Standing

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[98-2 USTC ¶50,638] In re David Kenneth Frey, Debtor. Kathleen Frey, Plaintiff v. Internal Revenue Service, An Agency of the United States of America , Defendant

U.S. Bankruptcy Court, Mid. Dist. Fla., Orlando Div., 97-06427-6J3, 7/22/98

[Code Secs. 6323 and 7402 ]

Jurisdiction: Declaratory judgment: Bankruptcy: Federal tax liens, validity of: Nominee: Alter ego: Collection or assessment of tax, interference with: Standing: Value of IRS's secured claim.--

A declaratory judgment complaint filed by a debtor's wife seeking a finding that she was not her husband's nominee or alter ego in connection with federal tax liens placed on her residence and assets was dismissed for lack of jurisdiction. Her contention that the suit did not interfere with the assessment or collection of any tax was rejected; a challenge to the validity of the nominee liens necessarily threatened the collection of federal taxes. The wife's arguments that the assets did not constitute property of the debtor's bankruptcy estate and that the tax liens were therefore void were rejected for the same reasons. However, she had standing to pursue her alternative claim that the value of her assets was less than the IRS's secured claim. The possibility that the value of her property would be diminished if the IRS's claim were found to be secured provided the wife with a sufficient interest to prosecute the claim.

R. Lawrence Heinkel, 201 W. Canton Ave. , Winter Park , Fla. 32789 , for debtor. Norman L. Hull, Norman Linder Hull, 537 N. Magnolia Ave., Orlando, Fla. 32802, for plaintiff. Karen Davis Miller, Department of Justice, Washington , D.C. 20530 , for defendant.

ORDER PARTIALLY GRANTING AND PARTIALLY DENYING MOTION TO DISMISS BY UNITED STATES

JENNEMANN, Bankruptcy Judge:

This adversary proceeding came on for hearing on June 25, 1998, on the Motion to Dismiss (the "Motion") (Doc. No. 12) filed by the Defendant, United States of America, and the Response to the Motion to Dismiss (Doc. No. 16) filed by the Plaintiff, Kathleen Frey, who is the wife of the debtor in this Chapter 13 case, David Kenneth Frey (the "Debtor"). The Complaint filed by Mrs. Frey asserts two counts. In the first count, the Plaintiff seeks a declaratory judgment pursuant to 28 U.S.C. §2201. Specifically, Mrs. Frey seeks a declaratory judgment against the United States of America which would find that she is not a nominee or alter ego of her husband, the Debtor, in connection with the liens placed by the United States of America (the "Defendant") on Mrs. Frey's residence and her interest in DKF Distributors, Inc. (the "Assets"). The Defendant had placed these liens on the Assets in order to collect certain taxes due by the Debtor. In the second count of the Complaint Mrs. Frey seeks to value the Defendant's claim in connection with the Debtor's bankruptcy to determine whether it is secured or unsecured.

28 U.S.C. §2201. Section 2201(a) provides in relevant part:

§2201. Creation of remedy

(a) In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section 505 or 1146 of title 11, or . . ., any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration. . . .

Under Section 2201, courts are permitted to issue declaratory judgments and to determine rights of individual parties. Nevertheless, a party cannot seek declaratory relief under Section 2201(a) with respect to federal taxes unless the action is brought under section 7428 of the Internal Revenue Code or Sections 505 or 1146 of the Bankruptcy Code. 28 U.S.C. §2201(a); Granse v. United States [96-2 USTC ¶50,514], 932 F. Supp. 1162, 1166 (D. Minn. 1996); Calmes v. United States [96-2 USTC ¶50,336], 926 F. Supp. 582, 584-85 (N.D. Tx. 1996); Cunningham v. United States [94-1 USTC ¶50,041], 165 B.R. 599, 605 (N.D. Tx. 1993). Because Mrs. Frey did not bring this action under Section 7428 of the Internal Revenue Code or Sections 505 or 1146 of the Bankruptcy Code, the Defendant argues that Mrs. Frey cannot seek declaratory relief for this federal tax dispute under 28 U.S.C. §2201(a).

Mrs. Frey, however, contends that a party, in a federal tax dispute, can bring an action under Section 2201(a) as long as the relief sought does not interfere with the United States ' assessment and collection of taxes. See Church of Scientology of Celebrity Centre v. Egger [82-1 USTC ¶9386], 539 F. Supp. 491, 494 (D.D.C. 1992) (finding that the Declaratory Judgment Act only bars declaratory relief sought for the purpose of restraining the assessment or collection of any tax). Thus, she argues that she can seek declaratory relief under Section 2201(a) because her action does not interfere with any assessment or collection action by the Defendant. Rather, the declaratory relief sought is only for the purpose of determining whether Mrs. Frey is a nominee or alter ego of the Debtor and what property is actually property of the Debtor's bankruptcy estate.

This Court disagrees. Section 2201(a) limits declaratory relief in tax disputes because Congress did not want "disputes over the right to tax or the merits of an assessment from being heard in the district court unless the tax has first been paid." Cunningham [94-1 USTC ¶50,041], 165 B.R. at 605 (quoting Rodriguez v. United States [86-1 USTC ¶9289], 629 F. Supp. 333, 341 (N.D. Ill. 1986)) (internal citation omitted). Here, in Count I, Mrs. Frey is challenging the validity of the Defendant's two liens which encumber the Assets alleging that she is not the nominee or alter ego of the Debtor. Thus, she argues, the nominee liens filed by the Defendant are improper because the Debtor has no interest in the Assets and the Defendant cannot seize the Assets to satisfy taxes payable by the Debtor.

By arguing that she is not a nominee or alter ego of the Debtor, Mrs. Frey not only is seeking a determination of what property is included in the Debtor's bankruptcy estate; she also is attempting to stop the collection of tax liability from the Assets. Simply put, Mrs. Frey's challenge of the validity of the nominee liens necessarily threatens the collection of federal taxes. Cf. Calmes [96-2 USTC ¶50,336], 926 F. Supp. at 584 (finding no declaratory relief available under Section 2201(a) when the plaintiff disputed the IRS' levy action against her personal income to satisfy the alleged deficiency owed by her husband).

Moreover, the Church of Scientology and Cunningham decisions offer no support for Mrs. Frey's argument. In Church of Scientology , the plaintiffs, among other things, sought declaratory relief requiring the Internal Revenue Service to rule on all of the Scientology ministers' applications for exemption from self-employment tax. [82-1 USTC ¶9386], 539 F. Supp. at 494. The plaintiffs did not request that the Internal Revenue Service actually grant the ministers' applications for self-employment tax exemption. Id. As such, the declaratory judgment only sought an order directing the Internal Revenue Service to act and did not attempt to thwart the assessment or collection of a tax. Id.; see also Cunningham [94-1 USTC ¶50,041], 165 B.R. at 605 (allowing plaintiffs to seek relief under Section 2201(a) when the plaintiffs are challenging the procedure by which the tax assessment was made, i.e. government officer did not have authority to sign the assessment certificate; plaintiffs did not challenge the underlying merits of the assessment).

Here, unlike the plaintiffs' request to force the Internal Revenue Service simply to rule on its ministers' pending applications in the Church of Scientology case, Mrs. Frey is requesting that this Court declare that she is not a nominee or an alter ego of the Debtor. This relief, if granted, would render the Defendant's liens on the Assets worthless. Mrs. Frey's requested declaratory relief would restrain the Defendant's attempts to assess and collect taxes. Section 2201(a) does not permit such a complaint. ¹ Accordingly, the Motion filed by the Defendant is granted as to Count I. Count I is dismissed.

As to Count II, Mrs. Frey argues in the alternative. First, she seeks a determination that the Assets are not property of the Debtor's estate and that the liens filed by the Defendant to collect taxes due by the Debtor are void. (Doc. No. 1) at ¶¶11 & 12. This allegation is similar to the declaratory relief sought in Count I. In the alternative, however, Mrs. Frey argues that, in the event the Assets are part of the Debtor's estate, the value of the Assets is less than the secured claim of the Internal Revenue Service. Id. at ¶13. In essence, in Count II, Mrs. Frey seeks to value the secured claim of the Defendant filed against the Debtor.

The Defendant asserts that Mrs. Frey does not have standing to bring Count II because she is not a debtor in this bankruptcy case and is not a direct creditor claiming any type of security interest in the property. Thus, they argue, Mrs. Frey does not have a sufficient stake to value the secured claim of the Defendant. Further, to the extent she seeks a determination of the validity or extent of the liens against her own property, there is no jurisdiction because she is a non-debtor. ²

Mrs. Frey claims she has sufficient standing to value the secured claim of the Defendant because, if the Defendant is a secured creditor, her ownership interest is diminished. The Court finds that this is a sufficient stake to permit Mrs. Frey to prosecute Count II of the Complaint. However, to the extent Mrs. Frey is challenging the Defendant's determination that she is the nominee or alter ego of the Debtor in Count II, the count is dismissed under the same analysis requiring the dismissal of Count I. Therefore, the Motion to Dismiss filed by the Defendant as to Count II of the Complaint is partially granted and partially denied. Mrs. Frey may prosecute the allegations in Count II which seek to value the Debtor's interest and the Defendant's claim to the Assets. All other allegations are dismissed.

The Debtor has objected to Claim No. 3 filed by the Defendant in this case. The issues raised by the Debtor in his Objection are very similar to the remaining issues raised by Mrs. Frey in Count II of her Complaint in this adversary proceeding. Due to the similarity of the issues raised by her in this adversary proceeding and the Debtor in the pending Objection, judicial economy dictates that the evidentiary hearings on Count II of this adversary proceeding as well as the Objection to Claim be held simultaneously. An evidentiary hearing on both of these consolidated matters will be held at 2:00 p.m. on October 22, 1998 . Accordingly, it is

ORDERD:

1. The Motion to Dismiss is partially granted and partially denied.

2. Count I is dismissed.

3. Count II may proceed to trial provided, however, to the extent that the Plaintiff seeks a determination that she is not a nominee or alter ego of the Debtor, such allegations asserted in Count II are dismissed.

4. The trial of Count II shall be consolidated for all purposes with the trial on the Debtor's Objection to Claim 3 filed by the Defendant. The trial shall be held at 2:00 p.m. on October 22, 1998 .

DONE AND ORDERED at Orlando , Florida this 21st day of July, 1998.

¹ Mrs. Frey might be able to challenge the nominee liens under 28 U.S.C. §2410. See Progressive Consumers Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F. 3d 1228, 1232-33 (1st Cir. 1995) (finding that plaintiff can seek relief under Section 2410 to determine "validity and priority of liens. . . .") (quoting Remis v. United States [60-1 USTC ¶9183], 273 F. 2d 293, 294 (1st Cir. 1960)).

² In support of its argument, the United States of America cites Holland Industries, Inc. v. United States (In re Holland Industries, Inc.), 103 B.R. 461 (Bankr. S.D.N.Y. 1989) as authority. The United States of America is correct in citing the general proposition that bankruptcy courts do not have jurisdiction to determine the validity of liens with respect to property in which the debtor has no legally cognizable interest. Id. at 466. Here, in Count II, Mrs. Frey alleges, in the alternative, that if the nominee liens are valid then the United States of America holds an undersecured claim because the property attached by the liens is less than their claim. Clearly, in making this valuation determination, it is presupposed that the Assets are property of the Debtor's bankruptcy estate. Thus, the Holland case does not apply.

 

 

[94-1 USTC ¶50,169] First of America Bank--West Michigan, Plaintiff v. William J. Alt, M.D., Lind Alt, Harbor Laboratory, Inc., United States of America, and Cote La Mer, Inc., Defendant

U.S. District Court, West. Dist. Mich. , So. Div., 1:91-CV-1020, 12/22/93

[Code Secs. 6323 , 6501 and 6502 ]

Tax liens: Assessments: Statute of limitations: Standing to challenge.--A bank lacked standing to challenge the validity of an IRS tax lien against a condominium owned by delinquent taxpayer individuals who had obtained a mortgage on the property from the bank on the grounds that the two underlying assessments were not filed within three years of the date on which their return was filed. The three-year limitations period for assessing tax protects taxpayers only, not third parties. Furthermore, since the assessments were assumed valid due to the bank's lack of standing, the IRS's lien attached for ten years under the applicable limitations period for collecting tax.

