuit Judges.
The issue is
has a tax claim which takes precedence over other claims to a fund
deposited by Southwestern Bell Telephone Company in an interpleader
action. The trial court held that a retained percentage of funds due
under a construction contract, which was not payable to the
contractor-taxpayer until labor and material claims were satisfied, was
not property subject to a federal tax lien and that an assignee for
security of construction contracts was a purchaser whose rights were not
affected by the tax claims. The payment of the laborers, materialmen,
and assignee exhausted the deposited fund and left nothing for the
, which has appealed.
Company contracted with R. J. Sims for certain construction work in
. Upon the completion of the work Sims left unpaid bills in the amount
of $20,151.75, incurred before
August 13, 1957
, for labor and materials. To secure payment of loans, Sims, by a
general assignment made
December 19, 1955
, and a special assignment made
July 3, 1957
, assigned to McAlester Finance Corporation his contracts with the
Telephone Company. The unpaid balance was $11,697.66, plus interest and
attorney's fees. Assessments of unpaid withholding and excise taxes were
made against Sims in the period March 18--
November 19, 1957
, and notices of lien were filed August 6--
November 20, 1957
, in the total sum of $24,601.09.
between the Telephone Company and Sims all contained the following
* * The Telephone Company agrees to pay the Contractor [Sims] on the
twentieth day of each month for 90% of the amount of completed approved
work on the first day of the month and agrees to make final payment
within ten (10) days after the completion and acceptance of all work by
the Telephone Company.
Telephone Company shall have the right to require satisfactory proofs of
payment, by the Contractor, of all labor and material furnished under
this contract, before acceptance of the work, but no action or
non-action of the Telephone Company in requiring such proofs shall
relieve the Contractor of the duty of causing any and all liens arising
out of the contract to be fully satisfied and discharged."
completion of the work the ratained percentage amounted to $27,183.70,
and was not paid to Sims because he failed to establish payment of labor
and material furnished under the contracts. The Telephone Company
brought an interpleader action under 28
C. §1335 and paid the retained sum into court. Named as defendants were
Sims, the holders of the claims for labor and materials, and the Finance
intervened asserting its tax claims.
Company takes the position that the labor and material claims must first
be satisfied out of the fund and that it is then entitled to be paid.
contends that its tax claims must be satisfied before any payment may be
made out of the fund to the laborers, the materialmen, or the Finance
6321 and 6322 of the Internal Revenue Code of 1954, the
has a tax lien upon "all property and rights to property" of
the taxpayer at the time of the assessment of the unpaid tax. 1
says that the retained percentage was property of the taxpayer to which
its lien attached.
v. United States, 363
June 20, 1960
[60-2 USTC ¶9538], the unpaid balance of a general construction
contract was claimed by subcontractors who had supplied labor and
materials and who had asserted a lien under
law. The United States asserted that its tax liens under §§ 3670 and
3671 of the Internal Revenue Code of 1939 2
took precedence. The New York Court of Appeals upheld the tax claim and
the United States Supreme Court reversed, holding that state law
controls in the determination of the nature of the legal interest which
the taxpayer had in the property sought to be reached by the
in asserting its tax claim. Federal law determines the priority of
competing liens asserted against the taxpayer's property or rights to
property. As the
court did not determine the nature of the property rights possessed by
the taxpayer under state law, the case was remanded so that such court
could "ascertain the property interests of the taxpayer under state
law and then dispose of the case according to established principles of
States v. Durham Lumber Company, 363 U. S. 522 [60-2 USTC ¶9539],
decided the same day as the Aquilino case, involved competing
claims of the United States for unpaid withholding and unemployment
insurance taxes, and of certain subcontractors under a general
construction contract. The taxpayers were adjudicated bankrupt and at
the time of such adjudication there was an unpaid balance due under the
construction contract. This sum was paid to the trustee and the claims
were resolved in the bankruptcy proceedings. The Court of Appeals for
the Fourth Circuit held that under North Carolina law, except to the
extent that the claim of the general contractor exceeded the claims of
the subcontractors, the general contractor had no property right which
is subject to seizure under the tax lien 3
and, hence, the United States could recover only so much of the unpaid
balance as remained after the satisfaction of the subcontractors'
claims. The United States Supreme Court affirmed on the authority of the
important differences between these two recent cases and the one now
under consideration. In the Aquilino case the subcontractors
contended that under the New York lien law 4
the contractor-taxpayer had no property interest in the balance unpaid
by the owner under the construction contract. The Durham Lumber
Company case involved
statutes which expressly create a lien in favor of subcontractors, which
is preferred over that of general contractors, and create a primary
obligation on the part of the owner to assure the payment of
In the instant
case, the labor and material claimants are aided by no such statutes. It
is conceded that Southwestern Bell Telephone Company is a public service
corporation within the intent of the Oklahoma Constitution, 6
and that public policy forbids a mechanic's lien against the property of
such a corporation when that property is essential to the performance of
public purposes. 7
has no statute such as the
lien law considered in the Aquilino case, which creates a trust
fund in favor of subcontractors and permits an action by a subcontractor
upon an obligation for moneys due to a general contractor, as well as
moneys received by him. Nor has
a statute similar to the
statute, before the court in the Durham Lumber Company case,
which permits a subcontractor to bring a direct, independent action
against the owner to the extent of any amount due under a construction
than these statutory differences is the difference in the construction
contracts. In Aquilino and Durham Lumber Company there was
no point raised on the obligation of the owner to pay the balance due on
the construction contract. For all that appears in those opinions the
obligation to pay was absolute. Here the obligation is dependent upon
the satisfaction of a condition precedent, namely, the proof of payment
for labor and materials. Article VII of the contract between the
Telephone Company and Sims requires the Telephone Company to pay the
retained percentage after "completion and acceptance of all work by
the Telephone Company." Article X gives the Telephone Company the
right to require satisfactory proofs of payment for all labor and
material "before acceptance of the work." Such proofs were
never furnished and the Telephone Company never accepted the work. Sims,
the contractor-taxpayer, could not compel the Telephone Company to pay
the retained percentage to him because of his failure to pay the
laborers and materialmen.
v. Federal laws]
As said in Aquilino,
the federal statute creates no property right but attaches federally
defined consequences to rights created under state law. The right to
property which the
asserts is covered by its lien is the right of Sims to compel payment by
the Telephone Company of the retained percentage. That right does not
exist because of the failure to pay the labor and material claims. The
rule is that conduct of a party which dispenses with performance by the
adverse party is equivalent to a waiver of the right to require
This accords to the general rule, recognized in
, that contracts must be performed according to their terms before
recovery can be had thereon. 9
As the contractor-taxpayer had no enforceable right to the money covered
by the retained percentage, there was no property or right to property
to which the tax lien of the United States attached, 10
except to the extent that the retained percentage exceeded the labor and
States attempts to avoid this weakness in its position by arguing that
as the labor and material claimants have no lien under Oklahoma law and
as they cannot sue the Telephone Company because of lack of privity of
they have no enforceable right to the fund which can defeat the tax
claim of the United States. This is but another way of saying that the
may rely on the weakness of the competing title.
This is a
federal interpleader action 12
and the fund has been paid into court. Right to recover from the fund
must be based on the strength of a claimant's title and not on the
weakness of the title of another claimant. 13
stands in the shoes of the contractor-taxpayer and can have no greater
rights to the fund than he has, the tax claim may be asserted only
against that portion of the fund remaining after the satisfaction of the
claims for labor and materials.
, the Finance Company takes the position that the labor and material
claims are superior to its claim. At the same time it says that if those
claimants have no rights under the provisions in the Telephone Company
contracts, then the Finance Company is entitled to full payment of its
claim before the tax claim is paid. This makes it necessary to determine
the rights of labor and material claimants to recover from the deposited
long line of federal decisions, 14
Oklahoma has held that laborers and materialmen have an equitable right
to payment from funds due a contractor on a public improvement in
preference to general creditors and that when a surety pays such claims
it is subrogated to the rights of the laborers and materialmen and its
right to recover from the fund takes precedence over an assignment of
the fund by the contractor. 15
This same rule should apply to a construction contract of a public
utility for property needed in the public service. Also, if a subrogee
has such right, certainly the subrogor has it too. As
has recognized this equitable right, it follows that the labor and
material claimants here have the right to secure payment from the fund
and this right is superior to that of the assignee Finance Company.
question is whether the
or the Finance Company may recover the $6,945.49 remaining in the
deposited fund after the satisfaction of the labor and material claims.
The tax lien created by §6321 arises at the time of the assessment of
unpaid taxes, 16
unless the competing claims are within §6323(a) which provides that the
lien imposed by §6321 shall not be valid "as against any
mortgagee, pledgee, purchaser, or judgment creditor" until notice
shall have been filed as therein provided. The Finance Company asserts
that it is a purchaser within the intent of §6323(a) and that its claim
must prevail over the tax claims as the notices were filed after the
v. Federal Law]
Here again we
have the problem of the applicability of state law or federal law. As
previously noted, Aquilino holds that, in the determination of
the existence of property or property rights subject to a federal tax
lien under §6321, state law governs, while the decision of the relative
rights of lien holders depends upon federal law. That case does not
cover the point as to which law governs in determining the existence of
the status of a mortgagee, pledgee, purchaser or judgment creditor, each
of whom under §6323 is not affected by a federal tax lien until notice
thereof has been filed.
Company Not Purchaser]
The problem is
presented by the contention of the Finance Company that it is a
purchaser under the law of
. The Supreme Court of that state has held that under its statutes 17
every chose in action, not founded upon tort, is assignable and right of
action is conferred upon the assignee. 18
A valid assignment passes the title of the assignor and, after
assignment, the assignor has no interest to be reached by his creditor
in any proceeding. 19
A possibility, coupled with an interest, is assignable. 20
The United States relies on the definition of purchaser stated in United
States v. Scovil, 348 U. S. 218, 221 [55-1 USTC ¶9137], where it is
said that a purchaser within the meaning of §3672, the predecessor of
$6323 of the 1954 Code, "usually means one who acquires title for a
valuable consideration in the manner of vendor and vendee."
distinction between vendor and vendee on the one hand and lienor and
lienee on the other is controlling. The transaction between the Finance
Company and the contractor-taxpayer was one in which the assignment of
the contracts was given as security for a loan. In other words, it was a
security transaction rather than a sale. This is made clear by the fact
that the contractor-taxpayer gave the Finance Company a promissory note
which was not satisfied by the assignment. 21
rule is that an assignment given as security for a debt "gives the
assignee only a qualified interest in the assigned chose, commensurate
with the debt or liability secured, although the assignment is absolute
on its face." 22
The distinction between a lien and an assignment is that a lien is a
charge upon property, while an assignment creates an interest in
While there appear to be no Oklahoma cases dealing with the legal effect
of an assignment as security for a debt, 24
it is reasonable to conclude that the general rule would prevail and
that the assignee does not receive a transfer of absolute title but,
rather, a qualified interest in the assigned chose.
United States and the Finance Company rely on Marteney v. United
States, 10 Cir., 245 F. 2d 135, 139 [57-1 USTC ¶9670], which held
that an assignee was a purchaser within the intent of §3672 of the 1939
Code. In that case there was an absolute and unqualified assignment of
an interest in a judgment in return for the cancellation of the
assignor's liability on a promissory note. This court said, at page 138,
that "a sale, in the ordinary sense of the word, is a transfer of
property for a fixed price in money or its equivalent." 25
The distinction between Marteney and the case at bar is that in Marteney
the assignment extinguished the liability on the promissory note,
whereas here the liability on the note remained and the assignment was
given merely to secure payment.
that the assignment did not make the Finance Company a purchaser within
the meaning of §6323. Instead it is a lienor. At the time of the filing
of the notices of the federal tax lien, the lien of the Finance Company
was inchoate and had not been perfected. Not only had no action been
taken to perfect the lien but, also, the amount of the debt to be
collected from the security had not been determined. 26
lien standard, which has been imposed by the Supreme Court in cases
involving liens under state law in competition with federal tax liens,
is fatal to the claim of the Finance Company. While only one such
decision involves an assignment given as security for a debt, 27
that decision, United States v. R. F. Ball Construction Co., Inc.,
355 U. S. 587 [58-1 USTC ¶9327], rehearing denied 356 U. S. 934, is
controlling here. There, as in the case at bar, the plaintiff brought an
interpleader action in which moneys due under a construction contract
were paid into court. A bonding company claimed under an assignment
given as security to assure payment of a contingent indebtedness which
did not arise until after the filing of the notice of the federal tax
lien. The trial court decided for the bonding company on the ground that
the assignment as collateral security was a perfected contractual lien 28
and the Court of Appeals affirmed. 29
The Supreme Court, in a five to four decision, reversed saying that as
the assignment involved was inchoate the provisions of §3672(a) of the
1939 Code did not apply. In two recent district court decisions the Ball
Construction Company decision has been applied in factual situations
quite similar to that here under consideration. 30
Company attempts to distinguish the Ball Construction Company
decision from the instant case on the ground that Ball involved
an assignment to secure a contingent or future indebtedness, whereas
here the assignment was to secure a present and existing debt. This same
point was raised in First State Bank of Medford v. United States,
supra, and the court, while recognizing the distinguishing
characteristic, disposed of the matter by saying "the distinction
does not perfect an unperfected lien." 31
problem is whether the perfected lien principle, established in cases
involving statutory liens, applies also to contractual liens. The
acceptance of an assignment of moneys due under a contract as security
for a loan is a common, legitimate commercial transaction. The
significance of the difference between contractual and statutory liens
and the problems inherent in the imposition of the perfected lien
principle on financial arrangements of the type here involved must have
been considered by the majority in the Ball Construction Company
case as the dissent takes pains to point out these matters. We are bound
by that decision. The fact that there the assignee was asserted to be a
law and here the contention is that the assignee is a purchaser under
law is not important. The arrangement between the Finance Company and
the contractor-taxpayer did not involve a vendor-vendee relationship as
required by the Scovil decision to establish the assignee as a
purchaser. The tax claims of the government take precedence over the
assignment to the Finance Company and the United States is entitled to a
judgment for that portion of the fund remaining after the satisfaction
of the claims of the laborers and materialmen, unless that sum is
subject to reduction because of the award of attorney's fees and costs
to the Telephone Company as plaintiff in the interpleader action.
the Ball Construction Company decision and upon United States
v. Liverpool & London & Globe Insurance Co., Ltd., 348 U. S.
