Stock Pledged

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[47-1 USTC ¶9120]Estate of Josef Ben Decker or Jos. B. Decker, Deceased; Appeal of Gertrude M. Decker, et al., Executors, and of Gertrude M. Decker, individually

Supreme Court of Pennsylvania, Western District, No. 127. March Term, 1946, 49 A2d 714, Filed January 6, 1947, Cert. denied, 331 U. S. 807, 67 S. Ct. 1190

Appeal from the Decree of the Orphans' Court of Allegheny County at No. 6543 of 1944.

Lien for taxes: Date of estate tax lien: Validity against pledgee of stock.--Lien for estate taxes is invalid against a prior pledgee of stock, since, even if the exception in favor of such pledgees contained in Code Sec. 3672(b)(1) does not apply where a lien for estate taxes is involved, still the estate tax lien attaches only at decedent's death, and it cannot be effective against a bona fide pre-existing pledgee. Dismissing the government's petition for re-argument, based on the decision of the same court at, 46-2 USTC ¶9399.

Alter, Wright & Barron, 2200 1st Nat. Bank Bldg., Pittsburgh , Pa. , for plaintiff. Weil, Hirsch & Shumaker, 721 Frick Bldg., Pittsburgh , Pa. , for defendant.

On Petition for Re-Argument

HORACE STERN, J.:

Section 3466 of the Revised States, U. S. C. A., Title 31, Section 191, provides for priority of payment to the United States of debts owed by an insolvent decedent's estate. The Act of June 29, 1939, c. 247, Title IV, Section 401, 53 Stat. 882, U. S. C. A. Title 26, Section 3672(b)(1) provides that tax liens in favor of the United States shall not be valid with respect to a security as against any bona fide prior mortgagee, pledgee or purchaser of such security. At the argument of the present case the question presented was whether this latter act superseded, as far as federal tax liens are concerned, the earlier provision for priority in regard generally to debts due the United States , and we held that it obviously had that effect. But appellants have now filed a petition for re-argument in which they rely upon the decision in Detroit Bank v. United States, 317 U. S. 329 [43-1 USTC ¶9224], that U. S. C. A. Title 26, Sections 3670-3672, although apparently covering tax liens in general, do not affect the liens of estate taxes provided for in 53 Stat. 128, U. S. C. A. Ttile 26, Section 827, so far as the necessity of recording such liens is concerned; from this they argue that the exemption in favor of mortgagees and pledgees contained in Section 3672(b)(1) is likewise not applicable where the lien of estate taxes is involved. Even accepting this contention, however, the result in the present case remains unchanged. For, viewing Section 827 as wholly unimpaired by Section 3672(b)(1), it is nevertheless clear that the lien of estate taxes there imposed attaches only at decedent's death, since the gross estate is determined as of that date and the estate tax itself becomes an obligation of the estate at that time: Detroit Bank v. United States, supra; see also cases cited in United States v. Maguire, 42 Fed. Supp. 337, 339. While, therefore, Section 827 creates a general lien upon the decedent's gross estate, it is obvious that, since such lien dates only from the time of decedent's death, it does not take priority over pre-existing mortgages or pledges the liens of which had attached during decedent's lifetime, nor does Section 827 purport to establish any such priority; (see Bowes v. United States, 127 N. J. Eq. 132, 138, 11 A. (2d) 720, 723). Indeed, it is impossible to believe that the statute could have intended that a bona fide mortgagee or pledgee should be obliged to surrender the mortgaged or pledged property if, though perhaps many years later, the mortgagor or purchaser happens to die leaving an estate insufficient to pay the estate tax; such an interpretation would be to render pledges and mortgages practically worthless as dependable securities. It is of interest to note that in United States v. Paul, 41 Fed. Supp. 41 [40-2 USTC ¶9653], affirmed 127 Fed. (2d) 64 [42-1 USTC ¶10,163], which was the case affirmed by the United States Supreme Court sub nomine Detroit Bank v. United States, supra, it was held (see the court's 8th conclusion of law, p. 47) that the lien of the United States for the federal estate taxes was inferior and subordinate to mortgages which had been placed by decedent upon his property prior to his death.

Petition for re-argument dismissed.

 

 

[59-1 USTC ¶9162] United States of America , Appellant v. Joseph L. Hartsell, et al., Appellees

(CA-6), U. S. Court of Appeals, 6th Circuit, No. 13,502, 261 F2d 593, 12/11/58, Aff'g a District Court decision, 58-1 USTC ¶9184

[1939 Code Sec. 3672(b)(1)--substantially unchanged in 1954 Code Sec. 6323(c)(1)]

Collection of tax: Notice of existence of lien: Burden of proof on Government: Stock pledged.--In 1952, taxpayer pledged his stock to his daughter as security for loans. Although it was shown that the daughter knew that her father was delinquent in taxes for 1943 and 1944, this was insufficient evidence to establish the Government's burden of proving that the pledgee had notice or knowledge of the existence of the lien for taxes on the date the stock was pledged. The Sixth Circuit affirmed the District Court's judgment that the pledgee had priority.

Charles K. Rice, Lee A. Jackson, A. F. Prescott, Thomas N. Chambers, Louise Foster, Washington 25, D. C., Fred W. Kaess, United States Attorney, Detroit, Mich., for appellant. F. M. M. Hally, Ray Cashen, Detroit , Mich. , for appellees.