[Code Sec. 6321 ]

Lien for taxes: Validity of lien: Transfer to related entity.--The transfer of a condominium by delinquent taxpayers to a related corporation did not defeat an IRS tax lien that was filed against the individuals only. Although the deed was executed before the IRS filed its lien, it was not recorded until afterward.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Conflicts of law.--An IRS tax lien had priority over a bank's unrecorded mortgage even though under state ( Michigan ) law it would not have had priority if the IRS was on notice of the bank's lien. Notice of a prior unrecorded interest is irrelevant to determining lien priority under the Code. The priority of IRS liens is determined under federal law, not state law.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Estoppel against IRS: Equitable principles.--The IRS was not estopped from claiming an interest in mortgaged real estate even though it waited almost 10 years to begin legal proceedings or to enforce its lien. Despite the fact that the lender would not have made the loan had it known of the IRS's assessment, the IRS had committed no affirmative action that misled the bank or induced it to make the loan. Furthermore, the IRS was not required under equitable principles to apply seized assets to the earliest tax liability.

[Tax Court Rule 37 ]

Suits by nontaxpayers: Default judgment: Attorney fees: Interrogatories, failure to reply.--A lender was not entitled to a default judgment against the IRS in a case involving the priority of liens since the IRS complied with discovery orders. The lender may have been entitled to attorney fees since the IRS had not answered all interrogatories fully and correctly. This issue was referred to a magistrate judge for further consideration.

Alvin D. Treado, Culver, Lague & McNally, 600 Terrace Plaza, Muskegon , Mich. 49443 , for plaintiff. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (IRS). Floyd H. Farmer, 102 S. Buchanan St. , Spring Lake , Mich. 49456, for defendant (Cote La Mer, Inc.). Cote La Mer, Inc., 4739 Poinsettia, Grand Rapids, Mich. 49508, pro se. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (USA).

MEMORANDUM OPINION

MCKEAGUE, District Judge:

This is a civil action brought by plaintiff First of America Bank-- West Michigan ("FOA" or "Bank") to foreclose its mortgage on certain real property previously owned by William and Rosalinda ("Lind") Alt, and to determine the priority of its lien. The subject property is a condominium located in Cote La Mer, a subdivision in Ottawa County , Michigan . The property was recently sold by judicial sale, yielding net proceeds of $79,710.45. Those proceeds have been placed in escrow with the Court.

The United States contends that its tax lien against Lind Alt has priority over plaintiff's claimed mortgage interest in the property pursuant to the Internal Revenue Code, 26 U.S.C. §6323 . Both parties are now before the Court on contesting motions for summary judgment.

FACTS

Lind Alt purchased the disputed Cote La Mer property on December 30, 1971 . On April 16, 1982 , Lind and William Alt filed their 1981 tax return with the Internal Revenue Service ("IRS"). A few months later, on October 11, 1982 , the IRS made an assessment against the Alts for their unpaid taxes from 1981. On June 27, 1984 , the Alts borrowed $501,000 from FOA in the form of a commercial loan, securing the loan with a mortgage on the condominium and two other pieces of property located in Muskegon County . The Bank recorded the mortgages by filing in Muskegon County , but not in Ottawa County where the Cote La Mer condo is located.

On or before April 15, 1985 , the government contends that it issued a statutory notice of deficiency for the Alts' unpaid 1981 taxes. ¹ Later in April of that year, the Alts commenced a Tax Court proceeding relating to their 1981 return. On May 27, 1986 , the Tax Court entered a judgment against the Alts for taxes due in the sum of $83,655.40, plus negligence penalties. A few days later, on June 2, 1986 , Lind Alt transferred the condominium to a corporation called Harbor Laboratory, Inc. ("Harbor Lab"), by quitclaim deed. Although the facts are unclear, Harbor Lab is apparently owned by Lind Alt. The deed was recorded on August 1, 1986 , in Ottawa County . The IRS later found Harbor Lab to be a nominee or alter ego of the Alts. On June 13, 1986 , the IRS made another assessment against the Alts, this time pursuant to the Tax Court's ruling in May.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt, but not Harbor Lab, in Ottawa County . The tax lien was for $178,280.87, for the tax period ending December 31, 1981 . This lien initially referenced the assessment of October 11, 1982 . On April 28, 1987 , however, the IRS filed an amended tax lien, changing the assessment date to June 13, 1986 , the date of the assessment which followed the Tax Court's ruling.

In August of 1987, the IRS sold other property of the Alts, realizing net proceeds of $94,770.80. These proceeds were applied against the Alts' 1981 tax liability.

By letter dated December 31, 1987 , FOA requested proof of fire insurance for the Cote La Mer property from the Alts. Lind Alt responded that the loan had been paid in full. Subsequent negotiations between the Alts and the Bank ensued, whereby FOA agreed to refinance the Alts' loan on March 8, 1988 , secured by the same property, including the condominium. This time, however, the mortgage was recorded in Ottawa County on April 28, 1988 . On June 12, 1991 , the IRS filed a notice of Federal Tax Lien against Harbor Lab in Ottawa County .

Throughout early 1991, FOA requested that the Alts obtain fire insurance on the Cote La Mer property. Effective June 26, 1991 , the Bank independently obtained its own insurance coverage for the condo. A few months later, on November 1, 1991 , FOA filed the present foreclosure action in Ottawa County Circuit Court. On November 12, 1991 , the IRS filed further liens against the Alts' property for tax years subsequent to 1981.

The IRS contends that Lind Alt owes the United States $188,794.83 as of August 1, 1993 , on the 1981 tax liability. At the judicial sale of the Cote La Mer condo, the property grossed approximately $91,500. After payment of back taxes on the property, U.S. Marshal fees, dues owed to the condominium association, and utility costs incurred by the association in maintaining the property, $79,710.45 remained. This sum was escrowed with the Court, pending disposition of this matter.

In October of 1992, FOA served its first set of interrogatories and document production requests in this case on the IRS. The IRS objected to most of these requests and inquiries. On January 25, 1993 , Magistrate Judge Scoville granted the Bank's motion to compel discovery, and the IRS was ordered to furnish FOA with supplemental answers. In its subsequent answers, the IRS indicated that it was appropriate for it to file a notice of deficiency for the tax year 1981 in the spring of 1986, as the Alts misrepresented their 1981 income by over 25%, giving the IRS a six-year statute of limitations. These subsequent answers proved inadequate to FOA, however, and on March 31, 1993 , Judge Scoville issued another order compelling the IRS to comply with discovery requests. In this set of answers, the IRS no longer claimed that the Alts had misrepresented their income by over 25%. Rather, the IRS claimed that notice of deficiency had issued on or before April 15, 1985 , pulling it within the three-year statute of limitations applicable in most situations. The IRS also revealed for the first time that the Alts had filed a Tax Court petition in 1985.

DISCUSSION

Both FOA and the United States are now before this Court on cross-motions for summary judgment. The briefs in this case present a myriad of issues for resolution. First and foremost, is the question, "Who has priority in the property?" Although it appears the IRS does, FOA challenges the priority of the federal tax lien on several grounds. The second issue is whether the equitable doctrines of laches or estoppel apply in this case. The third issue concerns whether the doctrine of marshalling may be applied to the IRS. The fourth question presented by the briefs asks whether FOA is entitled to discovery sanctions due to IRS actions (or nonactions) in the course of this litigation. The final issue presented for resolution is whether FOA is entitled to reimbursement for the insurance it obtained on the Cote La Mer property. Applying the standards for summary judgment, the Court will examine each of these issues in turn.

Summary judgment is appropriate when the record reveals that there are no issues as to any material fact in dispute and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Sims v. Memphis Processors, Inc., 926 F.2d 524, 526 (6th Cir. 1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986), and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The standard for determining whether summary judgment is appropriate is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Booker v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir. 1989) (quoting Anderson , 477 U.S. at 251-52). "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48 (emphasis in original).

The moving party bears the burden of clearly and convincingly demonstrating the absence of any genuine issues of material facts. Sims, 926 F.2d at 526. The court must consider all pleadings, depositions, affidavits, and admissions on file and draw all justifiable inferences in favor of the party opposing the motion. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). If the moving party carries this burden, the nonmoving party must present significant probative evidence showing that genuine, material factual disputes remain to defeat summary judgment. Sims, 926 F.2d at 526. The court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. The court must make purely legal judgments that go to the nature and sufficiency of the complaint as well as the evidence put forward to support it. Val-Land Farms, Inc. v. Third Nat'l Bank, 937 F.2d 1110, 1113 (6th Cir. 1991). Applying these principles to the present case, this memorandum concludes that FOA's motion for summary judgment shall be denied. The government's motion shall be granted.

I. Priority of Lien

The first question presented for resolution in this matter is whose interest in the Cote La Mer property has priority. FOA contends that its mortgage on the condominium has priority, while the United States claims that the federal tax lien prevails. This is a question of both federal and state law.

In Michigan , interests in real property are recorded with the register of deeds in the county where the property is located. All recorded liens, rights, and interests in property take priority over subsequent owners and encumbrances. M.C.L.A. §565.25. Where an individual fails to record a lien or interest in property, that interest is void as against any subsequent interest holder who purchased the interest in good faith for valuable consideration. M.C.L.A. §565.29. A person takes in "good faith" if he or she takes without notice of the prior unrecorded interest. Michigan Nat'l Bank & Trust Co. v. Morran, 194 Mich. App. 407, 410 (1992). Thus, Michigan has adopted what is frequently known as a "race-notice" statute: the first interest holder to record takes priority, unless that individual has notice of a prior unrecorded interest.

The Internal Revenue Code alters the scheme of priorities under Michigan law. Under 26 U.S.C. §6321 , a lien on an individual's property arises when the individual is liable to pay a tax, but neglects or refuses to pay the tax after notice of the liability is given. However, "[t]he lien imposed by section 6321 shall not be valid against any . . . holder of a security interest . . . until notice thereof which meets the requirements of [26 U.S.C. §6323(f) ] has been filed." 26 U.S.C. §6323(a) . Section 6323(f) requires that notice of a lien on real property be filed according to the laws of the state where the property is located. Accordingly, the tax lien has priority if it was recorded first with the register of deeds in the county where the property is situated.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt in Ottawa County , Michigan , the location of the Cote La Mer property. The Bank had recorded its mortgage on the property in Muskegon County in 1984, but did not file in Ottawa County until April of 1988. A cursory review of the facts thus suggests that the IRS has priority in the condominium. FOA disputes this conclusion, however, on four separate grounds. First, FOA challenges the validity of the IRS assessment against the Alts, which gave rise to the lien. Second, FOA contends that the statute of limitations on the collection of taxes has expired. Third, the Bank argues that the lien did not attach to the Cote La Mer condominium, as that property had been transferred to Harbor Lab on June 2, 1986 . Finally, FOA maintains that a genuine issue of material fact remains as to whether the IRS had notice of the Bank's prior unrecorded interest in the property. Such notice is relevant, the Bank contends, to determining the priority of the tax lien.

a. Validity of the IRS Assessment

FOA challenges the validity of the government's tax lien, claiming that the assessments pursuant to which the liens were filed were untimely and not preceded by notices of deficiency. Under 26 U.S.C. §6501(a) , taxes must be assessed within three years of the date on which the return was filed. In this case, two assessments were made for the Alts' 1981 taxes: one on October 11, 1982 , and the other on June 13, 1986 .