215 [55-1 USTC ¶9136], counsel for the United States contend that the
award by the trial court of costs and attorney's fees to the
interpleader Telephone Company 32
was improper to the extent that the deposited fund was impressed with a
federal tax lien. The Liverpool & London Ins. Co. case
involved garnishment proceedings but the Ball Construction Company
case was an interpleader action and the court said that the right to
costs of the interpleader was controlled by the Liverpool &
London Ins. Co. case. The propriety of the allowance of costs,
including a reasonable attorney's fee, to a plaintiff in an interpleader
action is well recognized, 33
but here this judicial prerogative collides with the supremacy of the
federal tax lien. Under the Ball and the London &
Liverpool cases, and under the decisions of the lower federal courts
announced since those decisions, the innocent stakeholder, even though
he asserts no rights to the fund in dispute, may not recover his costs
and attorney's fees when to do so would invade the paramount federal tax
to be no reported case involving a situation in which, as to part of the
deposited fund, there is a right superior to the tax lien. Yet that is
the situation in the instant case and it presents the question as to the
right of the interpleader to recover from that portion of the fund not
awarded to the
. The inviolability of a federal tax lien does not inure to the benefit
of the labor and material claimants here. While it may seem inequitable
to charge one group of claimants to a deposited fund with the expense of
the innocent stakeholder and not similarly charge another claimant, such
is the position taken by the government. It is supported by decisions
which we are bound to obey.
is reversed with directions: (1) to award to the labor and material
claimants the full amount of their claims, less the pro rata share of
each in any award to the interpleader; (2) to award to the United States
the amount of the deposited fund that remains after the deduction of the
amounts due under the labor and material claims; (3) to determine the
amount due the interpleader, if any, by way of costs and attorney's
fees, and to provide the payment of that amount out of the share due the
labor and material claimants; and (4) to take such further action as is
consistent with the views herein expressed.
Section 6321 provides: "If any person liable to pay any tax
neglects or refuses to pay the same after demand, the amount (including
any interest, additional amount, addition to tax, or assessable penalty,
together with any costs that may accrue in addition thereto) shall be a
lien in favor of the United States upon all property and rights to
property, whether real or personal, belonging to such person."
Section 6322 provides that the lien arises at the time the assessment is
These sections are identical in all important respects to §§ 6321 and
6322 of the 1954 Code.
3United States v. Durham Lumber Company, 4 Cir., 257 F. 2d 570,
574 [58-2 USTC ¶9736].
's N. Y. Laws, Lien Law (1958 Supp.), §36-a. See Aquilino v.
, supra, note 2.
General Statutes of
, §§ 44-6 to 44-12. See United States v. Durham Lumber Company,
257 F. 2d 572-573 [58-2 USTC ¶9736].
7Pittsburg Equitable Meter Co. v.
, 10 Cir., 67 F. 2d 65, and
decisions therein cited.
8Quinette v. Mitschrich, 109 Okl. 281, 235 P. 530, 531; Vogel
v. Fisher, 203 Okl. 657, 225 P. 2d 346, 347; and Owens v.
Automotive Engineers, 208 Okl. 251, 255 P. 2d 240, 247.
9Camp v. Black Gold Petroleum Co., 195 Okl. 30, 154 P. 2d 769,
771; Messick v. Johnson, 167 Okl. 463, 30 P. 2d 176, 178. See
also Miller v. Young, 197 Okl. 503, 172 P. 2d 994, 995, and Rollins
v. Rayhill, 200 Okl. 192, 191 P. 2d 934, 937.
10General Insurance Company of
v. Ted Price Construction Company, Ida. 1959, 175 F. Supp. 261, 263
[59-2 USTC ¶9568]; Wolverine Insurance Company v. Phillips, N.
D. Ia. 1958, 165 F. Supp. 335, 353 et seq. [58-2 USTC ¶9765]; and, Central
Surety and Insurance Corporation v. Martin Infante Co., N. J. 1958,
164 F. Supp. 923, 927 [58-2 USTC ¶9942], affirmed, 3 Cir., 272 F. 2d
231 [59-2 USTC ¶9736]. The opinion in Scott v. Zion Evangelical
Lutheran Church, 75 S. D. 559, 70 N. W. 2d 326 [55-2 USTC ¶9669],
refers to many federal and state decisions bearing on this point. Cf.
United States Fidelity & Guaranty Co. v. United States, 10 Cir.,
201 F. 2d 118, 121-122 [53-1 USTC ¶9249]. If United States v. Kings
County Iron Works, 2 Cir., 224 F. 2d 232 [55-2 USTC ¶9536], be
considered contra, the authoritative value of that case is weakened if
not destroyed by the later decision of that circuit in Fidelity and
Deposit Company of Maryland v. New York City Housing Authority, 2
Cir., 241 F. 2d 142 [57-1 USTC ¶9410].
, 20 Okl. 78, 93 P. 543; Union Bond & Investment Co. v.
Bernstein, 40 Okl. 527, 139 P. 974; Newman v. Kirk, 164 Okl.
147, 23 P. 2d 163; and, Conservation Oil Co. v. Graper, 173 Okl.
127, 46 P. 2d 441.
See 28 U. S. C. §1335 and Rule 22, F. R. Civ. P.
This is the general rule followed in state courts. See Curran v.
Williams, 352 Mich. 278, 89 N. W. 2d 602, 604; Slavin v. Slavin,
368 Pa. 559, 84 A. 2d 313, 317; Prudential Ins. Co. of America v.
Cahill, 321 Ill. App. 45, 52 N. E. 2d 481, 484; Denton Gin Co. v.
Gathings, (Mo. App.) 216 S. W. 2d 959, 965; 48 C. J. S. Interpleader
§41, p. 92; 30 Am. Jur., Interpleader, §27, p. 503. Cf. Shapleigh
v. Mier, 299
These are collected in Martin v. National Surety Co., 8 Cir., 85
F. 2d 135, affirmed 300
15Fidelity Nat. Bank of
v. United States Casualty Co., 191 Okl. 496, 131 P. 2d 75, 77, 78.
Vitrified Brick Co., 27 Okl. 180, 111 P. 326, 328.
19Market Nat. Bank of
v. Raspberry, 34 Okl. 243, 124 P. 758, 759. Cf. Oklahoma Oxygen
Company v. Citizens State Bank and Trust Company of Kilgore, Texas,
(Okla.) 274 P. 2d 372, 373.
20Harris v. Tipton, 185 Okl. 146, 90 P. 2d 932, 934.
The trial court gave the Finance Company a judgment against the
contractor-taxpayer for the balance due on the note which had not been
satisfied by the award to the Finance Company out of the deposited fund.
6 C. J. S. Assignments §93, p. 1150, quoted in Peterman Lumber
Company v. Adams, W. D. Ark. 1955, 128 F. Supp. 6, 13.
23Springer v. J. R. Clark Co., 8 Cir., 138 F. 2d 722, 726; 6 C. J.
S. Assignments §2(7), p. 1049.
24City Nat. Bank of
v. Lewis, 73 Okl. 329, 176 P. 237, 240, distinguishes between an
assignment and a pledge and holds that "an essential feature of an
assignment is the transfer of title."
The promissory note was for $14,774.47 and was due on
July 15, 1957
. At the time of the hearing in the lower court the amount unpaid was
$11,697.66, plus interest and attorney's fees. There is no showing as to
when the payments were made which reduced the face amount. Likewise
there is no showing that the Finance Company received any of the monthly
payments due under the construction contract.
27United States v. Security Trust & Savings Bank, Executor, 340
U. S. 47 [50-2 USTC ¶9492], and United States v. Acri, 348 U. S.
211 [55-1 USTC ¶9138], were each concerned with an inchoate attachment
lien. United States v. Scovil, 348
218 [55-1 USTC ¶9137], involved a landlord's distress lien. In United
States v. Gilbert Associates, Inc., 345
361 [53-1 USTC ¶9291], the question was whether the
istrative assessment of ad valorem taxes gave a town the status of a
judgment creditor. United States v. Colotta, 350 U. S. 808 [55-2
USTC ¶9680]; United States v. White Bear Brewing Co., Inc., 350
U. S. 1010 [56-1 USTC ¶9440], rehearing denied 351 U. S. 958; United
States v. Vorreiter, 355 U. S. 15 [57-2 USTC ¶9956]; and United
States v. Hulley, 358 U. S. 66 [58-2 USTC ¶9926], all involved
28R. F. Ball Construction Co. v. Jacobs, W. D. Tex. 1956, 140 F.
Supp. 60 [56-1 USTC ¶9514].
29United States v. R. F. Ball Construction Co., 5 Cir., 239 F. 2d
384 [57-1 USTC ¶9269].
State Bank of
1958, 166 F. Supp. 204 [58-2 USTC ¶9758], and Arthur Company v.
Chicago Paints, Inc.,
1959, 175 F. Supp. 50 [59-2 USTC ¶9689]. See also Three Mountaineers
v. Ramsey, W. D. N. C. 1956, 143 F. Supp. 888 [57-1 USTC ¶9226],
and Massachusetts Bonding & Insurance Company v. Antonelli
1959, 173 F. Supp. 391.
166 F. Supp. 209. A like contention was presented in Arthur Company
v. Chicago Paints, Inc., supra, and determined adversely to the
The judgment in favor of the interpleader was for attorney's fee in the
amount of $800.51 and costs of $15.00.
33Mutual Life Ins. Co. of New York v. Bondurant, 6 Cir., 27 F. 2d
464, 465, certiorari denied 278 U. S. 630; Treinies v. Sunshine
Mining Co., 9 Cir., 99 F. 2d 651, 655, affirmed 308 U. S. 66,
rehearing denied 309 U. S. 693; New York Life Ins. Co. v. Miller,
8 Cir., 139 F. 2d 657, 658; Globe Indemnity Co. v. Puget Sound Co.,
2 Cir., 154 F. 2d 249, 250.
34Commercial Standard Insurance Co. v.
, 5 Cir., 254 F. 2d 432, 433 [58-1 USTC ¶9477]; Narragansett Bay
Gardens, Inc. v. Grant Construction Co., 176 F. Supp. 451, 454-456
[59-2 USTC ¶9557]; and Ford Motor Co. v. Hackart Construction Co.,
143 F. Supp. 216, 218-219 [56-2 USTC ¶9831.].
Savings Bank, Plaintiff v. Jacob Reese, et al., Defendants
County Court, State of New York, No. 45342, 1/20/58
[1954 Code Sec. 6323]
Liens: Contract vendee as "purchaser": State v. Federal law
as to mechanics' liens.--A contract vendee of real estate is a
"purchaser" within the meaning of Code Sec. 6323 and his claim
was superior to a Federal tax lien as to surplus funds resulting from a
mortgage foreclosure. Under New York state law, mechanic lienors have
priority over the contract vendee's unrecorded contract, even though the
lienors are not "purchasers" and are subordinate to Federal
tax liens under the Aquilino decision (N. Y. State Ct. of
Appeals, 58-1 USTC ¶9191). The Federal Government may not complain
because state law allows the mechanic lienors to take part of the
contract vendee's share, since, applying only Federal law, the U. S.
does not share because the contract vendee takes the entire fund, and,
applying only state law, the U. S. does not share because the contract
vendee and the mechanic lienors take the entire fund.
, N. Y., for DeNuccio. John C. Broughton,
, N. Y., Assistant
. Leonard J. Brizdle,
, N. Y., for Tontine Shops. Hogan & Wattengel,
, N. Y., for Moyer Electric. Bernard D. Levy,
, N. Y., for Trustee in Bankruptcy of Jacob Reese.
surplus money proceeding incident to a mortgage foreclosure, the fund
involved is $3,312.49 before referee's fee and costs and expenses of the
DeNuccio, vendee under an executory contract of sale, which contract was
cut off by the foreclosure of the superior mortgage, claims $2,900 paid
the vendor, Reese, toward the purchase price and $500.82 for
improvements made on the premises while claimant was in possession.
Tontine Shops installed materials in the premises and filed a mechanic's
lien for $348. Moyer Electric likewise installed materials and filed a
mechanic's lien for $311.
United States of America
filed tax liens against Reese, the vendor, amounting to $5,177.87.
The trustee in
bankruptcy of Reese, the mortgagor and vendor, claims anything that may
be left after payment of the above-listed superior claims. Since there
will obviously be nothing left for the mortgagor, no discussion of this
claim is needed.
affecting the rival claims are as hereinafter set forth.
entered into an unrecorded contract with Reese on
September 15, 1955
to buy the premises which were encumbered by a mortgage to plaintiff.
Between the date of the contract and
January 15, 1956
DeNuccio paid Reese $2,900 toward the purchase price. Claimant entered
into possession of the premises, as vendee, on
January 16, 1956
and made improvements costing $500.92, completing the improvements
April 4, 1956
furnished materials to Reese and filed its lien
March 8, 1956
. Moyer Electric filed its notice of lien
March 14, 1956
filed its federal tax liens against Jacob Reese on
April 6, 1956
Reese filed a
petition in bankruptcy in June, 1956, and in November, 1956 the premises
were sold pursuant to a foreclosure judgment of this court.
to the priorities between DeNuccio, the vendee in possession, and the
U. S. A.
, which thereafter filed tax liens against the vendor, we find that
Section 6323 of the Internal Revenue Code provides that such liens are
not valid against "any mortgagee, pledgee, purchaser, or judgment
creditor until notice thereof has been filed."
contends that he is a "purchaser" and that the $2,900 purchase
money be paid before the filing of the tax liens gives him priority, so
that he must be paid that sum out of the surplus before anything is paid
on the tax liens.
U. S. A.
claims that DeNuccio is not a purchaser because no deed was delivered
under the contract. The question then is whether a contract vendee in
possession is a purchaser within the meaning of Section 6323.
holds that the question must be answered in the affirmative. Lacking any
specific definition of the word "purchaser" by the Congress,
we assume that that body meant the word to have its usual legal meaning.
word purchase, as designating the origin and nature of title to real
property, has a technical but well settled meaning. It includes every
mode of acquisition of an estate in land known to the law, except"
inheritance. Strough v. Wilder, 119 N. Y. 530, 535.
gave DeNuccio at least an equitable estate in the land. In re Site
Houses, 306 N. Y. 278, holds that a contract vendee acquires
"equitable title to the real property prior to the time title
vested. It obtained an interest in the land of such a nature that the
only estate remaining in the vendor was a lien for the purchase money,
to secure the payment of which he retained the bare legal title."