Before MILLER, Circuit Judge, and GOURLEY and WEICK, District Judges.

Order

WEICK, District Judge:

The sole question involved in this appeal is the priority of the lien of the Government for income taxes over that of a pledgee of shares of stock to secure payment of a loan.

This depends on whether the pledgee had "notice or knowledge of the existence of such lien" for income taxes on the date the stock was pledged. Internal Revenue Code of 1939 §3672(b)(1), 26 U. S. C. §3672.

The burden of proof was on the Government to establish such notice or knowledge on the part of the pledgee by a preponderance of the evidence.

The District Judge found that the evidence was insufficent to establish such knowledge and that the pledgee had priority. A review of the record convinces us that this finding of fact was correct and the judgment of the District Court [58-1 USTC ¶9184] is, therefore, affirmed.

 

 

[39-2 USTC ¶9775]Equitable Life Assurance Society of the United States v. Allen F. Moore, et al. J. R. Drake, Receiver of The First National Bank of Monticello, Illinois, and Louis Hammerschmidt, v. V. Y. Dallman, Collector of Internal Revenue and United States of America The Illinois Joint Stock Land Bank of Monticello, a Corporation, v. Allen F. Moore, et al.

District Court of the United States for the Eastern District of Illinois, Equity No. 640-D;, Civil 25-D, 46-D, 29 FSupp 179, Decided October 2, 1939

Priority of Government's claim for taxes.--In adjudging the priorities of the parties in the cases reported at ¶9729, 9730, and 9774 herein the Court decides as follows: (1) Unrecorded extensions of time for collection of tax agreed to pay taxpayer and the Government were effective as against judgment creditors who had no knowledge of the extension, and did not bar the Government's enforcement of its lien until the expiration of such last extension of time; (2) a pledge of stock, made before the tax was assessed, had priority against the Government's claim notwithstanding the fact that the assignment was not recorded on the corporation's books in accordance with its by-laws; (3) the lien did not extend to property conveyed by taxpayer to a bank by quitclaim deed which antedated the Government's lien; (4) a pledge of stock made after the Government's lien arose was subject thereto.

Green & Palmer, Urbana, Ill., Thompson, White & Ingram, Rob ert F. White, and C. E. Corbett, all of Sullivan, Ill., and Rob ert Shonkwiler, Monticello, Ill., for plaintiffs. Arthur Roe, U. S. Attorney, Danville, Ill., and LaForgee, Samuels & Miller, Decatur, Ill., for defendants.

Memorandum of Court Upon Final Hearing

LINDLEY, Judge:

In view of the common questions involved, I shall dispose of all three causes in one memorandum.

[Government's Claims]

In each, the United States seeks to establish against all other parties in interest, priority of its asserted lien for income taxes assessed against Allen F. Moore for the year 1926. In the first, Equitable Life Assurance Society v. Moore, et al., Equity No. 640-D, foreclosure of a mortgage in this court resulted in a decree in favor of the mortgagee, March 8, 1935, wherein the court found and decreed that the taxpayer owed the United States $5,723.52 with interest, for which it had a lien upon the mortgaged premises and the rents and profits thereof, subordinate, however, to the lien of the mortgagee. The Continental Illinois National Bank & Trust Company was a party defendant in the cause and the decree found and decreed that its interest, if any it had, was subsequent and subject to the lien of the mortgagee. However, the decree made no disposition of the question of priority between the Government and the Continental Illinois National Bank & Trust Company. A receiver was appointed and in due course filed his final report, from which it appears that, after satisfying the mortgage and accounting for the rents and profits, there remains in his hands a substantial surplus, which should be delivered to such of the parties as the court shall direct. The proper distribution of that surplus is one of the questions now confronting us. The United States claims a lien thereon prior to the rights of the Continental Bank and prior to the claim of Drake, originally as receiver and now as shareholders' agent of the First National Bank of Monticello , Illinois . Drake, in the capacity mentioned, has filed a claim of lien upon the surplus based upon a judgment obtained in the Circuit Court of Piatt County March 30, 1935, against Moore in the sum of $6,492.41. A part of the judgment has been satisfied by sale of certain property described in cause 25-D. This lien, Drake asserts, is superior both to the claim of the Government and the claim of the Continental Bank. The latter's claim of title is based upon a deed and an assignment dated December 4, 1936 , whereby Moore assigned to the bank all of his interest in all funds that might come into the hands of the receiver.

[Causes Analyzed]

In Cause 25-D, Drake, in the capacity aforementioned, seeks to enjoin the Collector of Internal Revenue from enforcing the alleged tax lien against property which it has previously sold under execution upon its judgment for $6,492.41. The evidence shows that the judgment was recovered by Drake on March 30, 1935; that execution immediately issued thereon and that sale was had of the premises described; that on March 8, 1933, the Collector filed his notice of tax lien in the Recorder's Office of Piatt County, Illinois; that, subsequent to the sale under execution followed by deed from the sheriff, on or about December 22, 1938, the Collector posted notice of sale of the same premises for distraint for the payment of the assessment above mentioned. Drake claims that no lien exists because the period allowed for making assessment had expired and that the alleged lien is void and of no effect. He seeks a decree clearing and quieting his title of the asserted claim of the United States .