The first assessment clearly falls within the statutory three-year period. The second assessment, however, falls well outside this time frame. Supplemental assessments are permitted by the Internal Revenue Code, but they too must fall within the three-year period of limitations. See 26 U.S.C. §6204(a) ; Brockhurst, Inc. v. United States [91-1 USTC ¶50,217 ], 931 F.2d 554, 557 (9th Cir. 1991). FOA also contends that the government failed to provide the Alts with notice of deficiency for the June 1986 assessment. Initially, the IRS contended that notice was served sometime in the spring of 1986; later the government alleged that notice was issued before April 15, 1985 , pulling it within the three-year statute of limitations. The government has no evidence to support these assertions, however. ²

The IRS does not appear to argue that the June 13, 1986 , assessment fell inside the statutory time frame, or that it can prove that notice was sent prior to April 15, 1985 . Rather, the government contends that the Bank lacks standing to challenge the assessment. Under 28 U.S.C. §2410(a), sovereign immunity of the government is waived, permitting a party to sue the United States to foreclose a mortgage on property upon which the government has a lien. This is essentially a suit to "quiet title." However, the courts have construed §2410 to permit only challenges to the procedural regularity of the lien, not the underlying tax liability or merits of the assessment. Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987). FOA contends that it asserts merely procedural defects in the assessment, and not the underlying tax. The IRS counters that a challenge to the notice is a challenge to the very merits of the assessment.

The case law provides little guidance on the resolution of this issue. In Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 737 (10th Cir. 1992), the Tenth Circuit held that a taxpayer could not raise a procedural defect in the issuance of a deficiency notice in a quiet title action because the purpose of the notice requirement was to allow the taxpayer to challenge the amount of the assessment in Tax Court. The challenge thus went to the underlying tax liability itself. However, the taxpayer was found to be entitled to relief under another statute, and the Court held that the failure of the IRS to send a notice of assessment could be challenged under §2410. Other cases suggest that all taxpayer challenges to notice, be it notice of deficiency or assessment, do qualify as claims of procedural irregularities. In an unpublished decision, the Sixth Circuit permitted a taxpayer to challenge notice under §2410, although it ultimately ruled against him on the merits. See Williams v. United States, No. 89-5740, 1990 W.L. 47555 (6th Cir. 1990); see also Gentry v. United States [91-2 USTC ¶50,374 ], No. CIV-1-89-337, 1991 W.L. 191246 (E.D. Tenn. 1991) (citing Williams). Thus, it would appear that in this Circuit, a taxpayer may challenge the validity of the assessment and the resulting lien by asserting that no deficiency notice was issued. A taxpayer challenge to the assessment on the grounds that it fell outside the statutory period similarly appears to constitute a procedural challenge.

The result may differ, however, where the individual claiming procedural irregularities which render the lien invalid is not a taxpayer, but a third party. In its brief, FOA cites only one case from 1965 to support its contention that third parties may challenge the validity of IRS liens on procedural grounds. See Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965). That case, however, made only a passing reference to the issue. Furthermore, McEndree v. Wilson , 774 F.Supp. 1292 (D. Colo. 1991), cited by the Bank during oral argument, is inapposite. Although McEndree addressed third-party standing under §2410, that case did not involve a procedural challenge to the validity of an IRS lien as the plaintiff conceded the validity of the assessments. Id. at 1296. Rather, the plaintiff merely sought to assert the priority of its lien over the federal tax lien. In the present case, no one disputes that FOA may attempt to argue that its mortgage takes priority over the federal lien. There is no authority, however, which permits the Bank, as a third party, to argue that the lien is procedurally invalid. As the procedural provisions of the Internal Revenue Code appear to exist to protect the taxpayer only, not third parties, FOA lacks standing to challenge the procedural regularity of the lien. This challenge to the IRS' priority must fail.

b. Collection of Taxes

FOA claims that any interest that the government had in the property has expired, as the IRS had only six years from the date of assessment to collect the tax owed pursuant to 26 U.S.C. §6502(a)(1) . Because the first assessment issued on October 11, 1982 , the government's lien only attached until 1988, the Bank argues.

The government notes, however, that §6502(a)(1) was amended effective November 5, 1990 , to give the IRS a ten-year collections period. This ten-year period applies even to taxes assessed before the effective date, if the previous six-year period had not yet expired as of November 5, 1990 . Although counting from the 1982 assessment, the six-year time frame expired in 1988, the six-year period had not expired by November 1990, if we count from the June 13, 1986 assessment. The government would have ten years in which to act. Thus, if the 1986 assessment is the proper trigger for the collections period, then the IRS has until June of 1996 to collect the Alts' unpaid taxes.

Due to the conclusion of the preceding section that FOA does not have standing to challenge the validity of the assessment, the Court assumes that the 1986 assessment is valid. Accordingly, the period of time in which the IRS may collect on the deficiency has not expired. This challenge by FOA also fails.

c. Lien as Against Property of Harbor Lab

FOA next argues that the federal tax lien did not attach to the Cote La Mer property as that property was transferred to Harbor Lab by quitclaim deed on June 2, 1986 . Because the lien recorded in Ottawa County only referenced the property of the Alts, it did not attach to the condominium owned by Harbor Lab, the Bank contends. The IRS did not file a lien against Harbor Lab in Ottawa County until June of 1991, after FOA had perfected its interest.

The IRS claims that the transfer to Harbor Lab is ineffective to defeat the tax lien as the deed was recorded after the assessment of the tax liability. The Supreme Court has ruled that "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). Although the transfer occurred on June 2, 1986 , the deed was not recorded in Ottawa County until August 1st, well after the June 13th assessment. Furthermore, the IRS had made a previous assessment in October of 1982. In these circumstances, the Alts should not be given the power to defeat the federal tax lien through a quitclaim transfer. The lien did attach to the Cote La Mer property. The Bank's third challenge to the priority of the government's lien is without merit.

d. IRS' Notice of Prior Unrecorded Interest

FOA also contends that the federal tax lien should not take priority as the government was on notice of the prior unrecorded interest held by the Bank. Under Michigan law, a lienholder has priority if he or she recorded first and had no notice of a prior unrecorded interest. The IRS argues that notice of the mortgage is irrelevant, as priority determinations are controlled by federal, not state, law.

Section 6323 of the Internal Revenue Code dictates that a federal tax lien has priority if it has been properly recorded under state law. 26 U.S.C. §6326(a) , (f). The Code imposes no notice requirement. State law appears to matter only to the extent it directs the government where to file the tax lien. Moreover, any notice requirement would render litigation over competing liens highly complex. If federal tax liens were forced to yield every time a governmental department had notice of a prior unrecorded interest, the tax lien system would be hampered. The government does not elect to extend credit based upon the security available, but is an involuntary creditor. Accordingly, the Court finds that notice of a prior unrecorded interest is irrelevant to determining lien priority under the Internal Revenue Code.

As the preceding discussion indicates, the federal tax lien does take priority over the Bank's mortgage on the Cote La Mer property. Summary judgment on this question shall issue for the government.

II. Doctrines of Laches and Estoppel

The second issue raised in the briefs concerns the applicability of the equitable doctrines of laches and estoppel. In its brief, FOA contends that pursuant to the doctrine of laches, the Bank's interest in the Cote La Mer property should be given priority over the government's tax lien. FOA notes that the Alts owed their 1981 taxes for almost ten years before the IRS instituted any legal proceedings or made any effort to enforce the lien on the condominium. Had the Bank been on notice earlier of the IRS' interest, FOA argues, it would not have gone ahead with the initial loan in 1984 or the refinancing agreement in 1988. Further, the issue is only now before this Court because the Bank forced a sale of the disputed property and filed the present action. Given these circumstances, FOA contends, equity demands that the Bank's mortgage prevail over the federal tax lien.

As the government notes, however, the doctrine of laches may not be invoked against the United States when it seeks to enforce its rights. See United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612, 618 (6th Cir. 1979). This well-established principle is "based upon the important public policy of preserving public rights and revenues from the negligence of public officers." Id. During oral argument, the Bank conceded that the doctrine of laches does not apply in this case.

Alternatively, FOA argues that the IRS should be estopped from claiming an interest in the property. But again, estoppel may not be invoked against the government, unless it is based upon an allegation of affirmative misconduct. See Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 385, 68 S.Ct. 1, 3 (1947); Giles v. Carlin, 641 F.Supp. 629, 635 (E.D. Mich. 1986) (long-standing tradition that "estoppel may not be invoked against the government"); Tonkonogy v. United States [76-1 USTC ¶9447 ], 417 F.Supp. 78, 79 (S.D.N.Y. 1976) (estoppel may be invoked only where allegation of affirmative misconduct). The only "affirmative" action which the Bank alleges, however, occurred during the discovery phase of this litigation. Such conduct has no bearing on the real issue in this case: Whose interest in the property should prevail? Estoppel would only apply if FOA demonstrated that the government had taken an affirmative step which caused the Bank to loan money to the Alts in exchange for a mortgage in the Cote La Mer property or to refinance the loan later. No such allegation has been made. Discovery conduct is simply irrelevant to the estoppel question.

The equitable doctrines of laches and estoppel may not be invoked in these circumstances against the government. Accordingly, there is no dispute here meriting a trial. The IRS' motion for summary judgment shall be granted as to these issues.

III. Doctrine of Marshalling

FOA next contends in its brief that the IRS should be required to marshall the assets from previously seized property. Essentially, the Bank wants this Court to order the IRS to apply all previously seized assets to the 1981 tax liability, as that is the earliest tax deficiency. FOA argues that the government is refusing to do so, applying the assets to deficiencies in later years, in order to protect its interest in the Cote La Mer property.

Under §5374.2(d) of the Internal Revenue Manual, agents of the IRS are required to apply all proceeds from the sale of seized property toward the satisfaction of the earliest tax liability. The provision clearly requires the government to marshall assets. However, as the government notes, the Manual was developed solely to guide the internal admin istration of the IRS, and confers no legal rights on taxpayers or third parties. See United States v. Will [82-1 USTC ¶9216 ], 671 F.2d 963, 967 (6th Cir. 1982). Furthermore, there exists no "right of marshalling" against the United States . United States v. Eshelman [87-2 USTC ¶9419 ], 663 F.Supp. 285 (D. Del. 1987). A junior lienholder cannot compel the IRS to marshall its liens. In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970); United States v. Herman [63-1 USTC ¶9135 ], 310 F.2d 846, 848 (2d Cir. 1962).

During oral argument, FOA conceded that the doctrine of marshalling is not applicable. Rather, the Bank requested that the Court invoke its "equitable powers" to require the IRS to apply the seized assets to the earliest tax liability. FOA provided the Court with no reason why it should exercise its powers in this fashion, however. Accordingly, the Court finds that the government shall prevail on this issue.

IV. Discovery Sanctions

The fourth issue raised in the briefs focuses on whether FOA is entitled to a default or attorney fees as a sanction against the government. Under Fed. R. Civ. P. 37(b)(2)(C), the Court may render a default against a party who fails to obey an order to provide or permit discovery. Alternatively, the Court may require a party against whom a discovery order is issued to pay the reasonable expenses, including attorney fees, of the party who sought the order. Fed. R. Civ. P. 37(a)(4). FOA claims entitlement to these sanctions due to the various discovery battles it has had with the IRS.

FOA served its first set of interrogatories and document requests on the IRS in October of 1992. The IRS refused to respond to fifteen of the 21 interrogatories and seven of the eight document requests on grounds of relevance. Magistrate Judge Scoville issued an order on January 25, 1993 , compelling the government to furnish supplemental answers. In the first set of supplemental answers which followed, the IRS claimed that the Alts had underreported their income from 1981 by more than 25%, and that a notice of deficiency had issued in the spring of 1986. Because the Alts had misrepresented their income by more than 25%, the government had six years from April 16, 1992 , the date of the 1981 filing, to issue notice, and thus the notice was timely. On March 31, 1993 , Judge Scoville issued another discovery order, requiring the IRS to provide details on the 25% claim. In its second set of supplemental answers, produced in response to the March discovery order, the government stated that it did not contend that the Alts had underreported their 1981 income by more than 25%. Instead, the IRS contended that notice had issued before April 15, 1985 , pulling it within the normal three-year period of limitations. The government also mentioned for the first time the Alts 1985-86 Tax Court proceeding.

FOA contends that these responses by the IRS constitute dilatory and obstructionist conduct, entitling the Bank to default under Rule 37. Default is an extreme sanction, and appears wholly unwarranted in this case. The evidence indicates that the IRS has complied with the discovery orders. The government explains its contradictory responses to FOA's interrogatories by stating that the file on the Alts was temporarily misplaced, resulting in incorrect information for a period of time. This contention is supported by the affidavit of attorney Alexandra Nicholaides.