2330 Ryer Corp., 185 Misc. 440, 56 N. Y. S. (2d) 783, holds that a
contract vendee "is in equity considered as the owner" and so
acquires an "estate and interest" in the real property.
contract for the sale of real estate immediately vests in the purchaser
the equitable title while the vendor remains seized in the land for the
benefit of the purchaser and holds the legal title only as
security for the payment of the remainder of the purchase price. Williams
v. Haddock, 145 N. Y. 144." Crippen v. Spies, 255 A. D.
411, 7 N. Y. S. (2d) 704. Italics added.
proceeding, the court sits as a court of equity (Corporate Inv. Co.
v. Mt. Vernon Co., 206 A. D. 273, 200 N. Y. S. 372), and is
"guided by equitable rules in its determination of the priorities
of the claims." Davison v. MacDonald, 124 Misc. 726, 209 N.
Y. S. 145, aff. 216 A. D. 759. The court must recognize DeNuccio's
equitable estate and concomitant lien (Elterman v. Hyman, 192 N.
Y. 113) and that he is thereby a purchaser within the meaning of Section
6323 of the Internal Revenue Code.
DeNuccio was in possession from
January 16, 1956
until the end of April in that year, such fact seems immaterial here.
Possession or the lack thereof might affect the right to extend a
vendee's lien to cover items not here involved. See Davison v.
MacDonald, supra. And possession is important when Real Property Law
Section 240-a, relating to risk of loss, is applicable. But Section 6323
of the Internal Revenue Code contains no requirement that the purchaser
be in possession.
Nor does that
section of the Code require recording of the instrument by which the
purchaser acquired his interest in the land. Since it is still the law
in this State that possession is notice of the vendee's interest (See
Governor's Memorandum of April 27, 1957 on veto of A. Int. 1327), the
U. S. A.
claim gains nothing through DeNuccio's failure to record the contract.
that DeNuccio's claim has priority over the U. S. A. claim, the court
has not overlooked the December 6, 1957 decision of the Court of Appeals
in Aquilino v. U. S. [58-1 USTC ¶9191], holding that state law
must bow to federal law in alloting priorities to U. S. tax liens. The
court has applied the federal law (IRC 6323) benefitting purchasers and,
in the absence of an applicable federal definition of
"purchaser," has employed the state laws' reasonable and
proper definition which is consistent with the federal law.
Passing on to
the question of priorities, as between DeNuccio and the mechanics
lienors, Tontine and Moyer, Section 13 of the Lien Law gives the lienors
priority over DeNuccio's unrecorded contract. Reedy Elevator Co. v.
Monok Co., 171 A. D. 653, 157 N. Y. S. 565, app. dis., 224 N. Y.
699; Schwartz v. Rappaport, 115 Misc. 227, 187 N. Y. S. 611; Greenberg
v. Marsh, 101 Misc. 18, 167 N. Y. S. 102, aff. 184 A. D. 890.
that the mechanics liens are superior to DeNuccio's claim and that
DeNuccio's claim is superior to that of the U. S. A., the court is faced
with the problem posed by the decision in Aquilino v. U. S., supra,
which rules that U. S. tax liens are superior to mechanics liens, and
indicates that the respective filing dates are immaterial since
mechanics liens are not given the preferential status accorded to
purchasers by I. R. C. Section 6323. See also U. S. v. Vorreiter,
78 S. Ct. 19 [57-2 USTC ¶9956]. The opinion of Justice Hill in Koehler
v. Aljon Homes, 2 Misc. (2d) 474, 155 N. Y. S. (2d) 175 [57-1 USTC
¶9239], shows clearly how inequitable is the subordination of mechanics
liens to tax liens.
U. S. A.
takes no part of the surplus moneys because the prior claim of DeNuccio,
as purchaser, consumes the entire fund. Claimant
U. S. A.
may not be heard to complain becauses state law allows the mechanics
lienors to take part of DeNuccio's share. If we apply only federal law,
U. S. A.
does not share because DeNuccio takes the entire fund. If we apply only
state law, the
U. S. A.
does not share because DeNuccio and the mechanics lienors take the
entire fund. The court sees no necessity for attempting to create a
hybrid of federal and state law whereby claimant
U. S. A.
would receive more than federal laws entitle it to.
The claims of
Tontine Shops ($348) and Moyer Electric ($311) are directed to be paid
and the balance remaining after proper fees and expenses is to be paid
to DeNuccio. The disposition above made leaves insufficient funds to pay
the full amount of DeNuccio's claim for return of the purchase price,
and therefore it is unnecessary to determine the rank of his claim for
¶9661]Wadley Nurseries, Inc. v. Matac Construction Corp., City of
and U. S.
the Supreme Court of New York, Spec. Term, Part 5, New York County, June
3, 1955, (133 N. Y. L. J. No. 109, p. 8)
[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]
Priority of liens: Taxpayer's assignee as "purchaser":
Receipt of assessment lists ineffective without filing.--A
subcontractor of taxpayer is considered a "purchaser", within
the meaning of 1939 Code Sec. 3672, where the taxpayer assigned to such
subcontractor a sum due the latter out of funds which the taxpayer was
to receive from the City of New York pursuant to its contract with the
City. The consideration for the assignment was the subcontractor's
forbearance in filing a mechanic's lien and bringing suit against
taxpayer for recovery of the sum due it. As against this right of the
subcontractor, the lien of the government for income taxes does not have
priority since the mere filing of the assessment lists with the
Collector on dates prior to the date of the assignment was not
sufficient to support the priority of the lien of the government. The
assessment lists must be filed in the public offices mentioned in Sec.
3672 in order that the government's lien based thereon may be granted
priority over other liens against the taxpayer.
110 East 42nd Street
, N. Y., for plaintiff. Peter Campbell Brown, Corporation Counsel,
, for defendant, City of
. J. Edward Lumbard, former United States Attorney, United States
District Courthouse, Foley Square, N. Y., for United States.
a subcontractor, entered into an agreement with the defendant--general
contractor Matac Construction Corporation--whereby the former undertook
to furnish all labor and materials necessary and required for the
performance of certain items specified in the contract entered into
between the defendant the City of New York and the general contractor.
Most of the facts in this case were stipulated by the parties and on the
basis thereof and the other evidence in the case the court concludes as
concededly duly performed the terms of its contract with the general
contractor, and sought to collect the sum due it from the latter. Upon
its failure to pay the same plaintiff threatened to file a mechanic's
lien and institute suit against the contractor. In consideration of
plaintiff's forbearance in filing the lien and in instituting suit, the
contractor, on September 19, 1949, executed and delivered an assignment
to the plaintiff in the sum of $13,024.34 out of moneys which were due
or which were to become due to the contractor from the City of New York.
This assignment was filed with the Treasurer of the City of New York and
the Department of Parks on September 22, 1949, and again on October 13,
1949. There is presently a balance of $15,871.98 which the city is
holding, the major sum of which is being claimed by the plaintiff and
the defendant the United States of America. The city is a stakeholder,
it makes no claim to the money and requests the court to determine the
priority in claims as between the plaintiff and the government.
2. The unpaid
taxes set forth in the assessment lists in the sum of $15,448.62 and
$6,746.50 were filed on April 26, 1949, and May 24, 1949, solely in the
office of the Collector of Internal Revenue and were never filed in any
of the public offices specified in section 3672 of the Internal Revenue
Code or section 240 of the Lien Law of the State of New York.
3. Two years
after the execution and filing of plaintiff's assignment and more than a
year after completion of the contract and the acceptance of the work
thereunder the Collector of Internal Revenue filed on May 11, 1951, and
June 20, 1951, with the Treasurer of the City of New York and the
Department of Parks tax levies and warrants of distraint for the sums
heretofore mentioned and lists for which were filed in the office of the
Collector of Internal Revenue.
question of law to be decided is whether the plaintiff is a
"purchaser" under the provisions of section 3672 of the
Internal Revenue Code. The government contends, contrary to the position
of the plaintiff, that it is entitled to priority based on the mere
filing of the assessment lists with the Collector of Internal Revenue
because the plaintiff is not a purchaser within the meaning of section
3672 of the Internal Revenue Code.
the assessment lists were filed in the office of the Collector of
Internal Revenue on dates prior to the date of the assignment made by
the general contractor to the plaintiff, nevertheless they are
subordinate to the lien of the plaintiff since the assessment lists were
not filed in the public offices mentioned in section 3672 of the
Internal Revenue Code. Mere receipt of the assessment lists by the
Collector of Internal Revenue did not constitute notice which would take
precedence over the assignment filed in the appropriate office by the
point is Grossman v. City of New York (188 Misc., 256). There
plaintiff brought an action to foreclose an assignment of moneys due
under a conract made between the assignor and the City of
for a public improvement. The facts in the instant case are similar.
Plaintiff in that case moved for summary judgment and among the defenses
interposed by the City of New York was an affirmative defense that there
were other claims and injunctions restraining the payment of the money
demanded by the plaintiff filed in the office of the comptroller, among
which was a notice of lien by the United States Government, Department
of Internal Revenue. The answer to the position by the government in
that case, given by Mr. Justice Walter, is adopted by this court:
United States Attorney urges that as section 3672 does not mention
assignees the liens here asserted are good as against plaintiffs from
the time the assessment lists were received by the collector. If there
were here any reason to believe that the assignment to plaintiffs was
purely voluntary by way of gift, respectful attention would have to be
given to that argument; but as all indications are that plaintiffs gave
value for the assignment to them and there is no evidence to the
contrary, they must be deemed to be purchasers and hence within section
3672; and as no notice of any of the liens here asserted by the United
States was filed prior to the assignment to plaintiffs. I hold that none
of such liens is superior to plaintiff's rights. * * *"
also Cranford Co. v. L. Leopold & Co., Inc., et al. (189
Misc., 388 [47-1 USTC ¶9231], aff'd 273 App. Div., 754, aff'd 298 N.
Here, too, the
assignment to the plaintiff was not voluntary by way of gift but was
based upon a valid consideration, namely, plaintiff's forbearance to
file a lien and to institute suit, and plaintiff therefore is a
purchaser within the meaning of section 3672.
accordingly, is directed in favor of the plaintiff for the amount set
forth in the complaint.
United States of America
, Plaintiff-Appellee v. Renato P. Varani, Defendant, Alexsandro Merucci,
U.S. Court of Appeals, 6th Circuit, No. 84-1438, 1/6/86, 780 F2d 1296,
Affirming and remanding unreported District Court decision
Collection of taxes: Levy and distraint: Ownership: Real property.--A
state tax sale purchaser who failed to comply with the state (Michigan)
statutory notice provisions was unable to prevent the United States from
foreclosing its tax liens upon the two parcels of property. Prior to the
time the purchaser acquired the property from the state following the
tax sale, the record owners had conveyed their interest to the
delinquent taxpayer in an unrecorded transaction. In an effort to
collect the delinquent taxes, the IRS had filed a notice of lien upon
the properties. When the IRS attempted to foreclose the liens, the
purchaser was brought into the action in order to clear the title to the
properties. The district court granted summary judgment to the IRS,
ruling that the purchaser's tax deeds were void because he failed to
comply with the
statute requiring that notice be given to the individuals in actual
possession of lands purchased at tax sale. In affirming the district
court, the appellate court held that the IRS had standing to challenge
the tax deeds by asserting the failure to give notice and that the
notice provisions were to be strictly construed. However, the purchaser
was entitled to remuneration and the case was remanded for calculation
of an amount consistent with guidelines given by the appellate court.
Gilman, United States Attorney, Pamela Thompson, Assistant United States
Attorney, Detroit, Mich. 48226, Glenn L. Archer, Jr., Assistant Attorney
General, Ronald F. Fischer, Michael L. Paup, W.S. Estabrook, L.A.
Snyder, Steven Shapiro, Department of Justice, Washington, D.C. 20530,
Lydick, Gromek, Bendure and Thomas, 577 East Larned, Detroit, Mich.
48226, E. Donald Goodman, Lopatin, Miller, Freedman, Bluestone, Erlich,
Rosen & Bartnick, 547 E. Jefferson Ave., Detroit, Mich. 48226, for
Chief Judge; and MERRITT and CONTIE, Circuit Judges.
Merucci, personal representative of the estate of Dominic Merucci,
appeals from an order of the district court granting summary judgment in
favor of the
on its complaint to foreclose tax liens on two parcels of real property
in which Dominic Merucci claimed an interest pursuant to two tax deeds
from the State of
. For the reasons that follow, the judgment of the district court is
affirmed and the case remanded for proceedings consistent with this
parcels of property are involved in the instant appeal, the property is
recorded in the Livingston County Tract Index as three parcels: the
northwest one-quarter of Section
21 , the west one-half of the northeast one-quarter of Section
21 , and the east one-half of the northeast one-quarter of Section
The index reveals that on
September 19, 1968
, Harry Elliott and wife transferred the property by deed to Russell and
Nila Elliott. Other evidence in the record below indicates that, by land
May 23, 1972
, Russell and Nila Elliott sold the property to the MacArthur Patton
Christian Association for $165,000 with Renato Varani signing for the
association. This transaction was never recorded in the county real
estate records. The Elliotts had mortgaged the property to the Federal
Land Bank on
May 28, 1971
of the Bank testified that he met with Varani on
May 27, 1976
, at which time Varani paid part of the delinquency on the property.
Varani asked that the receipt be written out to St. Pius X
June 17, 1976
, the Elliotts, at Varani's request, executed a warranty deed to St.
Pius X Confraternity. The deed was never recorded. Despite the payment,
the Bank Foreclosed on the mortgage and the property was transferred to
the Bank on
November 3, 1976
by sheriff's deed which was recorded. Next to this transaction on the
tract index with respect to each parcel is the notation "Redemption
Receipt L. 839 P.47." The redemption receipt does not indicate what
party redeemed the property. However, the sheriff's deed, which was
recorded, includes the notation "Received from St. Pius X
Confraternity $84,882.57 for redemption of Sheriff's Deed
Oct. 31, 1977
In July or
August of 1976, Varani orally leased the property, which included a
house, to Henry Reason, who, with his wife and children, operated a
310-acre dairy farm, growing corn, sorghum and alfalfa. The Reasons
received mail, utility service and telephone service at the property.