In Illinois Joint Stock Land Bank v. Moore, Civil 46-D, plaintiff bank filed a bill of interpleader against Moore, Drake, Collector of Internal Revenue, United States of America, Trenchard and Albers, Receiver of the Moore State Bank of Monticello, Illinois, in which it averred that Moore was the owner July 9, 1927, of 250 shares of the stock of plaintiff corporation; 50 of the shares being represented by Certificate No. 87, 70 by Certificate No. 131, and 130 by Certificate No. 155; that plaintiff is in process of liquidation; that three dividends to shareholders of record of 20 per cent each, aggregating 60 per cent, have been paid to all stockholders except to Moore.

Plaintiff has $15,000 on hand rightfully applicable to dividends upon the 250 shares. It avers that the part of this fund applicable to 180 shares is claimed by Albers as receiver of the Moore State Bank; that Trenchard claims the dividends upon 70 shares held by him as collateral for a loan; that the Government asserts a lien upon the fund to the extent of its alleged tax lien as aforesaid; that Drake as receiver claims a lien upon the dividends to the extent of its unpaid balance due on its judgment lien and that plaintiff holds the money merely as a stake-holder. It has brought the fund into court and seeks a decree adjudging the respective rights and priorities of the parties therein and thereto.

Thus, in each of the three causes, the United States is relying upon a claim of priority to the full extent of its unpaid tax demand and the question arises first in 640-D as to whether the United States, the Continental Bank or Drake, as shareholders' agent of a national bank, shall prevail. In 46-D, the question is whether the United States shall prevail in its claim of prior lien upon the dividends payable upon the stock held by the Moore State Bank or whether the claims of Trenchard, Albers as receiver and Drake as shareholders' agent are superior thereto. Closely interwoven with these is the prayer in 25-D that the Collector of Internal Revenue's claim shall be decreed void as a lien upon the title to Drake by virtue of sheriff's deed received upon execution sale.

Most of the facts are beyond dispute. The Commissioner of Internal Revenue issued a certificate of assessment of additional income taxes against Moore for the year 1926 on February 14, 1931 and caused it to be filed of record in the Office of the Recorder of Deeds in Piatt County, Illinois, on March 8, 1933, and in the Office of the Clerk of the United States District Court for the Eastern District of Illinois, on March 9, 1933. Moore executed a waiver of limitation of time within which the assessment might be collected, on December 2, 1936 , which extended the period of collection to December 31, 1938 . At various times in the years of 1936, 1937 and 1938, he made offers in compromise, each providing that the time within which the assessment might be collected, should be extended until a year following the rejection of the offers. As a consequence the Government claims that the period within which the assessment might be collected has been extended to September 30, 1939 . Upon these facts the Government asserts that it has a lien upon the funds in the hands of the receiver in the foreclosure case, upon the real estate previously sold and bid in by Drake and upon the dividends payable upon the stock in the Illinois Joint Stock Land Bank owned originally by Moore and assigned by him to Trenchard and the Moore State Bank.

Trenchard loaned $7000 to Moore on March 4, 1937 , and as security for payment of the same, Moore assigned and delivered to him, certificate for 70 shares of stock of the Joint Stock Land Bank. Trenchard gave no notice of the assignment to the Joint Stock Land Bank prior to October, 1937, but he insists that title to the stock passed to him by the assignment of Moore , superior to the claims of all others. Albers' claim is founded upon a note for $25,000 executed by Moore and delivered to the Moore State Bank on May 14, 1928 . At that time Moore delivered to the bank as collateral, certificates for 180 shares of said stock assigned in blank. The bank gave the Joint Stock Land Bank no notice of its assignment of the stock prior to November, 1937, but its receiver insists that by the assignment, it received complete title to the stock as against the Government and all other persons.

The Continental Illinois National Bank & Trust Company claims as against Drake and the Government, that it is entitled to receive the funds held by the receiver in the foreclosure case because it has received from Moore a deed and an assignment of all his right, title and interest in the funds in the hands of said receiver. This assignment, the Continental Bank says, is superior to the claims of the Government and of Drake.

[Statute of Limitations]

I shall first dispose of the defense of the statute of limitations, which each of the claimants other than the United States sets up against the asserted lien of the latter.

Section 1560 Title 26 U. S. C. provides that the Government shall have a lien for unpaid income taxes upon all the property real and personal of the taxpayer; Section 1561 that the lien shall arise at the time the assessment list is received by the collector and continue until discharged or unenforceable because of lapse of time; Section 1562 that it shall not be valid as against any purchaser or lien creditor until notice has been filed by the collector, in accord with the law of the state in which the property is situated; Section 276 that, where the assessment has been properly made, the tax may be collected only if begun (1) within six years after the assessment, or (2) prior to the expiration of any extension of the statutory period, agreed upon in writing by the commissioner and the taxpayer. Such agreed period may be extended by subsequent agreements.

Here, the lien, as against Moore , arose on February 19, 1931 , when the assessment list was received by the Collector of Internal Revenue for this District. This lien became valid, as against Moore 's mortgagees, purchasers and judgment creditors on March 8, 1933 , when notice of the tax lien was filed in the Office of the Recorder of Deeds of Piatt County, Illinois, where Moore lived and where his property was located. Thus, the tax might have been collected, in the absence of any extension, under the statute, at any time before February 19, 1937 , but by specific waiver agreement between the taxpayer and the United States , this time was extended to December 31, 1938 , and thereafter until September 30, 1939 . These extensions, however, were recorded nowhere. The claimants other than the United States contend that, in the absence of recording, they were of no effect as against Moore's lien creditors, and that, therefore, such parties, from and after February 19, 1937, were prior in right to the claim of the United States because of the expiration of the lien. Consequently the ultimate question of outlawry centers around the simple question of whether the extensions of time were effective to continue the lien, without being recorded.