Attorney fees and costs incurred in seeking the two discovery orders from Judge Scoville, however, may be warranted in this case. It does appear that the government refused to answer several requests and provided FOA with information that it did not fully verify. The Bank requests fees and costs in the amount of $5,916.34. This matter shall be referred to Magistrate Judge Scoville for further resolution.

V. Reimbursement for Insurance Coverage

The final issue presented in this case concerns the fire insurance coverage obtained by FOA on the Cote La Mer property. After the Alts neglected to obtain coverage on the condominium in 1991 as requested by the Bank, FOA independently obtained an insurance policy. FOA now seeks to recover the $717.18 in premiums it paid from the proceeds now in escrow with the Court. The IRS refuses to permit the Bank to recover these costs, claiming that the insurance policy was for the benefit of FOA alone, and not all creditors.

Neither party cites any law in support of their respective positions. It appears the government should prevail on this issue, as the policy never became the property of the taxpayer, and thus the tax lien never attached. Accordingly, if the property had been destroyed, only the Bank would have been entitled to the insurance proceeds. Thus, FOA is not entitled to reimbursement for the insurance costs. Summary judgment shall attach for the government.

CONCLUSION

In sum, FOA's motion for summary judgment shall be denied while the government's motion shall be granted. FOA's request for attorney fees and costs incurred in seeking the January 25, 1993 , and March 31, 1993 , discovery orders shall be referred to Magistrate Judge Joseph G. Scoville for disposition.

IT IS SO ORDERED.

¹ Previously, the government contended that the notice of deficiency was issued in the spring of 1986.

² The government does note that a Tax Court proceeding was commenced by the Alts in April of 1985, suggesting that notice was received prior to that petition. "The notice of deficiency is . . . the 'ticket' into the Tax Court that allows a taxpayer to challenge the tax assessment before paying it." Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 735 (10th Cir. 1992). It thus seems likely that notice was received sometime in April of 1985 or before.

 

 

[91-2 USTC ¶50,489] Middlesex Savings Bank, Plaintiff v. Raymond A. Johnson, et al., Defendants

U.S. District Court, Dist. Mass. , CIV. 90-12711-WD, 9/9/91

[Code Sec. 6323 ]

Federal tax lien: Priority: State tax lien: Attachment lien.--The IRS was granted summary judgment because its federal tax lien had priority over a tax lien of the Commonwealth of Massachusetts and an attachment lien of a bank. The tax lien in favor of the U.S. arose prior to that of Massachusetts ; the fact that the federal lien was not filed until after the state's claim arose did not affect the priority of the federal lien. The U.S. lien was also superior to that of the bank. Although the federal tax lien was recorded after the date the bank's lien attached to the property, the bank did not obtain a judgment, and thus become a judgment creditor, until after the U.S. lien was filed. Until reduced to judgment, the attachment was inchoate and, therefore, was insufficient to defeat the federal priority.

[Code Secs. 6323 and 7426 ]

Federal tax lien: Challenge by third parties: Notice: Discovery.--Judgment creditors did not have standing to challenge the validity of the tax assessment that gave rise to a federal tax lien assessed against the taxpayer's property. The presumption that the assessment underlying the lien was valid did not offend notions of due process because the judgment creditors acknowledged the priority of the U.S. lien. Further, the judgment creditors' objection that the IRS failed to present evidence that the creditors were notified of the assessment against the taxpayer was overruled because the priority of a federal tax lien attaches regardless of whether "competing claimants have actual notice or knowledge of the lien".

MEMORANDUM AND ORDER

WOODLOCK, District Judge:

Plaintiff, Middlesex Savings Bank, commenced this interpleader action in the state court after foreclosing a lien against real estate owned by defendant Raymond Johnson ("Johnson") at 27-29 Crane Ave. , in Maynard , Massachusetts . The foreclosure resulted in surplus proceeds of $56,115.11, to which Middlesex Savings Bank makes no claim. Excluding Johnson, ¹ six other defendants were named, each appearing to have an interest in the aforementioned real property.

Now before me are three motions for summary judgment and one motion to compel discovery. ² No matters of fact seem to be in dispute. The United States , as a defendant under 28 U.S.C. §2410, removed the case to this court pursuant to 28 U.S.C. §1444 . The United States has now moved for summary judgment based on its alleged lien on Johnson's property, which arose from the federal tax assessment of $51,273.31 ³ made against him on April 10, 1989, pursuant to 26 U.S.C. §6672 . The motion of the United States is well founded and will be allowed. The motion by one set of defendants to delay ruling on summary judgment and to compel the United States to respond to their discovery requests has no foundation in the law and will be denied. As a consequence of these decisions, the issues raised by the other two pending summary judgment motions are moot, and those motions will also be denied. ⁴

I

 

I will consider the property interests of the various parties and their claims to priority seriatim.

A. Tax Lien of the United States

Johnson's failure to pay the federal tax assessment made against him, after notice and demand, created a federal lien attaching to all his property effective April 10, 1989 --the date the assessment was made. 26 U.S.C. §6321 -6322. Under federal law, the rule of "first in time, first in right" generally determines priority. See United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85-86 (1954). And, it is well established that "[t]he effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question." United States v. Security Trust & Savings Bank [50-2 USTC ¶9492 ], 340 U.S. 47, 49 (1950).

However, a federal tax lien is "valid" against certain third persons (e.g., judgment lien creditors) only after being recorded by filing a notice of the lien pursuant to §6323(f) . 26 U.S.C. §6323(a) . On July 19, 1989 , the United States filed notice of the lien arising from the assessment. Thus, the federal tax lien on property belonging to Johnson is superior to any subsequently perfected claim. ⁵

B. Tax Lien of Commonwealth

The Commissioner of Revenue initially moved for summary judgment in favor of the Commonwealth (hereinafter both the Commissioner and the State of Massachusetts will be referred to as "the Commonwealth") on the basis of its allegedly superior tax lien pursuant to Mass. Gen. L. ch. 62C, §50 . That motion has been opposed by the five other participating defendants. However, the Commonwealth has not filed an opposition to the motion of the United States for summary judgment.

The tax lien of the Commonwealth against the assets of Johnson arose on July 7, 1989 --the date the assessment was made. See Mass. Gen. L. ch. 62C, §50(a) . The notice of the state tax lien against Johnson was not filed until August 24, 1989 . ⁶

The tax lien in favor of the United States arose prior to that of the Commonwealth, and consequently the claim of the United States has priority. It does not matter that the Commonwealth's lien arose prior to the date on which the federal lien was filed. The lien of the Commonwealth does not come within any of the classifications of persons (e.g., purchasers, judgment lien creditors) to whom the federal law accords priority until notice of the federal tax lien has been filed. See 26 U.S.C. §6323(a) ; see also New Britain [54-1 USTC ¶9191 ], 347 U.S. at 88 (predecessor statute indicates Congress did not intend antecedent federal tax liens to rank behind any but the specific categories of interests set out); United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291 ], 345 U.S. 361, 363-65 (1953) (under predecessor statute, state tax assessments are not "judgments" and notice is not required for federal tax lien to have priority over them).

C. Attachment by South Shore Bank

Defendant South Shore Bank (" South Shore ") originally filed a "limited opposition" to the summary judgment motion made by the Commonwealth, objecting to the extent that the motion sought to establish that the claim of the Commonwealth to the interpled monies was superior to its own. Although South Shore requested an extension of time to oppose the motion of the United States for summary judgment, it has not filed any opposition.

South Shore bases its claim to the interpled funds on a prejudgment attachment against Johnson of $150,000. According to South Shore , the attachment was filed with the Registry of Deeds on November 30, 1988 , but as of December, 1990, no judgment had been entered in its favor.

The tax lien of the United States is superior to the claim of South Shore . In this case, as in Security Trust, "the federal tax lien was recorded subsequent to the date of the attachment lien but prior to the date the attaching creditor obtained judgment." [50-2 USTC ¶9492 ], 340 U.S. at 48. As Justice Jackson noted in Security Trust, in relation to the predecessor of the current tax lien statute, a federal tax lien is not valid against a judgment creditor without notice, but this protection only applies to "a judgment creditor in the conventional sense." Id. at 52 (Jackson, J., concurring). South Shore was not a judgment creditor at the time of the filing of the federal tax lien, even if it eventually becomes one by receiving a judgment in its favor. ⁷ Because an attachment is contingent or inchoate--giving the attachment creditor "no right to proceed against the property unless he gets a judgment"--it is insufficient to defeat the federal priority. Id. at 50-51; accord United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 213 (1955) Clearly, the lien claimed by South Shore was not choate before the United States filed notice of its federal tax lien. Thus South Shore is not entitled to priority.

D. Interest of the Judgment Creditors

Only defendants Thomas Nadolski, Rosemary Nadolski and Rob ert Lyons (collectively, "the Judgment Creditors") have formally opposed the summary judgment motion of the United States . Earlier, they also opposed the motion of the Commonwealth and sought summary judgment against the Commonwealth.

The Judgment Creditors obtained a prejudgment attachment for $80,000 against Johnson's property on December 1, 1988 , which was filed with the Registry of Deeds on December 7, 1988 . Subsequently, they obtained a judgment against Johnson in the amount of $672,505.41 on September 26, 1989 , and a writ of execution for the property in Maynard on January 12, 1990 , which was levied and recorded on January 31, 1990 . ⁸

The lien of the Judgment Creditors cannot defeat the priority of the federal lien any more than the attachment by South Shore could. The Judgment Creditors did not qualify as "judgment lien creditors" on July 19, 1989 --the date the United States filed its notice of tax lien. Prior to attaining the judgment, the Judgment Creditors had only an attachment: an inchoate lien, not protected under 26 U.S.C. §6323 . See supra, §I,C. As conceded by the Judgment Creditors themselves, the federal lien has priority because their judgment was obtained after the federal tax lien was filed.

II

 

Despite their concession concerning the superiority of the federal tax lien, the Judgment Creditors object to summary judgment in favor of the United States on grounds that

the Government has presented no evidence whatsoever that (1) the taxes on which it relies were properly assessed and levied and (2) that the Judgment Creditors were given any notice of the assessments or opportunity to challenge such assessments.

Opp. to S.J. for U.S. , docket no. 20, at 1. Echoing this first theme, the Judgment Creditors pray, in the alternative, for a delay to examine the tax file for Johnson and they have separately moved to compel compliance with discovery requests which seek a range of documents including the entire IRS file on Johnson.

A. Challenging The Assessment

Authority addressing a variety of related issues suggests that a third party may not collaterally challenge a tax assessment, and thus the assessment is conclusively presumed valid in an action under §2420. ⁹ Generally, a third party lacks standing and "is not entitled to contest the tax liability of another." In re Campbell [85-1 USTC ¶9406 ], 761 F.2d 1181, 1185-86 (6th Cir. 1985). The fact that a party may bear the ultimate economic burden as a result of payment of a tax does not make that party the taxpayer or establish standing. See Lac Courte Oreilles Band of Lake Superior Chippewa Indians v. United States IRS [88-1 USTC ¶16,466 ], 845 F.2d 139, 142 (7th Cir. 1988) (manufacturer is taxpayer of excise tax, even if passed on directly to consumer).

In a variety of contexts courts have recognized that tax assessments are not open to collateral attack by non-taxpayers. See Myers v. United States [81-2 USTC ¶9490 ], 647 F.2d 591, 604 (5th Cir. Unit A June 1981) (citing Moyer v. Mathas [72-1 USTC ¶9342 ], 458 F.2d 431, 434 & n.4 (5th Cir. 1972)); see, e.g., Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38, 41-42 (2d Cir. 1965) (§2410 permits third parties to inquire into validity of lien, as distinct from the underlying tax assessment); Graham v. United States [57-1 USTC ¶9645 ], 243 F.2d 919, 922 (9th Cir. 1957) (nontaxpayer may not question validity of tax assessment in action to foreclose tax liens). In addition, there is considerable authority suggesting that tax assessments are not subject to attack except by means of specifically provided procedures. See, e.g., United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 260 (1960) (Clark, J., dissenting) (dicta) (validity of tax may not be tested under §2410 and §7424 procedures); Arford v. United States, 934 F.2d 229, 232 (9th Cir. 1991) (merits of underlying tax assessments may not be challenged in quiet title actions); Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987) (suit under §2410 is proper only to contest procedural regularity of lien, not to challenge the underlying tax liability).