Varani, who represented that he owned the property, asked that monthly
payments be made to M.P.C. Farms, and later to several religious
In 1978 the
state treasurer petitioned the Livingston County Circuit Court for
judgment and sale for delinquent taxes of 1976 and prior years on parcel
one, described as:
East 1/2 of NE
1/4 except beginning at Southwest corner thereof, thence North 615 in
center of highway, containing 741/3 acres more or less, Town 2 North,
Range 3 East, Iosco Township, Livingston County.
hearing on the complaint, after newspaper publication of the orders of
the court, together with each separate parcel description came before
the Livingston County Circuit Court on
April 9, 1979
, and an order of judgment on the tax sale was entered on
April 10, 1979
On October 21
November 15, 1979
filed tax liens in the amount of $321,337.95 with the
register of Deeds against Renato P. Varani, General Douglas MacArthur,
Post #375, American Legion Douglas MacArthur, Post #375, Thomas Varani,
St. Pius X Confraternity, and Confraternity of St. Pius X.
parcel, described as "NW 1/4 and West 1/2 of NE 1/4 of Section
21 , containing 240 acres more or less, Town 2 North, Range 3 East,
," was similarly petitioned for sale by the State Treasurer for
1977 delinquent taxes. A judgment of tax sale was entered on
April 8, 1980
December 20, 1979
, Dominic Merucci bought parcel 1 from the State, and a tax deed was
June 16, 1980
January 19, 1981
, Merucci bought the second parcel and a tax deed was issued on
June 15, 1981
September 12, 1980, the United States, at a public tax sale, sold the
property in question to John Alstott for $153,000 pursuant to 26 U.S.C. §6331
. Alstott paid a deposit of $15,300, but never paid the balance
because the government could not provide title to the property. Alstott
never met Merucci, never received notice that Merucci had purchased the
taxes on the property, and Alstott never recorded his own interest in
On May 13,
1981, the United States filed a tax lien with respect to the property at
10080 Coon Lake Road 4
Varani or General Douglas MacArthur Post #375, American Legion Douglas
MacArthur Post #375, Thomas Varani, St. Pius X Confraternity,
Confraternity of St. Pius X, Michigan Friends of the Confraternity of
St. Pius X, Inc., and MacArthur-Patton Christian, a voluntary ass'n.
lien alleged that these associations were the alter-egos, transferees,
or nominees of Varani.
January 6, 1981
, Merucci served notice on Russell Elliott of his interest in parcel
one, but was unable to serve Nila Elliott. The notice indicated that
"[t]his property is farm land with one house." Likewise, on
October 5, 1982
, Merucci served notice on Russell Elliott of his interest in parcel
two, but was unable to serve Nila Elliott. Nila Elliott received notice
by publication in March and April 1981, and November 1981, respectively.
On August 25,
1981, the United States filed a complaint against Renato Varani, Ida
Varani, Russell O. Elliott, Nila L. Elliott, Federal Land Bank, Henry
Reason, and the Livingston County Treasurer pursuant to 26 U.S.C. §§7401
-7403, 28 U.S.C. §§1340, 1345, to reduce to judgment federal tax
liabilities of Renato Varani and to foreclose liens on Varani's
The government proceeded pursuant to the lien of
May 13, 1981
and 26 U.S.C. §§6321 ,
6322 . The government
sought interest and penalties in their judgment against Varani and
requested that the tax lien be foreclosed and the real property sold.
Varani subsequently answered and counterclaimed against the
May 4, 1982
moved to dismiss the counterclaim, and, on
June 3, 1982
, moved to amend the complaint to add Merucci. On August 30, the court
dismissed Varani's counterclaim, 6
and the United States moved for default judgment based on the Varanis'
failure to comply with discovery requests.
October 7, 1982
, Merucci moved to dismiss the complaint on the ground that he, as a tax
purchaser, had a lien superior to the
, that the interest of Varani and his successors was not recorded, and
had no standing to foreclose on the lien. On December 3, Merucci's
motion to dismiss was denied.
April 20, 1983
, the court entered default judgment against Russell Elliott, and, on
April 26, against Varani for $372,420.51 plus interest. The court
ordered that the property be sold free of both Varani's and Elliott's
On July 30,
1983, the United States moved for summary judgment against Merucci on
the grounds that (1) Merucci's failure to give notice of his interest in
the property to Henry Reason rendered Merucci's title void under
Michigan law, and (2) the government never received notice of the sale
to Merucci as required by 26 U.S.C. §7425(b)
. The affidavit of Charles A. Parks, IRS District Director,
indicated that the IRS had received no notice of sale with respect to
the property pursuant to 26 U.S.C. §7425(c)(1)
. Merucci opposed the motion on the grounds that (1) the sale was
judicial, and, therefore, 26 U.S.C. §7425(b)
was not applicable and (2) the United States had no standing to
raise Reason's lack of notice to invalidate Merucci's lack of notice. 7
affidavit further indicated that he never received any notice from
Merucci that Merucci had purchased the unpaid taxes due on the premises.
In the fall of 1982, however, Merucci told Reason that he was the new
owner of the premises and that Reason would have to make some
arrangement with him if he wanted to stay on the property.
Haviland, Livingston County Register of Deeds, testified by deposition
that the federal tax lien index was kept by grantor/grantee and was not
tied in with the real estate tract index. To use the lien index, one
would need to know the name of the grantee. Merucci testified by
deposition that prior to his purchase of the property he had not heard
of Varani, the MacArthur Patton Christian Association, or St. Pius X
Confraternity. Merucci sent notice of his purchase to the Elliotts, but
made no title search, nor did he call to the Federal Land Bank to
discuss the properties. Merucci went to see the property after he
received a certificate for payment of taxes in June 1980. Merucci
visited the property to determine whether the property was vacant or
improved for purposes of serving notice. Merucci did not approach the
house, however. Merucci could not recall how he received the Elliotts'
address nor why he believed the Elliotts owned the property. Merucci
testified that when he called the township hall and asked about the
owner of record, he was told that the Elliotts owned the land. In the
summer of 1982, Merucci stopped at the house, told Reason he was the
owner, and heard the names of Elliott and Varani. Merucci testified that
he made no effort to determine who redeemed the property after
foreclosure by the Federal Land Bank.
On April 18,
1984, the district court granted summary judgment, holding that Merucci
never gave Reason notice as required by Mich. Comp. Laws Ann. §211.140
, and, therefore, the tax deeds were void. The "state never
received absolute title to the property in question." The court
found Merucci entitled to all taxes paid and the amount paid to receive
the invalid tax deeds, and ordered the
to move for appointment of a receiver to sell the property. The court
ordered that the proceeds of the sale be distributed in the following
order: (1) the costs of sale, (2) taxes due to
, (3) Merucci, (4) the
, and (5) Varani. On
May 2, 1984
, Merucci moved to alter or amend the judgment, and, on
June 8, 1984
, the motion was denied.
reviewing the district court's order in this case, we review the
statutes relevant to tax sales. Mich. Comp. Laws Ann. §§211.60
et seq. Foreclosure proceedings are commenced by the state
treasurer by filing a petition seeking to enforce the state tax lien
against the property with the circuit court of the county in which the
property is located. Section
211.61 . Notice of the proposed sale and of the right to be heard at
a circuit court hearing concerning the sale must be mailed to interested
211.61a . The circuit court then enters an order setting a date for
a hearing, and the order is published in local newspapers. Sections
211.62 , 211.66 .
Persons interested in the lands and desiring to contest the tax lien may
appear in court and file objections to the lien. Sections
211.62 . Following the hearing, if the court decides that a sale is
appropriate, the court enters judgment directing a sale, the time and
place of the sale, and appointing the person responsible for conducting
the sale. Section
Pursuant to an
order of the court, the property may, as in this case, be "bid
off" to the state. Sections
211.67 , 211.68 . A
purchaser of property at a tax sale, including the state, does not
receive title to the property until the expiration of approximately a
one-year period following the sale during which persons with an interest
in the property may redeem it by paying the delinquent taxes, plus
211.67 , 211.71 , 211.74
. Any person may purchase a state tax bid for the amount bid by the
state plus interest, at any time before April 20th of the year following
the sale. Section
211.84 . The purchaser receives certificates of sale which entitle
him to receive title to the properties upon expiration of the period of
redemption of the property. Sections
211.71 , 211.72 , 211.84
The right to
recover possession of land, or to a refunding of the amount paid, or to
secure a tax deed, by a person claiming through or under a deed executed
by the auditor general . . . shall be forever barred . . . by a failure
of the tax title purchaser, his heirs or assigns, to make a bona fide
attempt to give notice required by this act . . . for a reconveyance
of the premises within the above specified period of 5 years. In
a case of a failure to give the required notice for reconveyance within
the period of 5 years from the date the purchaser, his heirs or assigns
shall become entitled to a tax deed to be issued by the auditor general,
the person or persons, claiming title under tax deed or certificate of
purchase shall be forever barred from asserting that title or claiming a
lien on the land by reason of a tax purchase; and the purchaser, his
heirs or assigns shall not thereafter be entitled to a refunding of the
amount paid as a condition of the purchase of the tax title by reason of
any defect, irregularity, invalidity, or any cause whatever affecting
the taxes or the sale of the lands for a tax lien.
added). The purchaser claiming under a tax deed is required to reconvey
the property to a person who makes the payments required for redemption,
and such reconveyance must take place within six months after "the
filing of proof of publication of the notice as prescribed in section
211.141(1) . Section 140(1) provides:
A writ of
assistance or other process for the possession of land the title to
which was obtained by or through a tax sale . . . shall not be issued
until 6 months after there is filed with the county treasurer . . . a
return by the sheriff . . . showing service of the notice prescribed in
subsection (2). The return shall indicate that the sheriff has made
personal or substituted service of the notice upon the following persons
who were, as of the date the notice was delivered to the sheriff for
The last grantee or grantees in the regular chain of title of the land,
or of an interest in the land, according to the records of the county
register of deeds.
The person or persons in the actual open possession of the land.
The grantee or grantees under the tax deed issued by the state treasurer
for the latest year's taxes then appearing of record in the registry of
The mortgagee or mortgagees named in all undischarged recorded
mortgages, or assignees thereof of record.
The holder of record of all undischarged recorded liens.
law is clear. "It is a uniform principle of our tax laws that the
validity of a tax-purchaser's title depends upon compliance with the
statute relating thereto. Substantial compliance is not sufficient, . .
. and where the notice of reconveyance is insufficient a grantee under a
State tax deed acquires no title to the premises." St. Helen
Resort Ass'n v. Hannan, 321
536, 543 (1948); Whetstone v.
Consolidated Gas Co., 219 F.Supp. 121, 123 (E.D. Mich. 1963).
"Tax title proceedings are always closely scrutinized and strictly
construed. . . . Unless notice to redeem is served within the statutory
period, the purchaser cannot assert title under his tax deeds." Adair
v. Bonninghausen, 305
137, 141 (1943). "[T]he right of redemption continues as to
everyone entitled to exercise it unless and until the tax-title holder
cuts off the right of each one entitled to redeem by service of notice
in accordance with the statute." Geraldine v. Miller, 322
85, 93-94 (1948). Merucci, "having failed to serve the required
notice of right to redeem . . ., as required by statute, . . . and five
years having elapsed since he should have done so, is now barred from
asserting title under his tax deeds." Brousseau v. Conklin,
301 Mich. 241, 244 (1942); McVannel v. Pure Oil Co., 262 Mich.
518, 522 (1933); Otto v. Phillips, 250 Mich. 546, 547 (1930)
("Until such notice is served as provided by the statute, the owner
is under no legal obligation to redeem."); Marshall v. Anderson,
233 Mich. 480, 484-85 (1926); White v. Snow, 150 Mich. 270, 273
motion for summary judgment the movant has the burden of showing conclusively
that there exists no genuine issue as to a material fact and the
evidence together with all inferences to be drawn therefrom must be read
in the light most favorable to the party opposing the motion." Smith
v. Hudson, 600 F.2d 60, 63 (6th Cir.), cert. dismissed, 444
U.S. 986 (1979). In order to sustain the district court's judgment in
this case, we, prior to considering appellant's objections, must find
that the aforementioned standard has been met with respect to the facts
that (1) Henry Reason was a party entitled to notice pursuant to sections
211.73a , 211.140 ,
and (2) Merucci failed to make a bona fide attempt to serve notice on
Reason within the statutory period.
211.140(1)(b) requires notice to a person in "actual open
possession of the land." Reason's affidavit indicates that, with
his wife and children, he operated a dairy farm and grew crops using
both parcels of property from 1976. Reason received utility service,
mail, and telephone service on the premises. While the statute does not
define what circumstances compel a finding of "actual open
possession," Reason's affidavit supports the conclusion that he was
in "actual open possession of the land." Merucci admitted that
upon observing the land he concluded that a farm was in operation.
Further, Merucci failed to counter Reason's affidavit or produce
evidence that Reason did not occupy both parcels. See Fed. R.
Civ. P. 56(e). Accordingly, there is no genuine issue of material fact
with respect to Reason's entitlement to notice. Second, Merucci admitted
in his deposition that he never served the notice required by statute on
Reason. Accordingly, the district court properly concluded that Merucci
failed to comply with the statute's notice requirements, and, was
therefore barred from asserting his tax deed as title. Section
211.73a . 8
Since Merucci failed to perfect his interest in the property, title
resides in Varani and the district court properly concluded that the
could foreclose on its lien on that property.
challenges the result reached above on several grounds which we consider
in turn. First, Merucci contends that the
' attack on his title is an impermissible collateral attack. Authority
cited by Merucci is inapposite in that there is no evidence that the
issues raised in this case--the validity of Merucci's title and his
compliance with his statutory obligations--have been previously
determined by any state court. See United States v. United States
Chain Co. [63-1
USTC ¶9223 ], 212 F.Supp. 171, 180 (N.D.