In Loewer Realty Co. v. Anderson, 31 F. (2) 268 [1929 CCH ¶D-9124], the court discussed a similar question, saying that statutes of limitations should receive strict construction in favor of the Government; that limitations will not be presumed in the absence of clear Congressional action and that the purpose of the statute was to give the commissioner additional time to assess taxes, if he obtained the consent of the taxpayer. The court held that it was intended to include specific years within which it was permissible to make the assessment where no extension had been agreed to, and in case a waiver had been signed, the same period plus the extended period. The statute provides for preservation of the lien within each. To the same effect are American Natural Gas Company v. U. S., 13 F. Sup. 69 [36-1 USTC ¶9045], and Atlas Securities Company v. Commissioner, 58 F. (2) 214 [1932 CCH ¶9233]. The court concluded as did the court in Loewer Realty Co. v. Anderson , supra, that the statute bars collection within the definite period only in case no waiver has been given and that the bar of the statute does not exist until the termination of the period covered by the waiver.

It is asserted by claimants that the Government's lien is like unto a judgment on which no execution can be issued after a certain number of years. After that period the lien of the judgment expires and ceases to have legal existence until and unless renewed by scire facias or other proper proceeding. But I am not satisfied that such reasoning is applicable to the present statute. The parties dealing with the property of the taxpayer against whom a tax lien has been filed are charged with notice of the recorded lien and with notice of the provisions of the statute continuing and extending the same under certain conditions. They are bound to know that if the lien has been discharged in whole or in part, a release must be filed by the collector, (Title 26 Section 1563 United States Code) and that the time within which collection may be made may be extended by written agreement. Any inquiry directed to the commissioner or the collector will produce advice of the status of the lien. It was the intent of Congress to give notice to third parties by the filing of the lien and to continue that lien in existence until satisfied or until six years and such additional period as might be agreed upon by the taxpayer and the commissioner had expired. Parties dealing with the property must take notice of the existence of such lien and of the possibility of extension beyond the six year period. I conclude that the statute did not bar the enforcement of the lien until the expiration of the last extension, September 30, 1939 .

[Pledged Stock]

Albers as receiver of the Moore State Bank of Monticello attempts to enforce in favor of his trust estate a pledge of certificates of stock for 180 shares of Illinois Joint Stock Land Bank by Moore to the bank made on May 14, 1928 . On that date Moore borrowed $25,000 from the bank and assigned the shares as collateral security for the payment of his loan. The bank was closed on February 18, 1933 , and thereupon the receiver was appointed and qualified. The $25,000 note has been kept alive by renewals, and there is now due to the receiver of the bank upon the obligation $35,841.37. It is urged by the Government that this assignment of stock was invalid as against the lien of the United States for the reason that it was not recorded on the books of the company issuing the stock; that under the Federal Statute the Illinois Joint Stock Land Bank had a right to provide by its by-laws how stock could be transferred. The evidence is that in the by-laws, it was provided that transfers of the stock should be valid only if recorded on the books of the company. Therefore says the Government, the assignment to the bank, not being so recorded and being secret, is void as against the lien of the United States . The reply of Albers is that an assignment of a chose in action, made in good faith prior to the attachment of the lien of the United States , is valid in Illinois . There is no question that this is the rule. But the Government's position is that the federal statute works a different result and that the Illinois law is not controlling.

A similar question arose in Exchange National Bank v. Davy, 13 F. Sup. 226 [36-1 USTC ¶9053]. There an equitable lien arose by assignment of a trust estate prior to the attachment of the lien. It was not recorded. The Government insisted that its lien, therefore, took precedence, but the court overruled the contention, saying:

In the instant case, the equitable lien arose by the assignment of the trust, and the trust property consisted of a chose in action, not real property when given. No recording was required of such an assignment. The assignment became effective upon the trustee when notice of it was given; the beneficiary could not have effectively assigned the trust property to another after the first assignment, because the trustee, the legal title holder of the trust property, would have been bound to respect the first assignment. When the government filed notice of the tax lien, such lien attached to the trust property, subject to the rights of the assignee, the plaintiff herein. * * * A contract creating an equitable lien, when not a legal mortgage, cannot be affected by failure to record as a mortgage, as required by the laws of a state to render it enforceable against creditors or purchasers without notice. Chattanooga Nat. Bank v. Rome Iron Co., 102 F. 755.

Similar in its reasoning is United States v. Beaver Run Coal Co., 99 Fed. (2d) 610 [38-2 USTC ¶9540], though it must be observed that there the mortgage had been recorded prior to the attachment of the lien of the Government. The weight of authority is stated, in 9 Corpus Juris Secundum, p. 1102, article 581, as follows:

The negotiability or transferable quality of the stock of a national bank depends on the laws of the United States and cannot be controlled by state statutes and decisions, although the legal capacity or power of a particular person to make a disposition or transfer of such stock may be governed by state law.