Similarly, in an action for wrongful levy brought by a third party pursuant to 26 U.S.C. §7426 , the merits of the tax assessment are not subject to attack. Morris v. United States [86-2 USTC ¶9728 ], 652 F.Supp. 120, 122 (M.D. Fla. 1986), aff'd, [87-1 USTC ¶9241 ] 813 F.2d 343 (11th Cir. 1987). The IRC provides that for purposes of such an action, "the assessment of tax upon which the interest or lien of the United States is based shall be conclusively presumed to be valid." 26 U.S.C. §7426(c) .

I conclude that as a general proposition, collateral attacks by third parties should not be permitted under the instant circumstances. ¹⁰ If one considers the tax assessment as similar to a judgment, see Bull v. United States [35-1 USTC ¶9346 ], 295 U.S. 247, 260 (1935), this prohibition is analogous to practices protecting the finality of judgments. See Myers [81-2 USTC ¶9490 ], 647 F.2d at 604.

The prompt collection of taxes is an essential governmental function, and to allow third parties "to raise the entire history of the tax assessment in question in a full adversary proceeding would result in a substantial impediment to a process that is designed to be swift and efficient." In re Campbell [85-1 USTC ¶9406 ], 761 F.2d at 1186 (action arising from order authorizing entry to effect levy). ¹¹ I decline to erect such an impediment in this proceeding.

B. Due Process

The Judgment Creditors argue that "fundamental fairness" embodied in concepts of due process requires that they have an opportunity to review and raise objections to the IRS assessment against Johnson. Opp. to S.J. for U.S. , docket no.20, at 4; see also Mem. on Motion to Compel, docket no. 19, at 4. They do not cite any authority in support of this position.

The conclusion that the Judgment Creditors are precluded from contesting the validity of the tax assessment which gave rise to the federal tax lien does not create a due process problem. Their attachment lien fails to achieve priority precisely because it was too contingent to qualify as a property interest sufficient to displace another. Cf. Security Trust [50-2 USTC ¶9492 ], 340 U.S. at 50 (attachment is merely a lis pendens notice that a right to perfect a lien exists). It is the existence and superiority of the federal tax lien (not the legitimacy of the assessment) which results in their loss. The Judgment Creditors are entitled to a judicial determination of the nature and priority of the respective interests claimed by the other defendants, including the United States . However, due process does not require the underlying tax assessment to be opened to collateral attack by a third party. Myers [81-2 USTC ¶9490 ], 647 F.2d at 604. In fact, allowing such a collateral attack makes no more sense than opening the judgment obtained by the Judgment Creditors to attack by one of the other defendants whose claim is junior.

Nothing precludes the Judgment Creditors from contesting the validity or superiority of the federal tax lien. As the Myers court noted with respect to contesting a levy, a person with a competing claim is

entitled to show that the liens had not properly attached to the property in question, that the liens had been discharged through foreclosure and sale of the property, that the liens had been discharged through payment of the tax assessed, that his own interest in the property was superior in rank to the federal liens[], and that the government had failed to follow the procedural requirements of the [Federal Tax Lien] Act--in short, [he] was entitled to raise virtually any legitimate and available objection he might have had to the validity of the [lien]. What he could not do is challenge the merits of the tax assessment itself . . . .

[81-2 USTC ¶9490 ], 647 F.2d at 603; see also Arford v. United States, 934 F.2d 229, 232 (9th Cir. 1991) (procedural aspects of tax liens may be challenged in quiet title actions under §2410).

The Judgment Creditors have not raised direct objections to the validity or superiority of the federal tax lien, see, Mem. on Motion to Compel, docket no. 19, at 3 (position of the U.S. is correct, assuming that Johnson "in fact owes or should owe the taxes assessed. Thus the only issue in this case is whether the taxes were properly assessed and are owed by the taxpayer . . . ."). I conclude that the objections of the Judgment Creditors to the motion for summary judgment by the United States are without merit.

C. Notice

Although one stated objection of the Judgment Creditors is that the Government failed to present evidence that they were notified of the assessment against Johnson, it is not clear what the Judgment Creditors think is required or on what basis. In order for a tax lien to arise, the IRS must notify the taxpayer concerning the assessment to make demand for payment. 26 U.S.C. §6321 . No other notification is necessary for the lien to be established, although notice of the lien must be filed in order for the lien to be valid against certain persons. 26 U.S.C. §6323 . Once the lien is recorded in the manner required by §6323(f) , the appropriate priority attaches regardless of whether competing claimants have actual notice or knowledge of the lien. 25 Fed. Tax Coordinator 2d (Res. Inst. Am.) ch. V, §6316 (citing Dimmitt & Owens Fin. Inc. v. Unique Indust. Inc. [84-1 USTC ¶9228 ], 589 F.Supp. 14 (D. Ill. 1983), aff'd, [86-1 USTC ¶9326 ], 787 F.2d 1186 (7th Cir. 1986)). In short, although the government has not presented any evidence that the Judgment Creditors were given notice of the assessment other than by means of the filing, none is required.

D. Motion to Compel

The document requests of the Judgment Creditors include such things as "[t]he entire IRS file relating to any tax which forms the basis for any federal tax lien assessed against Raymond A. Johnson for taxes which are sought to be collected through payment of the funds held by the Plaintiff in this action." Request For Production No. 6. The United States objects to such requests as overbroad, burdensome, and not likely to lead to any relevant information which is not privileged. Cf. Fed. R. Civ. P. 26(b)(1) (information relevant to the subject matter of the action is generally discoverable).

In support of their motion to compel the production of these documents, the Judgment Creditors represent that they are necessary to permit them to review the IRS assessment against Johnson to determine if it is excessive or improper. Since these issues are entirely beyond the scope of the instant interpleader action and are of no possible consequence to it, the United States should not be compelled to produce the requested documents.

III

For the reasons discussed above, I ALLOW the motion of the United States for Summary Judgment and DENY the motion of the Judgment Creditors to compel discovery. Furthermore, because the claim of the United States has been established as senior on the basis of uncontested facts, the summary judgment motions of the Commonwealth and the Judgment Creditors are DENIED to the extent they challenge the superiority of the lien of the United States . The remaining issues, bearing on priority relative to other parties, are moot because the federal assessment is sufficient to absorb the interpled surplus. The clerk shall enter judgment for the United States awarding the entire interpled amount.

¹ Johnson never answered the complaint commencing this action.

² In addition, several defendants seek a determination of material facts which exist without substantial controversy, see Fed. R. Civ. P. 56(d), and there are several motions to extend deadlines already past.

³ The United States represents that the balance due on this assessment, including accrued interest, amounted to $61,502.38 as of November 19, 1990 . No party has raised the question of whether the priority accorded the lien should extend to interest accrued subsequent to the date the lien arose. The code itself, although failing to distinguish clearly between pre- and post-demand interest, suggests that post-demand interest is included. Section 6321 states:

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.

See also United States v. Vermont, 377 U.S. 351, 352 (1964) (Vermont statute which refers to the amount of the tax lien as "including interest after such demand" is "worded in terms virtually identical to the provisions of th[e] federal statute[]").

Section 6303(a) requires that the notice state the amount at issue, although the form of the notice filed to "validate" the lien is not prescribed by the statute itself, see §6323(f)(3) . The form, however, is defined by IRS regulations as Form 668, see 26 CFR §301.6323(f)-1(c) . Although the copy of Form 668 actually filed in this case states that the unpaid balance as of the date of assessment was §51 ,263.21, that form warns that the lien includes "the amount of these taxes, and additional penalties, interest, and costs that may accrue." See Mem. of U.S. , docket no. 12, ex. B. In addition, §6103(2) allows for disclosure of the amount of an outstanding lien "to any person who furnishes satisfactory written evidence that he has a right in the property subject to such lien or intends to obtain a right in such property." Consequently, I conclude that the amount of the lien in favor of the United States includes the subsequently accrued interest and therefore exceeds the interpled funds.

⁴ Memoranda filed in support of these motions for summary judgment concern the priority of various claims made by the moving defendants. The relative priority of all claims inferior to that of the United States is moot, since the superior claim of the United States exhausts the interpled funds.

⁵ Section 6323(b) protects certain claimants even if their claim arises after the tax lien is properly recorded. No such "superpriorities" are of concern in the instant case.

⁶ In its motion for summary judgment, the Commonwealth relies in part on an assessment against Kenbo Inc., a corporation for which Johnson was allegedly the responsible officer. Based on a Massachusetts statute, the Commonwealth argues that such an assessment is deemed to be assessed against Johnson personally. Mem. of Commonwealth, docket no. 4, at 5 (citing Mass. Gen. L. ch. 62C, §31A). A notice of lien against Kenbo, Inc. was filed on November 30, 1988 . Thus, the Commonwealth suggests that its lien against Johnson's assets is effective against all subsequent creditors (etc.) as of November 30, 1988 . Id. at 6 (citing Mass. Gen. L. ch. 62C, §50(b) ).

However, the "deemed assessment" against the responsible officer provided for in §31A requires that the Commonwealth notify a liable individual of the assessment against the corporation. Heritage Bank for Savings v. Doran, 399 Mass. 855, 861 (1987). Not only has the Commonwealth failed to present evidence that such notice was directed at Johnson personally (the Loconto Aff. is inadequate in this and several other respects; including the fact that the notices in question are not attached as exhibits), it does not even make such an allegation. Furthermore, even if under Massachusetts law a lien against property personally owned by Johnson could be created simply by a notice of assessment against Kenbo, Inc., it is doubtful that such a lien would be sufficiently "choate" under federal standards to have priority over a federal tax lien. See New Britain [54-1 USTC ¶9191 ], 347 U.S. at 84 (requiring certainty with respect to the identity of the lienor and the property subject to the lien).

⁷ In opposing the motion of the Commonwealth for summary judgment, South Shore maintains that under Massachusetts law its lien will be superior to that of the Commonwealth if it perfects its attachment by obtaining a judgment and execution and by properly levying thereon. Opp. of South Shore , docket no. 5, at 3 (citing Kahler v. Marshfield, 347 Mass. 514 (1964)). However, regardless of the law in Massachusetts , Security Trust specifically rejected this very doctrine of "relation back" as ineffective against a federal lien. [50-2 USTC ¶9492 ], 340 U.S. at 50. Thus even if, under Massachusetts law, South Shore as a successful attaching creditor would stand in the same position as a purchaser for value with respect to the tax lien of the Commonwealth, see Kahler, 347 Mass. at 516, no such rule would apply to the tax lien of the United States, whose priority is determined by federal law.

⁸ The Judgment Creditors argue that they had rights as a secured creditor as of December 7, 1988 because on that date their attachment was recorded and it was later perfected by levying the execution, pursuant to Mass. Gen. L. Ch. 223, §59 , within 30 days. They argue that a properly perfected attachment places them "in the position of a purchaser for value with an 'immediate lien' as of the date of the attachment." Opp. to Commonwealth, at 3, (citing Kahler v. Marshfield, 347 Mass. 514 (1964)). Thus, because the state tax lien was not valid against a judgment creditor until notice was filed on August 24, 1989, see Mass. Gen. L. ch. 62C, §50 , the claim of the Judgment Creditors allegedly has priority over the lien of the Commonwealth. Regardless of its validity under Massachusetts law, however, this means of "relation back" to an attachment prior to the assessment cannot defeat the federal tax lien which the IRS assessment gives rise to. See supra note 8.

⁹ The authorities, however, are not entirely univocal. See generally Annotation, Right to Attack Merits of Assessment, in Proceeding Under 26 U.S.C. §7403 to Enforce, or Under 28 U.S.C. §2410 to Discharge. Federal Tax Lien, 100 A.L.R.2d 869 (1961 & Supp. 1983); Conclusiveness of the Merits of a Tax Assessment and the Congressional Policy of Summary Tax Collection, 71 Yale L.J. 1329 (1962).