1962). Further, the statute itself provides an explicit limitation on
collateral attack on tax sales. Mich. Comp. Laws Ann. §211.73a
provides in pertinent part:
within the period of 5 years the tax title purchaser, his heirs or
assigns, has made a bona fide attempt to give the notice or notices
required by law for the reconveyance of the premises, neither the
legality or sufficiency of the sale or notice, nor the bona fides of the
purchaser in this attempt to give statutory notice, shall be questioned,
raised or adjudicated except in or by a suit in equity.
statute does not prevent the district court in this case from
adjudicating the issue of whether Merucci made a bona fide attempt to
serve the required notices. Accordingly, the district court's decision
that Merucci's title was void did not constitute an impermissible
Merucci contends that the
has no standing, as a matter of state law, to assert Henry Reason's lack
of notice as a defect in Merucci's title. The statute, section
211.73a , provides that
[a] person who
has himself been properly served with notice and failed to redeem from a
sale in accordance with this act, within the period herein specified,
shall not thereafter be entitled to question or deny in any manner the
sufficiency of notice upon the ground that some other person or persons
entitled to notice was not also served.
within this provision is that a person who has not been served or is not
entitled to service may attack title on the ground that the statutory
notice requirements were not complied with. This is consistent with the
court's holding in Geraldine v. Miller, 322 Mich. 85, 93-94
(1948) that "the right of redemption continues as to everyone
entitled to exercise it unless and until the tax title holder cuts off
the right of each one entitled to redeem by service of notice in
accordance with the statute." It is clear that Varani was a party
entitled to redeem the property. See
Comp. Laws Ann. §211.141
. Failure to serve the requisite notice renders Merucci's title
"void." Whetstone, 219 F.Supp. at 123. Accordingly,
regardless of the party asserting the inadequate notice, such lack of
notice is an inherent defect rendering the tax title void. Therefore,
Merucci's contention that the
lacks standing to assert Reason's lack of notice has no merit and
ignores the realities of the instant transaction. Until proper notice is
served, Geraldine, supra, the
, standing in Varani's shoes, retained the right to redeem the property
pursuant to section
211.141 . Merucci failed to extinguish Varani's right to redeem by
failing to comply with the statutory notice provisions.
argues that the government is estopped from foreclosing on the lien
because the government failed (1) to record its lien in a manner that
could be discovered by Merucci; (2) to pay delinquent taxes on the
property; and (3) to intervene in the state title acquisition process.
Assuming, without deciding, that the doctrine of estoppel can be
asserted in this context, we conclude that Merucci has plainly not
established the requisites of that doctrine. The elements of estoppel
are (1) the party estopped must know the facts; (2) the party estopped
must intend that his conduct be acted on; (3) the other party must be
ignorant of the true facts; and (4) the other party must rely on the
former's conduct to his injury. United States v. Ruby Co., 588
F.2d 697, 703 (9th Cir. 1978), cert. denied, 442 U.S. 917 (1979);
American Electrical Steel Co. v. Scarpace, 399
306, 308 (1976); Birch Forest Club v. Rose, 23
App. 492, 498-99 (1970). The act which rendered Merucci's title void was
his failure to serve Reason. Merucci cannot prove that he relied on any
of the asserted government acts in failing to serve Reason and perfect
his title. The government did not induce Merucci not to serve Reason or
not to ascertain the identity of the occupant of the premises. Merucci
simply cannot demonstrate that he was injured as a result of his
reliance on the action or inaction of the government.
Merucci contends that section
211.140a excuses his failure to serve Reason. That section provides
in pertinent part:
When a proof
of notice on an improved residential parcel is filed with the county
treasurer, the proof shall contain the statement: "this parcel is
an improved residential parcel". The proof shall show the street
address, if known. An additional copy of the notice on this class of
property shall be provided with the filing of the proof of notice.
Failure by the holder of a tax deed to include this statement and to
provide a copy shall invalidate the filing and render it null and void.
The county treasurer shall forward the copy of the proof of notice to
the county department of social services, which shall make an attempt to
contact the owner and occupant of the property to determine if the owner
or occupant is in need of assistance or protection of the court.
argument in this regard is wholly without merit. The statute requires
that "proof of notice" be filed with the county treasurer,
apparently proof that notice has already been served on the occupant.
The record includes no evidence that Merucci filed such a proof of
notice with the county treasurer or that Merucci included an extra
notice for purposes of service on the occupant. The statute reflects no
intent that the purpose of this extra copy of the notice is for the
county to give notice of the right of redemption or reconveyance but
that the county use the information for aiding the occupants in
relocating. The statute reflects no intent to excuse the purchaser from
his statutory notice obligations, in light of the principle that
"[t]ax title proceedings are . . . strictly construed." Adair,
at 141. Accordingly, this argument is without merit. The district court
properly concluded that Merucci's title was void, and that the
government could foreclose on its tax lien.
A person having an estate in the land; an interest in the land, either
in fee, for life, or for year; a mortgagee of the land; an assignee of
an undischarged mortgage on the land; the holder of a lien on the land;
istrator, trustee, or guardian of these persons; or a person in actual
possession of the land at the time of the tax purchase, shall be
entitled to receive from the person, or that person's heirs or assigns,
claiming title under the tax deed, within 6 months after the filing of
return of service or the filing of proof of publication of the notice as
prescribed in section 140, a release and quitclaim of all right and
interest in the land acquired under the tax deed upon payment to the
person claiming title under the tax deed or that person's heirs or
assigns, or to the treasurer of the county in which the land is
situated, of the amount paid for the purchase, together with 50% in
addition, and personal or substituted service fees, which fees shall
be the same as provided by law for service of subpoenas, for orders of
publication, or for the cost of service by certified mail, together
with a sum of $5.00 for each description, without additional cost or
added). The district court ordered that Merucci receive the amount of
taxes he had paid on the properties and the amounts he had expended in
securing title. Merucci now seeks the reimbursement provided by section
211.141(1) above. The
agrees that Merucci is entitled to the statutory reimbursement for
parcel 2, but argues that the statute is inapplicable to parcel 1
because title to that parcel "lapsed" pursuant to section
211.73a rather than having been redeemed or reconveyed. However,
title to parcel 1 did not lapse until
May 7, 1985
, during the course of this appeal. Accordingly, Merucci was entitled to
an award of reimbursement in accord with section
211.141(1) with respect to both parcels. Merucci is also entitled to
interest "on the amount paid for the original purchase" and on
subsequent taxes. St. Helen Resort, 321
at 545. The case is remanded to the district court to recompute
the judgment of the district court is AFFIRMED and REMANDED for
proceedings consistent with this opinion.
The complete factual background regarding the property in question is
recorded fully in neither
real property records nor in the district court record. Upon the record
constructed by the parties, however, we review the case.
The property is located at
10080 Coon Lake Road
and is described as follows:
described as follows:
West half of the Northeast quarter of Section
21 ; and the Northwest quarter of Section
21 ; and the East half of the Northeast quarter of Section 20,
excepting and reserving from the last above description a piece of land
as follows: Beginning at the Southwest corner of said East half of the
Northeast corner of Section 20, thence North 615 feet in center of
highway; thence East 330 feet; thence South 615 feet; thence West 330
feet in the center of highway to place of beginning. Also excepting 1
square acre of the Northwest corner of the East half of the Northeast
quarter and said Section 20, Town 2 north, Range 3 East,
The tract index reveals transfers via tax deed from the State to Merucci
on October 23, 1981, December 6, 1981, and June 16, 1982 with respect to
the NW 1/4 of Section
21 ; on August 26, 1981, January 6, 1981, and June 16, 1982 with
respect to the E 1/2 of NE 1/4 of Section 20; and on June 15, 1981,
October 23, 1981, December 6, 1981, and on June 16, 1982 with respect to
the W 1/2 of the NE 1/4 of Section
Both prior liens also referred to this property.
March 13, 1979
, Varani was indicted for violation of 26 U.S.C. §7201
for the years 1972 to 1976, and was subsequently convicted.
October 28, 1982
, Varani appealed the dismissal of his counterclaim, and, on
November 21, 1983
, this court dismissed the appeal on the ground that it was
A second amended complaint added the state treasurer as a party on
September 21, 1983
. The state opposed summary judgment on the ground that the
had no right of notice pursuant to 26 U.S.C. §7425
Merucci was required to serve Reason within five years after becoming
entitled to a tax deed on the property.
Comp. Laws Ann. §211.73a
. Accordingly, Merucci was required to serve Reason with respect to
Parcel 1 by
May 7, 1985
, and with respect to Parcel 2 by
May 6, 1986
¶9646]Mark James Co., Inc., Plaintiff v. Glen Cagel, District Director,
Internal Revenue Service
United States of America
, Defendants v. Nathan W. Shroyer, Intervenor
S. District Court, East. Dist. Tax.,
Div., Civil Action No. L-83-99-CA, 10/12/83
[Code Secs. 6323 and 7421]
Lien for taxes: Property subject to lien: Business purchased prior to
recordation of tax lien: Injunctions.--A purchaser of a business
that acquired a restaurant prior to the time that the IRS recorded a tax
lien against the seller could not enjoin the IRS from selling the assets
of the business pursuant to a seizure. It failed to meet its burden of
proof on each of the four elements required to secure a preliminary
injunction in the Fifth Circuit.
300 Republic Bank Bldg., Tyler, Tex. 75702, for The Mark James Co.,
Inc., Al Schulman, 806 Main St., Houston, Tex. 77002, Jeffrey K. Brown,
P. O. Box 1649, Bryan, Tex. 77806, for plaintiff. Janet Hellmich,
Assistant United States Attorney, Tyler, Tex. 75710, Michael Gibson,
Department of Justice, Dallas, Tex. 75242, for defendants. Chester V.
Hines, Pro se. James P. Kelley, P. O. Box 86,
, for intervenor.
of Fact and Conclusions of Law
August 4, 1983
, came on for hearing the above-styled and numbered civil action, in
which the Mark James Co., Inc., demanded a preliminary injunction in
this matter. The court, having heard the evidence, and having reviewed
the pleadings of the parties, concludes that no preliminary injunction
shall issue. The temporary restraining order, entered on
July 14, 1983
, is hereby dissolved by operation of law. The court makes the following
findings of fact and conclusions of law in support of its determination.
June 30, 1981
, a Notice of Federal Tax Lien against Edwin A. Riley and Eva Dell Riley
was filed in
, in the amount of $84,740.74.
September 1, 1982
, Edwin A. Riley and Eva Dell Riley entered into a contract of sale with
plaintiff. The subject of the contract of sale was a restaurant business
being conducted under the name of the Royal Restaurant. Included in the
contract of sale were: (1) all shares of the Royal Restaurant
Corporation; (2) all fixtures, equipment, and other tangible assets of
the restaurant business; (3) the leasehold interest in the premises; (4)
all the trade, business, goodwill, and other intangible assets of the
restaurant business; and (5) all saleable food inventory. The purchase
price for the restaurant business was $105,000, of which the following
allocations were made: (1) A $56,958.54 promissory note, secured by a
Deed of Trust to Nathan W. Schroyer; (2) $10,041.46, to be paid directly
to Edwin A. Riley and Eva Dell Riley at the closing; and (3) $38,000.00,
to be deposited in an escrow fund to pay the taxes, debts, and
obligations arising from the restaurant business under its operation by
Edwin A. Riley.
account could be disbursed only upon the joint signatures of Jeffrey K.
Brown, attorney for plaintiff, and Chester V. Hines, attorney for Edwin
A. Riley and Eva Dell Riley.
3. Ms. Sue
Brown, a Revenue Officer for the Internal Revenue Service, testified
that on October 13, 1982, she spoke on the telephone with both Jeffrey
K. Brown and Chester V. Hines, and informed each, as joint signatories
of the escrow fund, that taxes were due and owing from Edwin A. Riley
d/b/a The Royal Restaurant, and that she had prepared levies for these
taxes against each, as joint signatories for of the escrow fund. Revenue
Officer Brown further testified that she apprised both Mr. Brown and Mr.
Hines that the liability was large and would consume most of the escrow
fund. With respect to this conversation with Mr. Hines, Revenue Officer
Brown testified that Mr. Hines informed her the closing would be at 1:30
p. m. the next day (October 14, 1982), at his (Hines') office, in
Crockett, Houston County, Texas, at which time she could assert the tax
claims. With respect to her conversation with Mr. Brown, Revenue Officer
Brown testified that Mr. Brown asked her if he needed to be present to
be served with the levy, and she indicated her reply to him was that he
Mr. Hines was
not present at the hearing, and so did not testify. Mr. Brown was
present at the hearing, and testified that he could not recall any
conversations with Ms. Brown prior to
October 14, 1982
Recordation of Tax Lien]
Officer Brown arrived at Mr. Hines' office in the late morning of
October 14, 1982
, to serve the levy on Mr. Hines. (Apparently, Mr. Brown maintains an
. His office was served with the levy by another Revenue Officer on the
same day.) After being informed that Mr. Hines was not present, Revenue
Officer Brown went to the Houston County Court, and filed there a Notice
of Federal Tax Lien against Edwin A. Riley d/b/a The Royal Restaurant,
for $34,024.47. Revenue Officer Brown then returned to Mr. Hines'
office. Mr. Hines and Mr. Brown arrived shortly thereafter and presented
Revenue Officer Brown with a check in the amount of $6,500, as payment
for all federal tax liabilities. She, in turn, presented Mr. Hines with
the levy against him for $34,024.47. Revenue Officer Brown was informed
at this time that the closing had occurred at
a. m., instead of at
July 13, 1983
United States of America
seized the restaurant business which plaintiff had purchased on
October 14, 1982
July 15, 1983
, a Temporary Restraining Order was issued against the
to prevent it from selling the restaurant business which had been seized
July 13, 1983
7. Any finding
of fact more properly deemed a conclusion of law is adopted as such.
1. In order
for the movant to secure a preliminary injunction in the Fifth Circuit,
he or she must meet a four-pronged test. First, the movant must show a
substantial threat that it will suffer irreparable injury if the
injunction is not granted. Second, the movant must show that the
threatened injury to the movant outweighs the threatened harm granting
the injunction may do the non-moving party. Third, the movant must show
that granting the preliminary injunction will not disserve the public
interest. Finally, the movant must show a substantial likelihood of
prevailing at a trial on the merits of the case-in-chief. See University
of Texas v. Camenisch, 451 U. S. 390, at 392 (1981); Commonwealth
Life Insurance Co. v. Neal, 669 F. 2d 300, at 303 (5th Cir. 1982); Canal
Authority of the State of Florida v. Callaway, 489 F. 2d 567, at 572
(5th Cir. 1974); DiGiorgio v. Causey, 488 F. 2d 527 (5th Cir.