At the present time, the controlling federal law on the subject of transfers is U. S. Revised Statutes, article 6139, 12 U. S. C. A. art. 52, which provides that the stock of a national bank shall be deemed personal property, and transferable on the books of the association in such manner as may be prescribed in the by-laws or articles of association; and that every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all the rights and liabilities of the prior holder of such shares. Under this provision national bank stock is, as a general rule, salable and transferable at the will of the owner of the same as any other personal property, and the directors or stockholders cannot control the right of a stockholder to make an absolute sale of his stock to any person capable of purchasing and holding it and of assuming the liability of the transferor with respect thereto, regardless of the fact that the transfer is indebted to the bank. While the manner of transfer can be prescribed by the by-laws or articles of association, such authority can be exercised only to prescribe conditions which are essential to the protection of the association against transfers which are fraudulent or which may be designed to evade the just responsibility of the stockholders. Moreover, regulations or conditions so prescribed are operative only for the benefit of the corporation, its stockholders, and its creditors, and as to all other parties a transfer of such stock which is good at common law is good under the statute. As between the parties the title to stock is transferred by the seller's delivery of his certificate thereof to the purchaser, indorsed or assigned in the usual manner, without more; and either party may then compel the registration and transfer of the stock on the books of the bank. Also a pledge of national bank stock as collateral security may be effected by a delivery or assignment of the certificate without a compliance with recording or other requirements.

In Continental National Bank v. Eliot National Bank, 13 Fed. 369, the court had to do with the validity of an unrecorded transfer of national bank stock as against a subsequent attachment in behalf of a creditor without notice. The statute regarding the right of the bank, by its by-laws to provide how transfer of the stock can be made, is substantially the same as that covering Joint Stock Land Banks, and in the case cited the by-laws of the national bank provided that stock should be assignable only on the books of the bank. But the court held the assignment valid against later attachment. The court said:

It is a general rule that creditors, whether they proceed by an attachment on mesne process, seizure on execution, creditor's bill, or through an assignee in bankruptcy, must take their debtor's property subject to all equitable as well as legal charges, liens, or opposing titles. * * * The incorporeal property of the shareholder in a company of this sort is represented by his certificates; and if these are conveyed, the failure to record the conveyance is not evidence of such a constructive fraud as sometimes arises from the possession of chattels after the property has been parted with. On the contrary, it was proved in early cases to be the usage, and is now adopted by the court as law based on such usage, that the possession of the certificates, with a power to transfer them, is prima facie evidence of title; and if in fact the possessor has given value, his title cannot be impeached even by subsequent purchasers who did not receive the certificates, much less by creditors of the transferrer. In late cases these certificates are likened to bills of lading and other quasi negotiable securities.

Similar in their reasoning and conclusions are Dickinson v. Central National Bank, 129 Mass. 279; Scott v. Pequonnock Nat. Bank, 15 Fed. 494 at 500; Hazard v. Natl. Exchange Bank, 26 Fed. 94; Massury v. Ark. Natl. Bank, 93 Fed. 603 (CCA8). A full annotation of pertinent decisions appears in 67 L. R. A. 664.

I conclude that Congress, inasmuch as it has clearly attempted to protect pledgees, mortgagees and purchasers, as to an assignee of stock, transferable only on the books of the company, did not intend that such a restriction should nullify the pledge as against a subsequent lien.

I am aware that there has been authority to the contrary. Thus in United States v. Rosenfield, 26 F. Supp. 433 [39-1 USTC ¶9204], the court held that a bona fide purchaser for value of shares of stock from a seller against whom a notice of lien had been duly filed prior to the sale took subject to the lien. Congress took cognizance of this disposition and in debate commented that when a broker purchases securities on the exchange, it is obviously impossible to check all the offices in which a notice of the tax lien may be duly filed. Accordingly it amended the act by section 3672, Title 26 of the U. S. C. In the amendment it provided that even though notice of a lien has been filed in the manner prescribed in the statute, it shall not be valid as against any mortgagee, pledgee or purchaser, if at the time of such mortgage, pledge or purchase, the latter is without notice of the existence of such lien. However, this statute does not control the rights of Albers and the United States here. The congressional comment is referred to merely for the purpose of showing the intent of Congress and its conviction as to the proper protection of purchasers and lien creditors.

It follows from what has been said that the bank for which Albers is receiver, in 1928 acquired title to Moore 's stock in the Illinois Joint Stock Land Bank as collateral security for its loan and that the lien of the United States , which came into effect thereafter, is subject thereto.

[Judgment]

Drake as receiver of the First National Bank of Monticello obtained a judgment against Moore in the Circuit Court of Piatt County , March 30, 1935 . Thereafter he levied upon and sold on July 2, 1937 certain property of the taxpayer and in due time, received a sheriff's deed for the same. This title Drake asserts against the United States , claiming that it is prior to the latter's lien.

However, we have seen that the lien of the United States attached as against judgment creditors on March 8, 1933 , and that it continued in full force and effect after that date until the present time. Inasmuch as the statute of limitations has not barred the lien and inasmuch as it was of record at the time Drake procured his judgment and execution, it follows that Drake's action was subordinate to and subject to the rights of the United States of which notice had been given by the filing of the lien. Furthermore Drake knew in 1935 of the Government's lien. Consequently Drake and his co-plaintiff, who stands in a similar situation, cannot succeed in their complaint. Their liens are subject and inferior to those of the United States and the latter has a right to proceed with its distraint for collection from and out of the real estate sold to Drake. The bill in this cause, therefore, must be dismissed for want of equity. As was said in Loewer Realty Co. v. Anderson , supra, plaintiff acquired the property subject to a tax lien.