¹⁰ The Second Circuit has directly considered the scope of the inquiry into the validity of tax liens by a third party under §2410. See Pipola v. Chicco [60-1 USTC ¶15,276 ], 274 F.2d 909 (2d Cir. 1960). Pipola held that in a §2410 action, purchasers of a taxpayer's realty could not question the assessment which was the basis of a lien on the property. Shortly thereafter, the Second Circuit announced Pipola was overruled in an opinion which held that a taxpayer may challenge the merits of a tax assessment in an action to enforce tax liens. United States v. O'Connor [61-2 USTC ¶9495 ], 291 F.2d 520, 527 (2d Cir. 1961) (in suit under §7403 , assessment is presumptive but not conclusive). O'Connor created considerable confusion and some disagreement as to the extent to which it overruled Pipola. Compare. e.g., Quinn v. Hook [64-2 USTC ¶9609 ], 231 F.Supp. 718, 721 (E.D. Pa. 1964) (district court opinion in Pipola has survived as the correct interpretation of §2410), aff'd, [65-1 USTC ¶9273 ], 341 F.2d 920 (3d Cir. 1965) and Cooper Agency, Inc. v. McLeod [64-2 USTC ¶9776 ], 235 F.Supp. 276, 284 (E.D.S.C. 1964) (O'Connor court did not intend to overrule holding in Pipola that non-taxpayer could not commence action under §2410 and inquire into merits of assessment), aff'd, [65-2 USTC ¶9603 ], 348 F.2d 919 (4th Cir. 1965), with Sonitz v. United States [63-2 USTC ¶9715 ], 221 F.Supp. 762 (D.N.J. 1963) (plaintiff in §2410 action may challenge merits of tax assessment) and Falik v. United States [62-2 USTC ¶9751 ], 206 F.Supp. 181 (E.D.N.Y. 1962) (third party may attack validity of lien, as distinct from assessment, under §2410), rev'd, [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965).

The Pipola court had reasoned that a challenge to the assessment by a third party was prohibited because the taxpayer himself could not test the validity of the assessment in a government action to enforce under §7403 . While O'Connor undermined the stated rationale of the Pipola decision, it did not necessarily dictate a different result. In fact, although it declined to address the issue as applied to the same circumstances as Pipola, the Second Circuit has more recently refused to permit a taxpayer to initiate a suit under §2410 to challenge the validity of a tax assessment underlying a lien. Falik v. United States [65-1 USTC ¶9295 ], 343 F.2d 38 (2d Cir. 1965) (§2410 was not meant to enable challenges to tax assessments); cf. Remis v. United States [59-1 USTC ¶9458 ], 172 F.Supp. 732, 733 (D.Mass. 1959) (Congress passed §2410 to enable complete relief in certain circumstances, and not to create new jurisdiction in the federal courts to challenge tax assessments), aff'd, [60-1 USTC ¶9183 ], 273 F.2d 293 (1st Cir. 1960).

¹¹ Section 2410 waives the sovereign immunity of the United States so as to permit its joinder as a party in certain cases where a lien is involved. It seems unlikely that this waiver extends to permit an attack upon the merits of a tax assessment upon which a lien is based; for it to do so would undermine the general policy of judicial noninterference with tax collection.

 

 

[87-2 USTC ¶9633] W&J Propane Gas, Inc., a corporation, Plaintiff v. Casey Propane Gas Co., Inc., a corporation, Brantley Bank & Trust Co., a banking corporation, State of Alabama (Department of Revenue) and United States of America (Department of Treasury-Internal Revenue Service), Defendants

U.S. District Court, Mid. Dist. Ala., No. Div., Civ. 86-H-511-N, 10/9/87

[Code Sec. 6323 --Result unchanged by the Tax Reform Act of 1986]

Interpleader: Liens for taxes: Creditors' priority: Security interest holders: State law: Alabama: Interest: Attorney's fees.--In an interpleader action, a bank was found to have priority over the claims of the IRS and the State of Alabama because it held a valid and perfected security interest in an assigned promissory note; furthermore, the bank was entitled to interest at 3% above the New York Prime. Under Alabama law, the note was validly assigned to the bank as collateral for a loan and any defects in the assignment were not fatal to the assignment. As interested third parties, the federal and state governments did not have standing to challenge the validity of the assignment or the corporate approval of the assignment. Even if the challenges were successful, the bank had perfected its security interest and gained priority at the time that it had taken possession of the note. An ambiguity in the rate of interest stated on the face of the note was resolved under Alabama law. The corporation which brought the action was entitled to costs and attorney's fees.

MEMORANDUM OPINION

HOBBS , Chief District Judge:

Plaintiff W&J Propane Gas, Inc. filed an interpleader suit in Butler County, Alabama alleging that it owed a large outstanding balance on a $1,000,000 promissory note, payable to the order of Casey Propane Gas Company, Inc. Plaintiff contended that the Brantley Bank and Trust Co. claimed that payments on the note should be made to it by reason of an assignment of the note by Casey Propane. In addition, the interpleader alleged that the United States Internal Revenue Service and the State of Alabama had notified the plaintiff that they had claims to the note. The interpleader suit sought a judicial determination as to the priority of the claims with respect to the note as between the Bank, the IRS, and the State of Alabama .

The Internal Revenue Service removed this case to federal court. This Court has jurisdiction under Title 28, U.S.C. §1442 . A nonjury trial was held on the interpleader on July 2, 1987 . Having considered the evidence presented at trial, this Court concludes that the Bank's claim has priority over the claims of the Internal Revenue Service and the State of Alabama , and that the Bank is entitled to interest on the note at 3 percent above New York Prime. The Court now enters this memorandum opinion pursuant to Rule 52 of the Federal Rules of Civil Procedure.

FACTS

On March 2, 1984, W&J purchased the assets of Casey Propane and as part of the purchase price gave a promissory note and mortgage to Casey Propane in the sum of $1,000,000 with monthly installments of $11,365.97 (hereinafter W&J note). On March 9, 1984, on behalf of Casey Propane, J.W. Casey borrowed $100,000.00 from Brantley Bank in order to facilitate the sale of assets from Casey Propane to W&J. Mr. Casey signed a promissory note due in three months for $101,004.11 payable to the bank at an interest rate of 13 percent. As security for the loan, on behalf of Casey Propane, J.W. Casey executed a security agreement granting a security interest to Brantley Bank in the W&J note. In addition, on behalf of Casey Propane, J.W. Casey agreed to assign the W&J note to Brantley Bank. J.W. Casey & Brantley Bank recorded their agreement to assign on the back of the W&J promissory note and mortgage. ¹ W&J was notified of the assignment shortly thereafter.

On June 29, 1984, on behalf of Casey Propane, J.W. Casey executed a ninety-day promissory note which was made payable to the Bank in the amount of $310,586.30. ² Like the first note, this second note identified the W & J note as collateral and contained express language granting a security interest to Brantley Bank. However, unlike the first note and security agreement, which was signed only by J.W. Casey without any indication that he was acting in an agency capacity, the principal's name, Casey Propane, was typed above J.W. Casey's signature on this second note.

On September 29, 1984 , the June 29 note was stamped "Paid by Renewal" and a new ninety-day note in the amount of $305,183.56 was executed by J.W. Casey. Like all of the notes which were executed thereafter, this renewal note was signed by J.W. Casey only, without any indication of J.W. Casey's representative capacity or Casey Propane's name. In addition, like all notes executed by Brantley Bank and J.W. Casey, this note expressly granted a security interest in the W & J note. The June 29 note was renewed at ninety day intervals until November 2, 1985 . Each renewal note was substantially identical to the September 29 note, with the exception that the last note stated that the interest rate on the note would be "12.5 percent or 3 percent above New York Prime." All other notes identified a fixed interest rate.

On May 27, 1985 , an assessment against Casey Propane for uncollected taxes was noted by the federal government. The bank directed W & J Enterprises to make payments on the W & J note directly to the bank on June 3, 1985 . On April 7, 1986 , the federal government levied on the W & J note to satisfy its previous assessment. On April 16, 1986 , the Alabama Department of Revenue sought to enforce its state tax lien against Casey Propane by issuing a writ of garnishment to W & J Enterprises. The Alabama Department of Revenue admits that it obtained a writ of execution against Casey Propane after the Internal Revenue Service obtained its writ of execution against Casey Propane. The Alabama Department of Revenue admits that the Internal Revenue Service has a prior claim to the W & J note, but it joins the Internal Revenue Service in disputing the priority of Brantley Bank's claim. The Alabama Department of Revenue admits that if Brantley Bank's claim is prior to the Internal Revenue Service's claim, then the Bank's claim is prior to the Alabama Department of Revenue's claim.

Casey Propane Gas Company, Inc. was a family owned corporation. Although J.W. Casey was a named vice president, he was the person who routinely acted on behalf of the corporation. Mr. Casey acted often as though he was the corporation. For example, in his personal bankruptcy he has listed this debt to the bank as his personal debt. He has also listed the W & J note as his personal asset.

Loan proceeds from the banks were paid directly to J.W. Casey. To facilitate the sale of the assets of Casey Propane to W & J, Mr. Casey wrote personal checks to finance the deal. The loan checks from Brantley Bank were made out to J.W. Casey and deposited in J.W. Casey's account. These transactions amounted to a juggling of accounts to expedite the sale of Casey Propane assets to W & J.

The Bank, J.W. Casey, and Casey Propane had a long course of dealings during which Mr. Casey had borrowed money on behalf of the corporation dozens of times. To say that these dealings fell short of careful documentation as to the true nature of the dealings between these parties would be an understatement. Apparently, J.W. Casey had signed other notes at the Bank pledging as security the assets of Casey Propane, notes bearing only his signature as the obligor. However, the president of the Bank and J.W. Casey have testified unequivocably that the debt for which the mortgage note was pledged was the debt of Casey Propane. Casey Propane agrees that its right to the W & J note exists only to the extent the value of the W & J note exceeds the amount of its indebtedness to Brantley Bank, as evidenced by the November, 1985 note executed by J.W. Casey. No stockholder of Casey Propane has contended that the debt is other than the debt of Casey Propane.

ISSUES

I. Whether the liens of the IRS and the State of Alabama Department of Revenue have priority over the claim of the Bank to the W & J note.

II. Whether the Bank is entitled to a rate of interest of 12.5 percent or a rate of interest equivalent to 3 percent above New York prime.

I. PRIORITY OF THE COMPETING CLAIMS TO THE W & J NOTE

26 U.S.C. §6321 imposes a lien for unpaid federal taxes upon "all property and rights to property, whether real or personal" belonging to the taxpayer. See generally 35 Am Jur2d §10, at 17; Young, Priority of the Federal Tax Lien, 34 U. Chi. L. Rev.723 (1966). Where, as here, the federal government asserts its tax lien, the threshold question is whether and to what extent the taxpayer had "property" or "rights to property" to which the lien could attach under the statute.Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509 (1960). In answering this question, federal courts must look to state law, because state law determines the nature of the taxpayer's legal interest in the property sought to be reached by the statute. Meyer v. United States [64-1 USTC ¶9111 ], 375 U.S. 233 (1963); Prewitt v. United States[86-2 USTC ¶9513], 792 F.2d 1353 (5th Cir. 1986).

A. Valid Assignment of W & J Note from Casey Propane to Brantley Bank. Brantley Bank argued that the federal government could not levy on the W & J note to the extent the note had been assigned as collateral for the debt of Casey Propane to Brantley Bank. Brantley Bank argued that it had priority in the W & J note to the extent of Casey Propane's debt to the Bank, secured by the note.

In Alabama, when collateral is duly assigned as security for a debt the collateral holder has title to it, which the assignor, or one claiming through the assignor, cannot abridge. Darling Shop of Birmingham v. Nelson Realty Co., 262 Ala. 495, 79 So.2d 793, 797 (1955). To the extent that the collateral is assigned as security, the assignor's only authority over the collateral, unless the assignor has the consent of the assignee, is to pay the debt and then the collateral is reinvested in him. Id. Because the federal government's rights to the taxpayer's property cannot be greater than the taxpayer's rights, if Casey Propane has validly assigned the collateral, the federal government is precluded from levying on the note to the extent it has been assigned as collateral. See B.F. Goodman Co. v. Simco, Inc., 406 F.Supp. 200 (M.D. Ga. 1976).