1973); and Blackshear Residents Organization v. Romney, 472 F. 2d
1197 (5th Cir. 1973).
has failed to establish that it will suffer irreparable injury if the
injunction is not granted. Although plaintiff admittedly will lose its
restaurant business if the restaurant is sold pursuant to the seizure,
plaintiff nevertheless has an adequate remedy at law to avoid the same
of the restaurant. Under Section 6325(b)(2)(A) of the Internal Revenue
Code (26 U. S. C.), plaintiff may either pay in full the tax liability
which is secured by the restaurant business or plaintiff may post a bond
acceptable to the District Director of the Internal Revenue Service, for
the same amount. Upon receipt of such payment, or bond in lieu thereof,
will discharge the restaurant business from its tax liens. 1
In the event plaintiff were to prevail at a trial of the merits of the
wrongful levy action, then of course such payment would be repaid, with
interest, or its bond would be returned.
respect to the balance of the equities, the threatened injury to
plaintiff from not granting the injunction is limited to paying over the
amount of tax liability in question, or posting a bond for an equivalent
sum, pending the outcome of a trial on the merits of plaintiff's claim
for wrongful levy. And if plaintiff prevails at such trial on the
merits, its payment (with interest) or bond will be returned to it.
On the other
hand, if the
is enjoined from proceeding to sell the restaurant business pursuant to
the levy, it cannot be assured that the collateral securing its tax
claims will not diminish in market value pending a trial on the merits.
As a consequence, the threatened harm which the Government could suffer
from the granting of a preliminary injunction outweighs any threatened
injury to plaintiff.
introduced no evidence indicating that granting the preliminary
injunction would not disserve the public interest, and in light of the
adequacy of its remedy at law (see conclusion of law No. 2, supra),
there does not appear to be any compelling public interest to be served
by interference with the tax collection process, for "taxes are the
life-blood of government, and their prompt and certain availability an
imperious need," Bull v. United States [35-1 USTC ¶9346],
295 U. S. 247, 259 (1935).
respect to the merits of the case-in-chief, plaintiff has failed to show
a substantial likelihood of prevailing at a trial thereon. Plaintiff
contends it purchased all 100 shares of stock of a restaurant business
from The Royal Restaurant Corporation, and that by virtue of such
purchase, only the tax liabilities of The Royal Restaurant Corporation,
if any, became the responsibility of plaintiff. Therefore, its argument
concludes, the tax liabilities of Edwin A. Riley and Eva Dell Riley, or
of Edwin A. Riley d/b/a The Royal Restaurant, did not attach to the
equity in the restaurant business passed to the Mark James Co., Inc., at
the closing of the contract of sale.
If on the
other hand, the Mark James Co., Inc., purchased a restaurant business
from Edwin A. Riley and Eva Dell Riley, it seems clear the tax liens
against either, or both, attached to the equity in the restaurant
business passed at the closing of the contract of sale. The Government
submitted a series of documents for the proposition that the restaurant
business was operated by Edwin A. Riley as a sole proprietorship, rather
than as a corporation. Moreover, the contract under which the Mark James
Co., Inc., acquired the restaurant business clearly indicates both that
plaintiff purchased more than merely all the shares in The Royal
Restaurant Corporation, and that the restaurant was purchased from Edwin
A. Riley and Eva Dell Riley, not from The Royal Restaurant Corporation.
failed to offer evidence clearly controverting these inferences, i. e.,
that the restaurant was operated by Edwin A. Riley as a sole
proprietorship, and the restaurant was purchased, not from the Royal
Restaurant Corporation, but from Edwin A. Riley and Eva Dell Riley. If
such apparent inferences are true, then plaintiff clearly had notice as
to the tax liability of Edwin A. Riley and Eva Dell Riley, and of Edwin
A. Riley d/b/a The Royal Restaurant. If plaintiff had such notice, the
tax liens of the
attached to the equity of $48,041.46 passed to the Mark James Co., Inc.,
at the closing of the contract of sale on
October 14, 1982
And if the tax liens attached to such equity, then clearly the levies
complained of were not wrongful. Therefore, plaintiff has failed to show
a substantial likelihood of prevailing on the merits at a trial of the
wrongful levy action.
having failed to meet its burden of proof on each of the four elements
to secure a preliminary injunction in the Fifth Circuit, such relief
cannot be granted.
conclusion of law more properly deemed a finding of fact is adopted as
will issue in accordance with these findings and conclusions.
The applicable Treasury Regulation is Sec. 301.6325-1. The bond would
have to comport with the provisions of Treasury Regulation Sec.
301.71011-1, regarding the form of bonds.
Section 6321 of the Internal Revenue Code of 1954 (26 U. S. C.) provides
that a lien in favor of the United States attaches to all property and
rights to property of a taxpayer who has refused to pay tax for which he
or she is liable, after demand therefor. Section 6323(a) provides that
such a lien is valid as to a purchaser once notice of such lien has been
¶9367]William Little, Plaintiff-Appellee v.
United States of America
U. S. Court of Appeals, 9th Circuit, No. 77-3102, 5/16/83, Reversing an
unreported District Court decision
[Code Sec. 6321]
Lien for taxes: Property subject to junior federal tax liens:
Purchaser from state: Equitable subrogation to prior county tax lien.--An
individual who purchased property from the state of California after the
property had been deeded to the state in satisfaction of a county tax
lien was not entitled to any portion of the proceeds from the subsequent
sale of the property to satisfy junior federal tax liens. Because the
county lien was extinguished by the transfer of the property to the
state (under state law), the lower court erred when it upheld the claim
that he subrogated to the county tax lien when he purchased the
ert O. Harker,
595 E. Colorado Blvd.
, for plaintiff-appellee. Ernest J. Brown, Department of Justice,
, D. C. 20530, for defendant-appellant.
CHAMBERS, WALLACE, and NORRIS, Circuit Judges.
revolves around a parcel of real property deeded to the State of
in satisfaction of a county property tax lien. The deed to the state was
executed pursuant to Cal. Rev. & Tax. Code §§ 3511-3520 and
conveyed "absolute title to the property." 1
Appellee Little subsequently bought the property from the State for
$4,500 at a county auction.
In addition to
the senior county tax lien that was discharged by the deed to the State,
the property had been encumbered by two junior Internal Revenue Service
The latter were not extinguished by the conveyance to the State or the
sale to Little, and in April 1977 the government tried to sell the
property to collect its liens. Little obtained a Temporary Restraining
Order barring the sale and brought this action to permanently enjoin the
government from selling the property on the grounds that the Internal
Revenue Service liens were no longer valid.
court found the liens valid and denied the injunction, but ruled for
Little on his alternative claim that he was equitably subrogated to the
county tax lien because, in purchasing the property, he had discharged
the senior county lien and thereby benefited the government.
Accordingly, the district court entered judgment declaring that Little
was entitled to the first $4,500 of the proceeds from the sale of the
property. The government appeals from this part of the judgment.
We reverse the
part of the judgment finding subrogation because we feel that Little was
never in a position to discharge the county lien. That lien was legally
extinguished when the State of California became the owner in fee simple
of the property, and any benefit to the United States had its origin in
that event, not in the subsequent purchase by Little.
Little's rights relative to the Internal Revenue Service liens, we must
look to the applicable local law. See 26 U. S. C. §6323(i)(2) (1976).
law is codified in Cal. Rev. & Tax. Code §2194 and §§ 3511-3520
of subrogation to the county tax lien is grounded in the assumption that
he discharged the county lien when he purchased the property. However,
according to Cal. Rev. & Tax. Code §2194 that lien was extinguished
when the property was deeded to the State pursuant to Cal. Rev. &
Tax. Code §3511. Moreover, Cal. Civ. Code §2910 (Deering 1972)
provides generally that "the sale of any property on which there is
a lien, in satisfaction of the claim secured thereby . . . extinguishes
the lien thereon." The only encumbrances which survive the transfer
of title to the State are those specifically mentioned in Cal. Rev.
& Tax. Code §3520 and those which are not subject to the
, e.g., the Internal Revenue Service liens in the present case.
See United States v. Security Trust & Savings Bank [50-2 USTC
47, 49 (1950).
county tax lien is extinguished when the State acquires the delinquent
property follows from the State's sole purpose in engaging in the
transaction; the collection of taxes. Anglo Cal. Nat. Bank v. Leland,
2d 347, 350 (1937). The State takes the property in lieu of taxes and,
as the new owner, assumes the risk that a later sale will not generate
sufficient funds to offset the entire tax debt. At the same time, in its
capacity as owner the State is empowered to sell the property, if
possible, for more than the outstanding taxes and to retain the surplus,
Chesney v. Gresham, 64 Cal. App. 3d 120, 131, 134 Cal. Rptr. 238,
244 (1976), or to exploit the property in any other manner it sees fit.
See, e.g., People v. Lucas, 55
2d 564, 570, 11 Cal. Rptr. 745, 747 (1961).
Such was the
state of the title when Little bought the property. The county had
ceased to be a lienholder and the State of
had become the absolute owner of the property, subject only to the
Internal Revenue Service liens. If removal of the senior county lien was
of any benefit to the
is indebted to the State of
for this favorable turn of events. Little did no more than succeed to
the State's title which was already free of the county lien. The
district court therefore erred when it held that Little was equitably
subrogated to the county tax lien.
The part of
the district court's judgment declaring that Little is entitled to the
first $4,500 of the proceeds from the sale of the property is therefore
conveys to the State the absolute title to the property, free of all
(1) Liens for
taxes levied for municipal, irrigation, reclamation, protection, flood
control, public utility or other district purposes, not included among
those taxes and assessments for delinquency in the payment of which the
property is conveyed to the State.
(2) Liens for
special assessments collected on tax rolls.
(3) Liens or
assessments for other amounts which by law are collected on tax rolls by
or for account of cities.
constituting servitudes upon or burdens to the property; water rights,
the record title to which is held separately from the title to the
property; and restrictions of record.
At the time of the sale to Little the property was valued in excess of
$10,000. The county lien had been for $4,844.56, and the two Internal
Revenue Service liens were for $1,212.04 and $1,415.57, respectively.
¶9322]John M. Gilliland, et al. v.
United States of America
S. District Court, Mid. Dist. of Tenn., Nashville Div., No. 79-3333, No.
[Code Secs. 6323 and 7426]
Suits by nontaxpayers: Tax liens: Levy and distraint: Wrongful levy:
Priority of claims: Purchaser at foreclosure sale.--A prior federal
tax lien, duly filed under Tennessee law, had priority over the interest
acquired by individuals who purchased the property at a foreclosure
sale. Although the taxpayer whose delinquency necessitated the lien
owned only an equitable interest in the property at the time the lien
attached, the lien attached to that interest and survived the subsequent
foreclosure sale of the real property.
W. A. Moody,
Branstetter, Moody & Kilgore, 200 Church St., Nashville, Tenn.
37201, for plaintiffs.
, for defendant.
alleges wrongful levy upon lands belonging to the plaintiffs, pursuant
C. §7426. This court has jurisdiction by virtue of 28
C. §1346(e). The issue in the case may be simply stated as whether at
the time plaintiffs acquired the subject property the lands were subject
to a valid existing lien for back taxes. If the realty was subject to
such a preexisting lien, then the subsequent levy by the
would appear unobjectionable. If, however, no such valid lien encumbered
the property at the time of its conveyance to the plaintiffs, the levy
and seizure would be wrongful. For the reasons stated below, the court
concludes that the land was encumbered by a valid lien and that the levy
and seizure by the
was therefore proper.
The land in
question consists of 185.26 acres located in Rutherford County,
Tennessee. The status of the property at all times relevant to the
present suit can be traced chronologically as follows.
April 24, 1974
. George and Marion Kinnard conveyed to Webb Home Builders, Inc.,
(hereinafter referred to as "Webb") 1
a tract of land containing 249.77 acres "more or less,"
including the acreage at issue here. This conveyance was by an
installment deed, which recited as consideration paid by Webb the sum of
$192,000 in cash, together with a series of four promissory notes in the
total amount of $576,000 plus interest. The notes were payable at a rate
of one note each year for the following four years. An express lien was
retained on the property to secure the unpaid purchase price. In the
same deed, Webb conveyed legal title to a trustee to secure payment of
the notes. The trustee was given the power to sell the land upon Webb's
default on the notes, free of any equity of redemption or other
exemption to which Webb might otherwise be entitled, all such rights
being expressly waived by Webb. The deed was duly recorded on
April 25, 1974
assessed federal withholding and F. I. C. A. taxes owed by Webb in the
amount of $12,236.31. Under 26
C. §§ 6321 and 6322, a lien arose by operation of law on the date of
the assessment against all property then owned or thereafter acquired by
Webb. On February 13, 1975, the government filed a Notice of Federal Tax
Lien in the Rutherford County Register's Office, as required for
priority over certain claimants by 26 U. S. C. §6323.
Webb defaulted on the note which became due on
April 24, 1976
. Pursuant to the terms of the installment deed, the trustee disposed of
the property at a public foreclosure sale. At the
June 1, 1976
, foreclosure sale, the successful bidders were the Kinnards, grantors
in the earlier conveyance to Webb. 2
was not provided advance notice of the foreclosure sale.
sold the land to the plaintiffs in the case sub judice in May
1977. A tract consisting of 123.46 acres was sold to plaintiffs John and
Alma Jean Gilliland on May 16, 1977. On May 26, 1977, a total of 61.8
acres in two tracts was sold to plaintiffs Thurman and Sandra Whitworth.