In cause 640-D, we have seen that the receiver has on hand $6,517.29 which, in the absence of other prevailing circumstances, would be payable to Moore, the taxpayer. As we have observed, the decree of foreclosure found that the Government had a second lien upon the premises and the rents and profits thereof to secure its tax claim. Drake, because of his position above defined, claims a lien upon the fund, and the Continental Illinois National Bank & Trust Company likewise claims the funds as against both Drake and the Government because of a deed by Moore and his wife dated October 27, 1931, and an assignment from Moore dated December 14, 1936, whereby the latter assigned to the bank all of his right, title and interest in and to the funds then and thereafter to be in possession of as receiver. What we have said disposes of the claim of priority of Drake. As pointed out, the lien of the United States attached to all property real and personal of Moore in 1933. Drake's judgment lien did not come into effect until 1935. Consequently the Government's lien is superior.

[Quitclaim Deed]

The same answer would have to be given as to the claim of the Continental Illinois National Bank & Trust Company if it were grounded solely upon its assignment. So far as the evidence discloses, the bank took a valid assignment of Moore 's interest in the fund in court in 1936, but the Government's lien had attached prior thereto, in 1933, and found valid in a decree, to which the bank was a party, in March 1935. Under my conclusions as expressed therein, the lien of the Government, remaining in full force and effect, would take precedence over the title of the Continental Bank, who, by decree, had notice of the lien at the time it took its assignment. But there is an additional fact in evidence which radically changes the situation. Moore and his wife executed a quit claim deed of the premises, out of which the fund now in court grew, to the nominee of the bank, in October, 1931, recorded February 21, 1933 . The lien of the Government did not attach until March 9, 1933 . Thus it appears that at the time the Government's lien was perfected already existing in the Continental Bank, through its nominee, was good title by way of a valid conveyance of all interest in the premises or the proceeds therefrom. Because of what has been said, it is apparent that the rights of the bank, therefore, under this deed are superior to those of the Government. See Exchange National Bank v. Davy, supra.

As against Drake, likewise the lien of the Continental Illinois National Bank & Trust Company must prevail because of the deed executed in 1931 and the assignment executed December 4, 1936 . Drake's asserted lien against the funds arise out of a garnishment in 1937, but the deed and assignment of the funds to the Continental Bank having been perfected prior thereto, the bank must prevail against Drake also.

[Additional Issue on Pledged Stock]

There remains to be disposed of the controversy between Trenchard and the Government in the interpleader suit. Trenchard claims the dividends upon 70 shares of stock held by Moore in the Illinois Joint Stock Land Bank by virtue of an assignment of the shares as a pledge on March 7, 1937 , as security for a loan of $7000. The assignment was of the same character as that to the Moore State Bank. There was no record on the books of the company issuing the stock and no notice to the Government. However, at that time the lien of the Government had attached and had remained in full force and effect. The pledge of the stock to Trenchard was subject to the lien of the Government, unless Trenchard is entitled to subrogate himself to the rights of a prior holder of the stock. It is suggested in Trenchard's brief that such subrogation exists, but the evidence is not sufficient to sustain the contention. Trenchard himself apparently did not know where the stock was when he made the loan. He took it, not by assignment from the prior holder, but directly from Moore . The money he loaned was delivered not to the prior assignee but to Moore himself. Thus, it appears from the evidence that the transaction was one entirely between Trenchard and Moore. The former's rights must be determined as of the date upon which he took the assignment, which is subsequent to the attachment of the Government lien. Nor is Trenchard in any better position because of the recent amendment, for the evidence is such that he must have known, and did in fact know of the existence of the Government's lien at the time he took his assignment.

I conclude, therefore, that in cause 640-D, the Continental Illinois National Bank & Trust Company must prevail over the Government and Drake; that in 46-D, Albers has a first lien on 180 shares of the stock of the Illinois Joint Stock Land Bank; that when and if his lien is discharged, the remainder, if any, will be payable upon the lien of the United States Government; that Trenchard's claim is invalid as against the United States; that the latter has a first lien upon the 70 shares of stock assigned to Trenchard, subsequent to the attachment of the lien of the United States, and that the dividends deposited in court upon said 70 shares, must be delivered to the United States Government; that Drake as receiver has no lien upon any of said shares of stock except subject first to the claim of Albers as receiver for the Moore State Bank and second to the lien of the United States. In 25-D the lien of the Government is superior to the rights of Drake as receiver and plaintiffs' complaint must be dismissed for want of equity.

All the parties in 46-D have stipulated that the decree to be entered by this Court, shall determine the right, title and interests of the several parties in and to the 250 shares of stock in the Illinois Joint Stock Land Bank of Monticello, Illinois, and the dividends declared and hereafter to be declared upon the same. Accordingly the decree shall comply with such stipulation, and fix, determine, preserve and continue the respective interests, titles and liens of the respective parties in and to said stock and dividends thereon to be hereafter declared.

The foregoing will be included in my findings of fact and conclusions of law.

The costs in 46-D shall be taxed against and paid from the fund deposited in this court. The costs in 25-D shall be assessed against the plaintiffs, payable so far as Drake is concerned, in due course of admin istration. The costs in 640-D shall be assessed and taxed against the fund held by the receiver.

Proper decree may be submitted.