Under Alabama law, in order to have a valid assignment, the assignor must indicate the intention to presently assign his property rights to the assignee. Erika, Inc. v. Blue Cross & Blue Shield of Alabama , 496 F.Supp. 788, 789 (N.D. Ala. 1980). In ascertaining the intent of the parties, the Court must look to the agreement embodying the assignment and to the circumstances attending the execution of the agreement.Id. See also 6A Corpus Juris Secundum, Assignments §43 at 655.

On the back of the W & J mortgage note, the following words were typed: "Assigned to Brantley Bank & Trust Company by Casey Propane Gas Co., Inc." J.W. Casey signed his name below these typed words and indicated that he was signing as the president of Casey Propane. Although the principal's name, Casey Propane, is not indicated in J.W. Casey's signature, Casey Propane is expressly represented as granting an assignment in the words of assignment. The fact that J.W. Casey is indicated as President of Casey Propane when in fact he is Vice President is not fatal to the assignment. Both parties intended J.W. Casey to assign in a representative capacity. The substance of the assignment, not the form, determines the validity of the assignment.

Brantley Bank gave notice of the assignment to the president of W & J Enterprises and later directed him to make payments to the bank. W & J received notice of the bank's assignment almost one year prior to receiving notice of the Federal government's tax lien. None of the parties to the transactions has ever complained of its arrangement. The W & J shareholders acquiesced in the transaction and accepted the benefits thereof. ³

Security agreements were executed which identified the assignment and granted express security interests in the W & J note. Casey Propane, Brantley Bank, and J.W. Casey all agree that Casey Propane assigned the note. Only the federal and state governments, as interested third parties seeking to undo the transaction almost two years after its completion, contest the parties' intent to assign.

The Government argued that Alabama Code Section 10-2A-161 must be met before this assignment can be valid. Under this section, the sale or pledge of an asset, other than in the regular course of business, or the sale, or pledge, of all, or substantially all, of a corporation's assets, must be approved by the board of directors and ratified by the shareholders. For all practical purposes, on March, 9, 1984 , the W & J note was the only asset of Casey Propane Gas Co., Inc. Furthermore, the act of pledging a one million dollar note was not in Casey Propane's regular course of business. However, Alabama Code, Section 10-2A-161 is for the benefit of stockholders, and only stockholders may claim benefits on account of the statute's nonobservance, not the corporation itself, nor one who stands in its shoes. Autauga Co-Operative Leasing Ass'n. v. Ward, 250 Ala. 229, 33 So.2d 904, 907 (1948). In fact, once the corporation acquiesces, the corporate stockholders are estopped to deny the assignment.Hoene v. Pollak, 118 Ala. 617, 24 So. 349 (1898).

The Court finds that Casey Propane intended to assign the W & J note as collateral for the loan it received from Brantley Bank. Casey Propane's intent to assign is shown not only by a satisfactory writing but also by surrounding circumstances indicating acquiescence and corporate approval of the assignment.

B. Casey Propane Granted a Valid Security Interest in the W & J Note to Brantley Bank. Even if the taxpayer, Casey Propane, had not validly assigned the W & J note as security, the federal government would not have superior claims to the W & J note if Casey Propane had granted a valid security interest in the W & J note. Once the nature of the taxpayer's property interest is determined, priority is determined by federal law. See 26 U.S.C. §6323 (1987). A security interest ⁴ which is valid and perfected under state law, has priority over a federal tax lien if first in time. Id. at §6323(a) , (h)(I)--definition. See generally Coogan, The Effect of the Federal Tax Lien Act of 1966 Upon Security Interests Created Under the Uniform Commercial Code, 81 Harv. L. Rev. 1369 (1968).

Under Alabama law, a security interest is valid when ". . . the debtor has signed a security agreement which contains a description of the collateral value has been given and the debtor has rights in the collateral." Ala. Code §7 -9-203(1)(a)-(c) (1975). Parol evidence is not admissible to vary the terms of a written security agreement, so that it conforms to the requirements of Alabama Code Section 7 -9-203.In re Delta Molded Prods., Inc., 416 F.Supp. 938 (N.D. Ala. 1976), aff'd, 571 F.2d 957 (5th Cir. 1978). However, whether value has been given and whether the debtor has rights in the collateral are questions of fact which the trial court must decide.

Because Casey Propane was the holder of the W & J note made to its order, it was the party which had rights in the collateral note. Looking at the entire series of transactions evidencing the loans from Brantley Bank, the documentation therefrom, and the circumstances attending those transactions, the Court finds that Casey Propane was the debtor of the loans from Brantley Bank. As debtor of the loans, Casey Propane could transfer its rights to the W & J note as security for the loan proceeds.

The Court considered the following factors in determining that Casey Propane was the debtor of the loans from Brantley Bank. First and foremost, all parties to the loan transaction, Brantley Bank, as lender, J.W. Casey, as agent, and Casey Propane, as principal, agree that Casey Propane was the debtor of the loans from Brantley Bank. Only the federal and state governments, third parties seeking to reinterpret the agreement of the parties nearly two years after its completion, contest that Casey Propane, Inc. was the debtor of the loans from Brantley Bank. Second, Brantley Bank was in possession of a corporate resolution from Casey Propane Gas Co., dated August 21, 1980 , stating that J.W. Casey, as Vice President of the corporation, was authorized to borrow money on behalf of the corporation and to pledge any property of the corporation for the purpose of securing payment of the money so borrowed.

Third, evidence introduced at trial showed that J.W. Casey managed the daily affairs of Casey Propane, handling all of its financial and other dealings entirely. Casey Propane held out J.W. Casey as its agent, with the authority to borrow money and pledge assets on its behalf. Brantley Bank was entitled to rely on J.W. Casey's actions as representative of Casey Propane. Fourth, Casey Propane ratified J.W. Casey's loans from Brantley Bank by accepting the benefits of the loans in financing the sale of assets from Casey Propane Gas Co. to W & J Enterprises. Finally, Casey Propane shareholders acquiesced in the loans taken on its behalf by J.W. Casey by failing to object thereto when they had full knowledge of the transactions. This is shown by the fact that payments by W & J were used to pay the interest on the note and the reduce the indebtedness on the note.

The federal government argued that the security agreement granting a security interest to Brantley Bank was invalid because it was improperly signed, even though it was proper in form in other regards. The federal government cited several Alabama cases that discussed the adequacy of the debtor's signature in the context of Alabama Code Section 7 -3-403. This section and the cases cited address whether an agent's signature is adequate to bind the principal. See,e.g., Legg v. Kelley, 412 So.2d 1202 ( Ala. 1982);Wurzburg Bros. v. Coleman, 404 So.2d 334, 336 ( Ala. 1981). The instant case is different than those relied on by the Government in that neither the principal nor the agent to this transaction disputes that the agent's signature is adequate to bind the principal; only the federal and state governments dispute the validity of the signature.

The adequacy of the debtor's signature for purposes of taking a valid security interest under Alabama Code Section 7 -9-203 is different from the adequacy of the debtor's signature for purposes of Alabama Code Section 7 -3-403. The purpose of Alabama Code Section 7 -3-403 is to encourage certainty and definiteness in the law of commercial paper.Wurzburg Bros., Inc. v. Coleman, 404 So.2d 334, 336 (1981). Takers of a negotiable instrument should be able "to tell at a glance whose obligation they hold." Wurzburg Bros., 404 So.2d at 336 (quoting J. White & R. Summers, Uniform Commercial Code, at 13-2) (1972). The purpose of Alabama Code Section 7 -9-203 is to require memorialization of the agreement of the parties and to protect the debtor against unauthorized security interests.

On behalf of Casey Propane, J.W. Casey executed several security agreements on the same documents which contained the promissory notes. The first security agreement merged into the second security agreement and thereafter the security agreement was renewed at ninety day intervals until November 2, 1985 . The last security agreement was simply signed J.W. Casey, without any indication of representative capacity or name of principal. However, this security agreement referred to a prior security agreement executed June 29, 1984 in which the name of the principal, Casey Propane, was typed above the signature of the agent J.W. Casey.

The Alabama courts have not previously considered the adequacy of a corporate debtor's signature under Alabama Code Section 7 -9-203. However, the caselaw from other jurisdictions is instructive. See generally Sufficiency of Debtor's Signature on Security Agreement or Financing Statement Under UCC §§9-203 and 9-402, 3 ALR4th §9, at 526-29.

The security agreement signature requirement is primarily a statute of frauds. Murray v. Conrad, 346 N.W.2d 814, 819 ( Iowa 1984). Thus, "any symbol executed or adopted by a party with the present intention to authenticate a writing" satisfies the Alabama Commercial Code. Alabama Code §7 -1-201(39) (1975) (defining signature). The omission of the name of the corporate debtor or the representative capacity of the corporate agent from the debtor's signature has normally been found to be insufficient to invalidate the security agreement where the circumstances show that the authorized agents signed their names intending to bind the corporation. See, e.g., In Re E J M, Inc., 28 U.C.C. Rep. Serv. 192 (Bankr. Ga. 1979); In Re Bro Cliff, Inc., 8 U.C.C. Rep. Serv. 1144 (Bankr. W.D. Mich. 1971); In Re Reid Communications, Inc., 21 U.C.C. Rep. Serv. 1436 (Bankr. W.D. Va. 1977). See generally 1 Bender's Uniform Commercial Code Service §2.07[1] (1985). See also J. White & R. Summers,Handbook of the Law Under the Uniform Commercial Code, 913 (2d ed. 1980) (when an authorized agent of a company has executed a security agreement, the absence of the true business name from the signature should not defeat the security interest).

The issue surrounding the sufficiency of the debtor's signature is whether the signature was executed or adopted by the debtor with the present intention to authenticate the writing. Alabama Code §7 -1-203(39) (comments) (1975). In the context of the corporate agent's signature, this issue is best analyzed as a question of whether the corporation intended to be the debtor of the loan which was given in exchange for the grant of collateral. This form of analysis allows the principal corporate debtor's consent to the security agreement to be shown apart from the corporate agent's signature. See 1 Bender's Uniform Commercial Code Service §2.07[2][b][ii] (1985). The Court has analyzed this issue already, finding that Casey Propane intended to be the debtor of the loans from Brantley Bank and intended that J.W. Casey execute the security agreement on its behalf in order to secure the loans.

Having executed a valid security agreement, Brantley Bank took possession of the promissory note from W & J Enterprises. Alabama Code, Section 7 -9-305 provides that a security interest in a promissory note is perfected when a security agreement is properly executed and either a proper financing statement is filed or the secured party takes possession of the collateral. Thus, when Brantley Bank took possession of the promissory note of W & J Enterprises, it perfected its security interest and gained priority as to the collateral over all after-acquired liens, including the federal and state tax liens at issue.

II. An Interest Rate Equivalent to Three Percent Above New York Prime is Properly Chargeable to the Amount of Outstanding Indebtedness Owed Brantley Bank

The only note which is outstanding, the November 1985 promissory note, states that the note's interest will be computed "at the rate of 12.5% or 3% above New York Prime." The November 1985 note fails to state when either interest rate will apply. The note is ambiguous on its face as to whether interest will be computed at the higher or the lower rate.

The Court must determine the parties' interest, as embodied in the note, in ascertaining the interest which is properly chargeable to the November 1985 note. Because this resolution is substantive, and this is a diversity case, the law of Alabama controls. Erie R.R. v. Tompkins, 304 U.S. 64 (1938).

Because the contractual term at issue is ambiguous, parol evidence is admissible under Alabama law to resolve this ambiguity. McClendon v. Eubanks, 249 Ala. 170, 30 So.2d 261 (1947). Alabama has adopted the majority view of contract interpretation, as propounded by Professor Williston. See,e.g., Wagar v. Marshburn, 241 Ala. 73, 1 So.2d 73 (1941);Pierce v. Lyndall, 237 Ala. 432, 187 So. 628 (1939). Under the Williston view, "it is not primarily the intention of the parties which the court is seeking, but the meaning of the words at the time and place when they were used." 4 Williston §5613 , at 583. See also Calamari & Perillo, The Law of Contracts §3 -10, at 118-121.