Both deeds were duly and promptly recorded.
two years later, on
May 29, 1979
filed a Notice of Seizure and levied on the 185.26 acres purchased by
the plaintiffs from the Kinnards. The levy was in satisfaction of the
unpaid taxes owed by Webb and was predicated upon the assumption that
the government had a valid outstanding lien upon the property which
survived the foreclosure sale and the subsequent conveyance to the
was originally filed as a quiet title action pursuant to 28
C. §2410 on
July 12, 1979
. However, since it appeared that the government claimed actual title to
the property and not merely a lien, the court concluded that §2410 did
not confer jurisdiction over the action. The complaint was dismissed for
lack of jurisdiction, but the plaintiffs' motion for a new trial was
granted on condition that the complaint be amended to allege
jurisdiction under the wrongful levy statute, 26 U. S. C. §7426. The
amended complaint was filed on
September 11, 1980
, within the 20 days allowed from the order granting the motion for a
to the motion for a new trial, the government argued, inter alia, that
the nine-month statute of limitations for actions under §7426 had
expired and that suit under that section should therefore be barred. See
26 U. S. C. §6532(c). While the court did not expressly rule on that
argument, the government has not chosen to pursue the issue in
subsequent pleadings or proceedings. In most situations, failure to
argue the statute of limitations can be considered a waiver, since it is
generally an affirmative defense that must be specifically pleaded.
However, the court is sensitive to the ruling of some courts that the
period of limitation in §6532(c) is jurisdictional and must therefore
be strictly construed. See De Gregory v. United States [75-1 USTC
¶9498], 395 F. Supp. 171 (E. D. Mich. 1975); Gallion v. United
States [68-1 USTC ¶9213], 389 F. 2d 522 (5th Cir. 1968). As noted
by the court in United Sand and Gravel Contractors v. United States
[80-2 USTC ¶9626], 624 F. 2d 733 (5th Cir. 1980), the nine-month
limitation involved here "protects the legitimate interest of the
in requiring other claimants of the seized property to bring their
claims quickly." 624 F. 2d at 739. The court will therefore address
the statute of limitations issue at this time.
complaint in this case was filed well within the nine-month limitation
period. It is only the amended complaint setting forth the correct
jurisdictional basis of the action which was filed beyond the nine-month
period. The issue then is whether the amended complaint should be deemed
to relate back to the original filing date for purposes of the statute
of limitations. The court now expressly holds that the amended complaint
does relate back to the original filing date, and the fact that the case
was actually dismissed once in the interim is of no significance. The
action was timely filed.
As noted by
the court in the memorandum and order granting plaintiffs' motion for a
new trial, the complaint as originally filed set forth facts necessary
to state a cause of action under the wrongful levy statute. The only
mistake that plaintiffs made was in failing to cite and argue that
section, relying instead on an incorrect jurisdictional statute. It is
well settled that a complaint need not "set forth the statutory
basis for the court's jurisdiction in order for the court to assume
jurisdiction, if the facts alleged provide a basis for the assumption of
jurisdiction." Rohler v. TRW, Inc., 576 F. 2d 1260 (7th Cir.
1978), citing with approval, Wright & Miller, Federal Practice and
Procedure, §1206. Indeed, the court could well have noted jurisdiction
even without requiring an amendment to the complaint. However, dismissal
followed by an order to amend the complaint and granting a new trial was
the method chosen to crystallize the issues under the proper statute.
The fact remains that the complaint filed on July 12, 1979,
approximately seven weeks after the government's levy, set forth the
salient facts necessary to state a claim under 26 U. S. C. §7426. Under
the circumstances, the government's interest in requiring rapid recourse
to the courts by third-party claimants to seized property has been
We turn now to
the substantive issues presented in this action. In order to determine
the propriety of the levy, it is necessary to decide whether there was a
valid existing tax lien against the property seized by the
May 29, 1979
As stated, a
lien arose by operation of law against all property and rights to
property owned by Webb at the time of the assessment of back taxes. 4
That occurred in December of 1974. It is well established that the
property rights of the taxpayer to which the lien attaches are
determined by state law. Aquilino v. United States, 363 U. S.
509, 4 L. Ed. 2d 1365, 80 S. Ct. 1277 (1960); United States v. Durham
Lumber Company, 363 U. S. 522, 4 L. Ed. 2d 1371, 80 S. Ct. 1282
(1960); United States v. Bess, 357 U. S. 51, 2 L. Ed. 2d 1135, 78
S. Ct. 1054 (1958). See also, Slodov v. United States, 436
238, 56 L. Ed. 2d 251, 98
1778 (1978), n. 19, 436
at 256, 56 L. Ed. 2d at 267. Thus it is to the law of
that the court must look to determine the extent of Webb's interest in
the subject realty on the date of the tax assessment, and the
concomitant extent to which the federal tax lien attached to that
cites the case Walker v. Wood, 31 Tenn. App. 196, 213 S. W. 2d
523 (Tenn. App. 1948), for the proposition that mortgages and deeds of
trust in Tennessee, regardless of how they might be worded, are mere
sureties, creating liens in favor of the mortgagee, but leaving legal
title in the mortgagor. This rule, according to the Walker
court (as well as the defendant herein) is "well settled,"
although the only authority cited in Walker
is an 1874 case, Erhert v. Chapman, 67
27 (8 Baxter) (
1874), and Gibson's Suits in Chancery, §1037(2) (5th ed. at §1084(2)).
v. Wood is wholly at odds with the majority of
cases. Cf., Howell v. Tomlinson, 33
App. 1, 228 S. W. 2d 112 (1949); Bertha v. Smith, 172
180, 110 S. W. 2d 474 (1937); Lingerfelt v. Gibson, 161
477, 32 S. W. 2d 1047 (1930); Lincoln Savings Bank v.
598 (12 Lea) (1883); Henshaw v. Wells, 28
(9 Hump.) 568 (1848). Any doubt as to the rule followed in
was laid to rest in Harris v. Buchignani, 199
105, 285 S. W. 2d 108 (1955), citing with approval Howell v.
Tomlinson, supra, and Bertha v. Smith, supra. The Howell
court included an illuminating discussion of the distinction between the
law of mortgages at common law and in courts of equity. The court noted
that mortgages at common law act to convey legal title to the mortgagee,
while the equity practice treats the mortgage as a security, and the
mortgagee as a mere lienholder. The court then said:
has kept much of the common-law theory of mortgages. While it follows
the equitable theory in many particulars, it still adheres to the basic
common-law notion that a mortgage vests the mortgagee with the legal
title to the land and the right to immediate possession.
, which follow the "title theory," and not the "lien
theory," it is generally held that a deed by the mortgagee conveys
his title and estate in land, subject to the mortgagor's equity of
S. W. 2d at 116, quoted with approval in Savely v. Bridges, 57
App. 372, 418 S. W. 2d 472, 480-81 (1967) (dictum).
therefore concludes that the installment deed conveying legal title
first to Webb, then immediately to the trustee, was effective to do just
that. Webb's interest was from the date of the conveyance an equitable
interest only. Furthermore, because of express waivers in the deed
itself, Webb's interest was further restricted. The property rights
enjoyed by Webb consisted merely rights enjoyed by enjoy possession as
long as it continued to make payments on the notes, and the right to
have legal title conveyed to it absolutely upon the complete
satisfaction of its obligation under the notes. Following default, at
all times up until the foreclosure sale, Webb was entitled to tender the
full balance due on the notes in satisfaction of its obligations and to
thereby become entitled to legal title to the property.
Thus the tax
lien which arose against all property and rights to property owned by
Webb in December of 1974 attached only to Webb's equitable interests in
the subject realty, for those were the only interests which Webb had or
ever acquired under Tennessee law. However, it is clear that the lien
did in fact attach to Webb's interests in the realty, even though those
interests were equitable in nature. See Howard v. United States,
566 S. W. 2d 521 (
1978) (federal tax lien attached to the equitable interest of income
beneficiary in a spendthrift trust). And, since Webb's equitable
interests in the property continued to exist until terminated by the
foreclosure sale, the issue now before the court is whether that sale
was also effective to extinguish the government's rights under the tax
discharge of lien]
Once a federal
tax lien has attached, its discharge is determined by federal law. Title
26 U. S. C. §7425(b) governs the discharge of liens by non-judicial
sales of the property. That section provides, in relevant part as
[A] sale of
property on which the
has or claims a lien . . . made pursuant to an instrument creating a
lien on such property . . .
shall . . . be made subject to and without disturbing such lien . . . if
notice of such lien was filed . . . in the place provided by law for
such filing more than 30 days before such sale and the United States is
not given notice of such sale in the manner prescribed in subsection
shall have the same effect with respect to the discharge or divestment
of such lien . . . of the
, as may be provided with respect to such matters by the local law of
the place where such property is situated, if--
notice of such lien . . . was not filed . . . in the place provided by
law for such filing more than 30 days before such sale,
the law makes no provision for such filing, or
notice of such sale is given in the manner prescribed in subsection
In the present
case, it is clear that notice of the lien was filed in the manner and
place required for such filing almost a year and one-half before the
foreclosure sale. Notice was never given to the
that a sale was planned, in spite of the fact that the government had a
lien on all property rights of the defaulting purchaser. In addition,
the sale was conducted pursuant to the terms of an instrument which
created a lien on the property, a lien in favor of the Kinnards having
been expressly reserved in the installment deed to Webb. In fact, it was
the Kinnards who directed the trustee to hold the sale, in order to
satisfy their lien. The foreclosure sale was precisely the kind of
non-judicial sale contemplated by 26
C. §7425(b), and in the absence of the notice required by the statute,
the sale could not operate to discharge the government's tax lien. That
tax lien, having previously attached to Webb's equitable interests in
the subject property, clearly survived the trustee's foreclosure sale.
have also argued that even if there was a pre-existing lien against
their property, it was not discoverable by a reasonable search and was
therefore not binding on them. This contention is based on the asserted
distinction between the "Webb Homebuilders, Inc.," to which
the Kinnards sold the property under the installment deed that
utlimately led to foreclosure, and the "Webb Home Builders,
Inc.," named in the Notice of Federal Tax Lien filed by the
government. This argument is without merit and must be rejected.
adduced at the trial which showed that the name of the corporate entity
was at all times relevant to this suit "Webb Home Builders,
Inc.," the name shown on the Notice of Federal Tax Lien. This was
the same corporation which purchased the realty from the Kinnards,
although the installment deed was recorded with the misnomer, "Webb
Homebuilders, Inc." This mistake in the deed is not sufficient to
defeat the tax lien and subsequent levy. The court finds that the
recorded lien was entirely sufficient to place the plaintiffs on
constructive notice of the existence of the government's claim.
particularly true in light of the recordation system in use in the
Rutherford County Register's Office, where the documents relevant to the
subject property were filed. It was the testimony of an Internal Revenue
Service revenue officer, who has conducted an average of two or three
title searches per week, including numerous searches in
, over the last 26 years, that the files in that county are not
alphabetized, except for the initial letter of the last name. An
effective search for liens in the name of "Webb Homebuilders,
Inc.," would necessarily have revealed the lien in the name of
"Webb Home Builders, Inc." Therefore, the plaintiffs could not
have been prejudiced by the mistake in the installment deed and would
have discovered the lien by a thorough and diligent search of the
records. Furthermore, since the government was absolutely correct in the
information recorded in the Notice of Federal Tax Lien, it should
certainly not lose the protection provided by Congress because of an
error in the installment deed which ultimately proved harmless.
fact that the government's Notice of Seizure described Webb's place of
, rather than
, the address shown on previous documents, is irrelevant to the issues
now before the court. Testimony at the trial indicated that Webb had
simply moved to Lavergne after ceasing business but had been located in
Nashvile prior to that time. Once again, the government was wholly
correct in both the content and form of the notice, and the plaintiffs
have not been prejudiced by any failure to indicate Webb's former
address on the notice.
plaintiffs have argued that the levy was wrongful because any equitable
rights which Webb had to the subject land had little or no monetary
value and that the lien was likewise without value. The plaintiffs have
cited no cases in support of this proposition, and the court believes
that the argument is without merit.
that the government's lien attached to Webb's interest in the subject
realty and was not discharged in the manner specified in the Internal
Revenue Code. The court therefore concludes that the lien continued in
full force and effect until the date of the levy and seizure and that
the levy was proper under the statute.
An order will
be entered dismissing the plaintiffs' action.
with the memorandum contemporaneously filed, these actions are hereby
The fact that some documents pertaining to the subject realty
incorrectly refer to the corporate entity as "Webb Homebuilders,
Inc.," rather than the proper "Webb Home Builders, Inc.,"
will be discussed, infra. At the present time, it will suffice to
note that the two names refer to the same corporation, and thus the
simple designation "Webb" will be used throughout most of this
Of the 249.77 acres originally conveyed, 64.51 acres had been released
prior to Webb's default. Thus, the Kinnards purchased only the 185.26
acres involved in the present action at the trustee's foreclosure sale.
C. §6331 provides in relevant part as follows:
(a) If any
person liable to pay any tax neglects or refuses to pay the same within
10 days after notice and demand, it shall be lawful for the Secretary or
his delegate to collect such tax . . . by levy upon all property and
rights to property . . . belonging to such person or on which there is a
lien provided in this chapter for the payment of such tax. . . .
(b) The term
"levy" as used in this title includes the power of distraint
and seizure by any means. . . .
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
provides further that the lien arises at the time the assessment is made
and eontinues until the tax is paid or the liability becomes
unenforceable due to lapse of time.
United States of America
, Plaintiff v. Ann G. Paladin and Carl D. Traina, Defendants
S. District Court, West. Dist. N. Y., Civ-78-860, 539 FSupp 100, 2/11/82
[Code Sec. 6323]
Lien for taxes: Priority: Alleged conversion or fraudulent transfer:
Motion for summary judgment.--The government's liens on insurance
proceeds were superior to the interest acquired by a third party who was
assigned a portion of the proceeds by the taxpayer for a nominal
consideration. Two liens were superior because they were filed prior to
the assignment, and two other liens had priority where the third party
was not a purchaser because of his failure to pay full and adequate
consideration. Thus, summary judgment was appropriate on the issue of
priority and on the issue of conversion by the third party. Summary
judgment was inappropriate on the issue of the allegedly fraudulent
transfer of the proceeds because a material question of fact concerning
the application of state law was presented.
Assistant United States Attorney,
, N. Y. 14202, for plaintiff. Andrew L. Gaita, 220 Convention Tower,
, N. Y. 14202, for defendants.
seeks to recover unpaid taxes assessed against the defendant Paladin for
the years 1971 through 1974. It also asserts causes of action against
the defendant Traina, Paladin's brother, based on his alleged conversion
of money belonging to Paladin on which plaintiff claims a lien and an
alleged fraudulent transfer of such money to him. Plaintiff has moved
for summary judgment. Its motion has been opposed by Traina but not by
judgment is a drastic remedy which may be granted only when there are no
material issues of fact to be resolved at trial. Gladstone v. Fireman's Fund Ins. Co., 536 F. 2d 1403, 1406 (2d Cir. 1976).