 

 

[55-1 USTC ¶9358]United States of America, Plaintiff-Appellee v. E. Regensburg & Sons, a corporation, Defendant-Appellant, and Adele Regensburg, Executrix of the Estate of Isaac Regensburg, deceased, Defendant United States of America, Plaintiff-Appellee v. E. Regensburg & Sons, a corporation, Defendant-Appellant, and Sally Regensburg Perls Ross and Edward Bellette Regensburg, as Administrators c.t.a. of the Estate of Bellette Regensburg, deceased, Defendants

(CA-2), In the United States Court of Appeals for the Second Circuit, Nos. 231, 232. October Term, 1954, Docket Nos. 23402 , 23403 , 221 F2d 336, April 11, 1955

Appeal from the United States District Court for the Southern District of New York.

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

Lien for taxes: Validity against mortgagees and others: Pledged stock.--All the stock in taxpayer corporation had been issued to its founder and his five sons. In 1934 the stockholders entered into an agreement pledging their stockholdings to the company as security for advances, past and future. At the time of his death in 1943, the amount of accumulated withdrawals of one of the sons exceeded the amounts accrued to his account by over $1,700,000. At the end of the same year the withdrawals of another son amounted to over $300,000. After their deaths, the company foreclosed on their stock and bid in the stock at the foreclosure sale. Since no notes were given by these stockholders and no interest was paid by them or accrued on the company's books, the withdrawals were not valid loans and could be regarded only as dividends. Accordingly, the company acquired no lien on their stock and the Government's tax liens thereon must prevail.

J. Edward Lumbard , United States Attorney for the Southern District of New York (Thomas C. Burke, Assistant United States Attorney, of Counsel), for plaintiff-appellee. Paskus, Gordon & Hyman (Arthur B. Hyman, Charles H. Lieb and Rob ert R. Slaughter, of Counsel), for defendant-appellant.

Before CLARK, Chief Judge, FRANK, Circuit Judge, and GALSTON, District Judge.

GALSTON, District Judge:

The primary question presented on these appeals is whether payments made to the stockholders of this family corporation were dividends, as the Government contends, or loans, as the appellants contend. In essence the same or similar question was presented to this court in Regensburg v. Commissioner, 144 Fed. (2d) 41 [44-2 USTC ¶9412], cert. den'd 323 U. S. 783, and nothing that appears in the record herein warrants a different conclusion as to the nature of those payments.

The corporate defendant was engaged in the manufacture of cigars. It was a typical family business in that all of its capital stock, consisting of 1000 shares, was issued to Edward Regensburg, the founder, and his five sons. He and the sons were the sole officers and directors of the corporation.

The tax liabilities against Isaac Regensburg and Bellette Regensburg or their estates, as a result of the decision of the Commissioner of Internal Revenue in 1942, are the same tax liabilities which the plaintiff is seeking to collect in these suits. Notices of liens for such taxes were filed by the Government on January 17, 1945 . At the time of Isaac's death, on December 1, 1943 , the accumulated amount of his withdrawals from the company in excess of the amounts accrued to his account was $1,700,610.87. At the end of 1943 the amount of withdrawals by Bellette amounted to $317,719.45. He died on February 17, 1944 . It was only after the deaths of Isaac and Bellette that the corporation made demand for the repayment of the foregoing sums on the theory that they constituted loans. In 1947 and 1948 the corporation foreclosed its alleged liens on the shares of stock held by their respective estates, and the corporation bid in the stock of Isaac for the sum of $275,000 and that of Bellette for $110,000, and applied the purchase price in partial discharge of the alleged indebtedness of those two estates.

Section 3670 of the Internal Revenue Code provides that upon failure to pay taxes after demand a lien shall arise in favor of the United States, "upon all property and rights to property, whether real or personal, belonging to the delinquent taxpayer."

[The Issue]

The question to determine is: What rights to the stock acquired by the corporation, formerly in the name of Isaac and Bellette Regensburg or their estate, did the corporation have on the date that the Government filed its tax liens?

As was said by Judge Swan in Regensburg v. Commissioner, supra, at least for the tax years 1936 to 1940 inclusive:

"That withdrawals were recorded on the corporate books as debits against the taxpayers; that they were not proportionate to holdings of stock nor participated in by all the shareholders; and that the formalities of a dividend declaration were lacking is not conclusive against a finding that withdrawals were dividends," citing Chattanooga Savings Bank v. Brewer, 17 Fed. (2d) 79 [1 USTC ¶212], cert. den'd 274 U. S. 751, etc.

In respect to the contention made in the earlier case, and repeated here, that the payments were loans and should not be classified as dividends, it is significant that no note was ever executed to evidence any indebtedness on the part of the shareholders, and no interest was ever paid or accrued on the balances shown in their accounts.

If the sums that had been withdrawn from this family corporation by the stockholders were dividends and not loans, then the corporation could not acquire the shares of stock of Isaac and Bellette, because they were not indebted to the corporation. Nor are the defendants aided by New York State law. Such cases as People ex rel. Fox Film Corp. v. Loughman, 259 N. Y. 30; Matter of Calder v. Graves, 261 App. Div. 90, aff'd 286 N. Y. 643; and Groh's Sons v. Groh, 80 App. Div. 85, all sustain the principle of law that if the sums in question were withdrawn with the acquiescence of all the stockholders and without any insistence that they be repaid, they must be regarded, in New York law, as dividends, and not as loans. Nor is the appellant helped by Ellner Co. v. Isaacson, 165 N. Y. Supp. 942, or Famous Realty, Inc. v. Frindel, 135 N. Y. Supp. (2d) 261.