Both parties to the contract at issue, the November 1985 note, have testified that the interest rate on the note was 12.5%. The construction put on the contract by the parties is important in construing an ambiguous contractual term, but it is not dispositive.Taylor v. Riley, 272 Ala. 696, --, 133 So.2d 869, 872 (1961). The Court finds that other primary rules of construction are more dispositive of the meaning of the contractual term at issue.

The Court may examine the parties' prior course of dealing in resolving the ambiguity in the November 1985 note.Ott v. Fox, 362 So.2d 836 ( Ala. 1978). On behalf of Casey Propane, J.W. Casey negotiated and executed several promissory notes with the bank, notes which represented the debt of Casey Propane to the bank. Except for the November, 1985 note, all of the notes were renewal notes which were negotiated at ninety-day intervals. Each renewal note stated a fixed interest rate, which was 3 percent above New York Prime. The November 1985 note was a demand note which was negotiated at a time when 12.5 percent was 3 percent above New York Prime.

For a period extending over a year and a half, the parties had negotiated ninety-day promissory notes which contained indentical terms, except that the interest rates on the notes were adjusted so that they were equivalent to 3 percent above New York Prime. At the time the parties negotiated the November 1985 note, "12.5%" and "3% above New York Prime" were equivalent rates of interest. Because the November 1985 note was a demand note, the Court finds that the words "or 3% above New York Prime" were added to the fixed rate computation to insure that future interest on the note would be consistent with the interest computations on all previous notes.

In construing contractual terms, Alabama courts have construed ambiguous terms most strongly against the party who framed or prepared them. Alabama -Tennessee Natural Gas Co. v. City of Huntsville , 275 Ala. 184, --, 153 So.2d 619, 628 (1963). The party who prepared this note, Brantley Bank, has argued that the ambiguous terms at issue should be construed to grant a rate of interest which exceeds the rate they received on all previous notes, 3 percent above New York Prime.

Certainly, Brantley Bank should have been able to foresee the inherent ambiguity in the terms at issue. Brantley Bank could have avoided this ambiguity in two ways. First, Brantley Bank could have called the demand note and renegotiated another note with different terms. Second, Brantley Bank could have drafted the November 1985 note so that it specified when either rate of interest applied. Equity demands that Brantley Bank should not benefit from its action in drafting a note with an ambiguous rate of interest.

Brantley Bank's argument boils down to a contention that the words "3% above New York Prime" are a nullity and should be disregarded. The Court knows of no reason why the Bank would type words on a note which are a nullity. Those words on a demand note would appear to this Court to offer protection to the debtor in the event the prime rate dropped materially, as it in fact did. Accordingly, this Court finds that 3 percent above New York Prime is the rate of interest which applies to the November 1985 note.

A separate judgment will be entered in accordance with this memorandum opinion.

JUDGMENT

In accordance with the attached memorandum opinion, it is the ORDER, JUDGMENT and DECREE of this Court that:

1. Brantley Bank & Trust Co. has a valid and enforceable claim for a security interest in the $1,000,000 promissory note made payable to the order of Casey Propane Gas Co., Inc., in the amount of $271,883.56 plus interest computed at a rate of three percent above New York Prime. The claim of Brantley Bank & Trust Co. is found to be superior to the claims of the Internal Revenue Service and the Alabama State Department of Revenue.

2. W & J Propane Gas Co. shall make payments on the $1,000,000 note to Brantley Bank & Trust Co. until the debt of Casey Propane Gas Co., Inc. to Brantley Bank & Trust Co. is satisfied in full.

3. W. & J Propane Gas Co. is hereby awarded an attorney's fee in the sum of $800.00, to be paid equally by Brantley Bank & Trust Co. and the Internal Revenue Service.

4. Court costs are taxed equally against Brantley Bank & Trust Co. and the Internal Revenue Service.

¹ The agreement was written as follows: " 6-29-84 Assigned to Brantley Bank & Trust Company by Casey Propane Gas Co., Inc. (Signed) J.W. Casey, Pres."

² Casey Propane previously had passed a corporate resolution of long standing authorizing J.W. Casey to borrow money on behalf of Casey Propane.

³ The proceeds from the loans enabled Casey Propane to complete the sale of its assets to W & J Enterprises.

⁴ 29 U.S.C. §6323(h)(I) reads in pertinent part

The term "security interest" means any interest acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation and (B) to the extent that, at such time, the holder has parted with money or money's worth.

 

 

[72-1 USTC ¶9108]United States of America, Plaintiff v. Philip G. Arneson; Mari Arneson; Jean Arneson; Theodore Arneson, Executor of the Estate of Anton Arneson; Arneson, Berg & Doyle, Ltd.; John Bosshard, Defendants v. The State of Wisconsin Department of Revenue, Applicant for Intervention

U. S. District Court, West. Dist. Wis., 70-C-183, 54 FRD 429, 10/1/71

[Code Sec. 6321--Result unchanged by '69 Tax Reform Act]

Lien for taxes: Intervenor: State: Claim alleged.--Having alleged a claim against property of the taxpayer, the State of Wisconsin was granted leave to intervene in an action to impose a federal tax lien on such property.

John O. Olson, United States Attorney, Madison, Wis., N. John Fliss, State Dept. of Revenue, 1 W. Wilson St., Madison, Wis., for plaintiff. Harry A. Speich, 149 High St., Mineral Point, Wis., Arneson, Berg & Doyle, 522 Hoeschler Bldg., LaCrosse, Wis., Dale Thompson, 202 State St., Madison, Wis., John Bosshard, Hoeschler Bldg., LaCrosse, Wis., for defendants.

Opinion and Order

DOYLE, District Judge:

This is a civil action brought by the United States government for the collection of tax monies allegedly owed to it. Jurisdiction is claimed under 28 U. S. C. §§ 1340, 1345 and 26 U. S. C. 7402, 7403.

[Lien for Taxes]

Plaintiff, in its complaint, alleges inter alia that, on two separate occasions, a delegate of the Secretary of the Treasury "made assessments in compliance with law" against the defendant taxpayers, Philip Arneson, Mari Arneson, and Jean Arneson, for unpaid income taxes, together with interest and penalties thereon, for the taxable period 1961 through 1966; that, upon the making of these assessments, federal tax liens securing payment of the amounts outstanding under such assessments arose in plaintiff's favor in the amount of $53,422.63; that defendant Philip Arneson is an heir and beneficiary of his deceased father, Anton Arneson, whose estate is presently pending in Probate Court of Iowa County, Wisconsin, and with respect to which interest the federal tax liens described aforesaid attach for the amounts of the tax liabilities outstanding; and that defendant Philip Arneson has executed documents attempting to convey and alleviate his interest in the estate of his deceased father.

Plaintiff seeks a judgment that would determine inter alia that the defendant taxpayers are indebted to plaintiff in the sum of $53,422.63; that would enjoin defendant Philip Arneson from assigning, transferring or encumbering his interest in the estate of his deceased father, Anton Arneson; and that would order that the federal tax liens of the plaintiff be foreclosed against the property of Philip Arneson described in the complaint.

[Intervention]

Pursuant to Rule 24(c), F. R. Civ. Pro., the Department of Revenue of the State of Wisconsin has served upon the parties to this action a motion to intervene. In support of this motion, the Department argues that it has a substantial interest in the property of Philip Arneson, which property is "the subject of the action commenced and relief prayed for therein," and that, unless permitted to intervene, it will be impeded in the protection of its interest in the aforesaid property.

Rule 24(a), Fed. Rules of Civil Procedure, provides in pertinent part that:

"Upon timely application anyone shall be permitted to intervene in an action; . . . (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action may as a practical matter impair or impede his ability to protect that interest, unless the applicant's interest is adequately represented by existing parties."

The purpose of the rule has been stated to be to allow intervention as a matter of right "if an absentee would be substantially affected in a practical sense by the determination made in an action . . ." Moore 's Federal Practice (Rules Pamphlet--1968 Ed.) p. 559.

The Wisconsin Department of Revenue has filed a timely motion for intervention. It has claimed an interest in the property of Philip Arneson, property to which plaintiff has asked that its tax liens be applied. And it has claimed that it is so situated that its interest in Philip Arneson's property will not be adequately protected by the existing parties. Intervention must be allowed.

Accordingly, the motion to intervene of the Department of Revenue, State of Wisconsin is hereby granted.

 

 

[42-2 USTC ¶9829] United States of America , Plaintiff, v. The Warren Railroad Company and The Delaware, Lackawanna & Western Railroad Company, Defendants

United States District Court, Southern District of New York, Civil 5-316, November 10, 1942

Property subject to lien: Intervening motions.--Motion of stockholder of Warren Railroad Company to intervene in the case of United States v. Warren Railroad Company, 127 Fed. (2d) 134 [42-1 USTC ¶9391], which had been remanded by the Circuit Court of Appeals for the Second Circuit, with directions, was denied on the basis of the holding in the remanding decision that stockholders of the Warren Railroad Company had for tax purposes purely derivative rights and that the judgments rendered by that decision should stand against them since Warren Railroad Company took no appeal therefrom, but applications to intervene filed by stockholders of the New York, Lackawanna & Western Railroad and the Lackawanna Railroad of New Jersey were allowed under Rule 24(b) of the Federal Rules of Civil Procedure because the cases in which they sought to intervene were new suits and no decision precludes the allowance of intervention, since the applications were timely.

DeForest & Elder, 20 Exchange Pl., New York, N. Y., for Warren R. R. Co. Frederick M. Schlater, 20 Exchange Pl., New York, N. Y., for intervening defendants. Austin J. McMahon, 140 Cedar St., New York, N. Y., for Delaware, Lackawanna & Western R. R. Co. Mathias F. Correa, U. S. Attorney, for plaintiff.

Memorandum

CONGER, D. J.:

Motion denied as to the application of Albert T. Hanby, stockholder of the Warren Railroad Company.

I have no discretion to allow the above named stockholder to intervene.

The Circuit Court of Appeals of this Circuit in the case of the United States v. Warren Railroad Company, 127 Fed. (2d) 134 [42-1 USTC ¶9391] has passed on this precise question in this case. The Circuit Court remanded this case to the District Court with directions that the United States was to file a supplemental petition for a judgment and directed that notice of hearing on the petition be given to the lessor (Warren Railroad Company) and the lessee (Delaware, Lackawanna & Western Railroad Company), and then gave this direction with respect to the stockholders: "Inasmuch as the rights of the stockholders of the lessors are for tax purposes purely derivative, notice of the hearing need not be given to them and, as the lessors have taken no appeal, the judgments against them should stand."

Under the circumstances I feel that I am precluded from permitting the said stockholder to intervene herein.

The application of the stockholders of the New York, Lackawanna & Western Railroad Company and the Lackawanna Railroad Company of New Jersey is granted.

While these cases are similar to the action of the United States v. Warren Railroad company, nevertheless, they are new actions; issue has not yet been joined. I feel that the above case does not prevent my allowing intervention by stockholders in a new suit. In the Warren case the Court in reversing laid down a rule of procedure for that particular case and provided that no notice need by given the stockholders.

The moving stockholders may not be necessary parties to these cases. However, that does not preclude them from intervening if they so desire. Rule 24(b) of the Federal Rules of Civil Procedure permits intervention in any action "(2) where an applicant's claim or defense and the main action have a question of law or fact in common." There are such questions in these cases.

Certainly the stockholders have a vital interest in the outcome of the cases at bar. A judgment against the defendants would be binding on them, at least indirectly. If the government is successful a recovery in its favor would adversely affect the stockholders in that it would have to be paid out of the moneys which the stockholders are accustomed to receive from the Delaware, Lackawanna & Western Railroad Company.

The application to intervene has been timely made. There is no showing that intervention will in any way unduly delay or prejudice the adjudication of the rights of the original parties.

Settle order on notice.