The moving party has the burden of demonstrating that there is no
material factual issue and that he is entitled to judgment as a matter
of law. Robertson v. Seidman & Seidman, 609 F. 2d 583, 591 (2d Cir.
1979). In ruling upon a motion for summary judgment, a court "must
resolve all ambiguities and draw all reasonable inferences in favor of
the party against whom summary judgment is sought * * *." Heyman
v. Commerce and Industry Insurance Co., 524 F. 2d 1317, 1320 (2d
Cir. 1975). After reviewing the pleadings, the transcript of Traina's
pretrial deposition, Paladin's answers to interrogatories, plaintiff's
request for admissions, 1
the affidavit of Philip A. Corigliano submitted in support of the
current motion, and the memoranda of law submitted by plaintiff and
Traina, I have concluded that the plaintiff has established that it is
entitled to summary judgment against Paladin and against Traina on its
cause of action for conversion.
Paladin opened the Stage Pigalle Bar in 1965. Paladin ran the bar as a
sole proprietorship until 1970, at which time she became ill. She
executed a power of attorney in favor of Traina
September 28, 1970
and authorized him to conduct transactions on her behalf with respect to
chattels and goods, banking, insurance, general business operations, and
records and reports. Thereafter, Traina ran the bar and also handled
Paladin's personal affairs, including the preparation of her personal
income tax returns.
December, 1973, plaintiff made various tax assessments against Paladin.
Withholding and Federal Insurance Contributions Act ("FICA")
taxes (including interest and penalties) totalling $1,938.31 for the
September 30, 1973
December 10, 1973
. Assessments for such taxes (including interest and penalties) for the
December 31, 1973
March 31, 1974
May 29, 1974
in the amount of $3,125.06 and
July 10, 1974
in the amount of $704.13, respectively. Federal unemployment taxes
(including interest) totalling $113.10 for the quarter ending
December 31, 1973
July 10, 1974
. Additional assessments for federal unemployment and personal income
taxes were made against Paladin throughout the remainder of 1974 and
1975. The assessments totalled $7,641.46.
Pigalle Bar was destroyed by a fire
January 18, 1974
. Paladin executed a partial assignment of the fire insurance proceeds
July 16, 1974
in the amount of $9,066.08. According to Traina's pretrial testimony,
the assignment was intended to reimburse him for amounts he had
previously expended to pay creditors of the bar. The written document
recites the sum of one dollar as consideration for the assignment.
Insurance proceeds totalling $16,000 were remitted to Paladin's
attorney, Andrew Gaeta, who thereupon disbursed $9,066.08 of the
proceeds to Traina.
At the time
Paladin assigned said portion of the insurance proceeds to Traina, four
separate tax assessments, totalling $5,880.60 had been made against her.
A payment in the amount of $496 had been made toward the assessments
April 4, 1974
, leaving an outstanding balance of $5,384.60. Plaintiff filed lien
notices with respect to two of the assessments (totalling $4,567.37)
with the Erie County Clerk
April 29, 1974
June 12, 1974
. Other notices were filed after Paladin executed the assignment. As of
April 30, 1981
, the amount outstanding on all assessments made against Paladin,
including accrued interest and penalties and deducting the $496 credit,
well-established that a tax assessment is presumed to be correct. Welch
v. Helvering [3 USTC ¶1164], 290
111, 115 (1933). Thus, in an action by the government to collect an
unpaid tax assessment, the taxpayer has the burden of demonstrating by a
preponderance of the evidence that the assessment is incorrect. United
States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696, 700 (2d Cir.
1965). In her answers to interrogatories, Paladin has stated that she
does not dispute the correctness of the tax assessments made against
her. Therefore, plaintiff is entitled to summary judgment against
, United States v. Pierce, 609 F. 2d 407 (9th Cir. 1979) (per curiam).
C. §6321, a taxpayer's failure to pay a tax assessment creates "a
lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to such person." Plaintiff claims that Traina's receipt
of a portion of the fire insurance proceeds constitutes a conversion of
its lien on the proceeds. A conversion of property is any unauthorized
exercise of dominion or control over the property by one who is not the
owner thereof which interferes with another person's superior possessory
rights in the property. Meese v. Miller, 436 N. Y. S. 2d 496, 500
); Bunge Corp. v. Manufacturers Hanover Trust Co., 325 N. Y. S.
2d 983, 988 (1st
), aff'd 335 N. Y. S. 2d 412 (1972). In order to successfully maintain a
cause of action for conversion, the plaintiff must establish that its
right to possession of the property was superior to the defendant's and
that the defendant exercised unauthorized control over the property to
the exclusion of the plaintiff's superior rights. Gold Metal
Products, Inc. v. Interstate Computer Services, Inc., 436 N. Y. S.
2d 312, 313 (2d
established that its claim to the insurance proceeds was superior to
Traina's. The lien provided by section 6321 arises at the time the
underlying assessment was made. 26 U. S. C. §6322. Under 26
C. §6323(a), the lien is valid against "any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor"
provided that appropriate notice of the lien has been filed. Thus, at
the time the proceeds were assigned to Traina, they were subject to four
separate liens in plaintiff's favor in the total amount of $5,384.60.
With respect to two of the liens (totalling $4,567.37), plaintiff's
claim to the proceeds is valid against Traina because notice of the
liens was filed prior to the assignment.
whether plaintiff's other two liens (totalling $817.23) are also valid
against Traina is somewhat more complex because notice thereof was not
filed until after the insurance proceeds were assigned to him. If Traina
is deemed a "purchaser" of the proceeds, plaintiff's liens
would not be valid against him. A purchaser is defined as a "person
who, for adequate and full consideration in money or money's worth,
acquires an interest * * * in property which is valid under local law
against subsequent purchasers without actual notice." 26 U. S. C.
§6323(h)(6). The requirement of adequate and full consideration is a
matter of federal rather than state law and must be strictly applied. Continental
Oil Co. v. United States [71-1 USTC ¶9296], 326 F. Supp. 266, 270-1
(S. D. N. Y. 1971). Because the assignment of the insurance proceeds to
Traina was supported by consideration in the amount of only one dollar,
it was not supported by adequate and full consideration. Fritz v.
United States [71-1 USTC ¶9425], 328 F. Supp. 1343, 1345-6 (D.
Minn. 1971); United States v. Galvin [61-2 USTC ¶9755], 199 F.
Supp. 4, 6 (E. D. N. Y. 1960). Furthermore, past consideration in the
form of Traina's alleged payments to Paladin's creditors cannot be
deemed adequate and full consideration sufficient to render Traina a
purchaser within the meaning of section 6323. United States v.
Pavenick [61-2 USTC ¶9679], 197 F. Supp. 257, 259 (D. N. J. 1961).
If Paladin was indebted to Traina due to payments made by Traina to her
creditors, such indebtedness could not receive priority over plaintiff's
claims for taxes unless Traina had provided present adequate and full
consideration for an assignment of the insurance proceeds. Thus, I
conclude that Traina was not a purchaser of the insurance proceeds
within the meaning of section 6323, and that plaintiff's four liens on
the proceeds were superior to Traina's rights to the proceeds.
element of plaintiff's cause of action for conversion is whether Traina
interfered with its right to possession of the insurance proceeds.
Traina has argued that, because the total amount of plaintiff's liens at
the time of the assignment was $5,384.60 and Paladin received almost
$7,000 of the proceeds, his receipt of approximately $9,000 of the
proceeds did not interfere with plaintiff's liens. Essentially, Traina
argues that even after he received a portion of the proceeds plaintiff
could have satisfied its claims out of the proceeds received by Paladin.
However, Traina has not cited any cases which support his argument that
he has not interfered with or excluded plaintiff's rights to the
insurance proceeds. Moreover, Traina's argument is contrary to the plain
language of section 6321, which provides that a tax assessment creates a
lien in favor of the government "upon all property and
rights to property" belonging to the taxpayer (emphasis added).
See, e.g., Stevan v. Union Trust Company of
District of Columbia [63-1 USTC ¶9377], 316 F. 2d 687, 692 (D. C. Cir. 1963); Welsh
v. United States [55-1 USTC ¶9238], 220 F. 2d 200, 201-2 (D. C.
Cir. 1955); United States v. Barndollar & Crosbie [48-1 USTC
¶9203], 166 F. 2d 793, 794 (10th Cir. 1948). Thus, plaintiff's liens
attached to the entire amount of the insurance proceeds and not to a
particular portion thereof. The fact that Paladin received proceeds
sufficient to pay the amount of the liens (or that she possessed any
other property in such a sufficient amount) is unavailing to Traina.
Accordingly, I find that plaintiff is entitled to summary judgment on
its cause of action for conversion against Traina. Traina's liability
for conversion amounts to $5,384.60, the outstanding amount of the liens
which had arisen at the time of the conversion.
seeks summary judgment on its fraudulent transfer claim against Traina.
Under section 276 of
's Debtor and Creditor Law, a conveyance made with actual intent to
defraud creditors is fraudulent and may be set aside. Because actual
intent to defraud is a necessary element of a cause of action under
section 276, summary judgment is inappropriate with respect thereto.
Plaintiff also asserts a claim for constructive fraud under section 273
of the Debtor and Creditor Law, which provides that a conveyance made by
a person who is or who will be thereby rendered insolvent is fraudulent,
without regard to the person's actual intent, if the conveyance is made
without fair consideration. Summary judgment under section 273 is
inappropriate in the present case because it is unclear whether Paladin
was insolvent or became insolvent at the time she assigned the insurance
proceeds to Traina. See, Debtor and Creditor Law, §271. Additionally,
Traina has testified that the assignment was made to compensate him for
debts he had previously paid on Paladin's behalf. Thus, Traina has
raised a factual issue concerning whether the assignment was made
without fair consideration. Id., §272.
Based on the
foregoing discussion, plaintiff's motion for summary judgment is hereby
ORDERED granted with respect to Paladin (Count I) and its cause of
action for conversion against Traina (Count II), but is ORDERED denied
with respect to its claim based on an alleged fraudulent transfer (Count
Plaintiff filed a request for admissions by both defendants
April 19, 1979
. Neither defendant responded to the request and the matters contained
therein are therefore deemed admitted under Fed. R. Civ. P. rule 36.
Traina's argument in this respect is a legal rather than a factual one.
Accordingly, Traina has not raised any factual issue which requires
trial of plaintiff's claim for conversion.
Judgment shall not be entered by the Clerk at this time. See, Fed. R.
Civ. P. rule 54(b).
¶9183]City & County Bank of
United States of America
S. District Court, East.
, No. Div., CIV. 3-8-79, 5/16/79
[Code Sec. 6323]
Lien for taxes: Validity: Filed after foreclosure sale but before
recording of deed.--A federal tax lien was invalid against the
purchaser of real property that was sold at a foreclosure sale forced by
a creditor despite the fact that the tax lien was filed before the
purchaser recorded its deed to the property. Because the government had
actual notice of the foreclosure sale, it would be inequitable to permit
the government to avoid a senior lien on real estate by awaiting a
foreclosure sale and then racing the purchaser to the courthouse to file
its own lien notice.
Faires, Ridenour, Ridenour, Ridenour, Bowes & Shumate, United
American Bank Bldg., Knoxville, Tenn. 37902, for plaintiff. U. S.
Attorney, J. V. Crockett, Department of Justice, Washington, D. C.
20002, for defendant.
This is an
action to quiet title to certain real property in
presently encumbered with a federal tax lien. The Government has filed a
counterclaim maintaining the superiority of its tax lien. The case was
referred to a Special Master who has filed a report with this Court. The
case is now before the Court on plaintiff's motion to accept the Special
Master's report and the defendant's motion to reject.
which are more carefully set out in the Special Master's report, may be
summarized as follows: Plaintiff bank loaned money to Cumberland
Plastics, Inc. (debtor), and secured the loan by means by a duly
recorded trust deed to the real property at issue here. When the debtor
defaulted on the loan, the bank requested foreclosure of the trust deed.
Formal notice of the trustee's foreclosure sale was timely delivered to
the Internal Revenue Service (IRS). The land was sold to the bank, as
the sole bidder, at the trustee's sale on
March 14, 1977
. The bank's bid was less than the total indebtedness owed the bank. At
the time of the sale there was no recorded lien on the property.
However, before the bank recorded the deed to it from the Trustee, the
IRS duly perfected a tax lien against the debtor and his property.
contends that the validity of its tax lien as against the bank in this
case is governed by the rule in
that an unrecorded deed is void as to the creditor of the vendor of the
deed, including a creditor with actual notice of the conveyance. McCoy
v. Hight, 162
507, 39 S. W. 2d 271 (1931).
Master disagreed, and concluded that the Government's tax lien does not
affect the bank's interest in the property as a purchaser under
In the opinion
of the Court, the Special Master correctly construed federal and
court has ever applied the McCoy rule in a situation like this,
where the vendor is the trustee acting pursuant to a trust deed. In all
cases in which the rule has been applied in favor of creditors with
actual notice of the conveyance, the actual vendor was the debtor of the
creditor. See McCoy, supra; City National Bank and Trust Co. of Miami
v. City of Knoxville, 158 Tenn. 143, 11 S. W. 2d 853 (1928).
the position argued by the Government would permit the Government, when
unable to avoid a senior lien on real estate, to simply await a
foreclosure sale and then race the purchaser to the courthouse to file
its own lien notice and deprive the purchaser, who is usually the senior
lien holder on the land, of the value of his senior lien. The rule cited
by the Government was never meant to be used in this fashion. No
underlying policy of protecting creditors would justify endangering or
upsetting duly recorded senior liens in this manner. Since the
Government had actual notice of the foreclosure sale, equity cries out
to protect the purchaser at that sale.
We are not
sure that the rule which is relied upon by the Government would be
followed by the courts of
today. We are certain that it would not be applied under the
circumstances of this case.
it is ORDERED that defendant's motion to reject the Special Master's
report be, and the same hereby is, denied. It is further ORDERED that
plaintiff's motion to enter judgment in accordance with the Special
Master's report be, and the same hereby is, granted.
Presented by Alvin Brown and Associates,
tax attorney, formerly with the Office of the Chief Counsel of the
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