The Government's liens, under Section 3672 of the Internal Revenue Code, accordingly must prevail over the underlying pledge agreement of 1934, because that agreement was not supported by a valid loan.

The evidence supports the district court's conclusion [54-2 USTC ¶9620], which is on all fours with the holding in Regensburg v. Commissioner, supra, that the withdrawals were in fact of earnings. Even the payment by the estate of one brother, Jerome, of the alleged overdraft due from him goes only to the weight of the evidence. This occurred after the institution of the Government's actions, and little if any weight should be attached to that circumstance.

The judgments are affirmed.

 

 

[58-2 USTC ¶9930] United States of America , Plaintiff v. Lawrence Santos , and Manufacturer's Shoe Company, Ltd., Defendants

U. S. District Court, Dist. Hawaii, Civil No. 1603, 10/27/58

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

Lien for taxes: Priority as against pledgee.--Taxpayer, on December 10, 1951, fulfilled a prior agreement to pledge 15,750 shares of stock to a corporation as security for the repayment of a debt evidenced by a promissory note by endorsing the stock and delivering it to the corporation. A jeopardy assessment was made against taxpayer on December 26, 1951 , for taxes, penalties and interest for the taxable years 1943-1946; notice was given to and demand for payment made upon taxpayer on December 27, 1951 ; and a tax lien was filed on January 7, 1952 . The corporation has a valid lien on the stock which has priority over the government's lien.

Louis B. Blissard, United States Attorney, Harry W. Dudley, Assistant United States Attorney, District of Hawaii, for plaintiff. Smith, Wild, Beebe & Cades, Milton Cades, William B. Borthwick, Honolulu , T. H., for Lawrence Santos . William B. Stephenson, Clinton R. Ashford, Honolulu , T.H., for Manufacturer's Shoe Co., Ltd.

Findings of Fact and Conclusions of Law

HALL, District Judge:

The above cause having come on regularly for trial on October 21, 1958, the Honorable Peirson M. Hall, Judge presiding without a jury, no jury having been requested, the Plaintiff appearing by its attorneys, Louis B. Blissard, United States Attorney for the District of Hawaii, and Harry W. Dudley, Assistant United States Attorney for the District of Hawaii, Defendant Lawrence Santos appearing in person and by his attorneys, Milton Cades, Esq., and William B. Borthwick, Esq., and Defendant Manufacturer's Shoe Company, Ltd., a corporation, appearing by Lawrence Santos, its President, and by its attorneys, William B. Stephenson and Clinton R. Ashford; and Defendant Lawrence Santos having admitted certain assessments for taxes, penalties and interest and certain abatements, and having stipulated that the records of the Internal Revenue Service show certain credits on said assessments, without admitting their accuracy or consenting thereto, and the said Defendant Lawrence Santos, having rested without offering any evidence on the amounts of said taxes, penalties and interest, and evidence having been introduced on behalf of the Plaintiff and Defendant Manufacturer's Shoe Company, Ltd., and the Court having considered the same and having heard the arguments of counsel and being fully advised in the premises, now makes the following Findings of Fact and Conclusions of Law:

Findings of Fact

I. Prior to the filing thereof, this action was authorized by the then Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury, and this action was brought under the direction of the Attorney General of the United States .

II. At the time this action was commenced, the Defendant Lawrence Santos resided in the City of Honolulu , Territory of Hawaii .

III. At the time this action was commenced, the Defendant Manufacturer's Shoe Company, Ltd., was and now is a corporation organized and existing under the laws of the Territory of Hawaii, and had and has an office and its principal place of business in the City of Honolulu, Territory of Hawaii.

IV. On December 26, 1951, the then Commissioner of Internal Revenue made a jeopardy assessment of taxes, penalties and interest upon Defendant Lawrence Santos in the amounts and for the items hereinafter set forth; the list of said assessments was certified by the then Commissioner of Internal Revenue to the then Collector of Internal Revenue for the District of Hawaii, by whom they were received on December 26, 1951; that on December 27, 1951, notice of said jeopardy assessment was given to and demand for the payment of the amount thereof was made upon the Defendant Lawrence Santos.

V. That Defendant Lawrence Santos is indebted to Plaintiff for income and victory taxes for the year 1943 in the sum of $157,506.84, and an Internal Revenue Code, §293(b), penalty for said year in the sum of $86,515.96, less the sum of $300.00 paid on account of said taxes and penalty on December 6, 1956.

VI. A jeopardy assessment was duly levied by the then Collector of Internal Revenue against Defendant Lawrence Santos on December 26, 1951, for the amounts of tax and penalty set forth in Paragraph V above, together with accrued interest thereon to December 26, 1951 of $73,525.30.

VII. Defendant Lawrence Santos is indebted to Plaintiff for income taxes for the year 1944 in the sum of $59,593.71, and an Internal Revenue Code, §293(b), penalty in the sum of $29,796.86.

VIII. A jeopardy assessment was duly levied by the then Collector of Internal Revenue against Defendant Lawrence Santos on December 26, 1951, for the amounts of tax and penalty set forth in Paragraph VII above, together with accrued interest thereon to December 26, 1951, of $22,615.97.

IX. Defendant Lawrence Santos is indebted to Plaintiff for income taxes for the year 1945 in the sum of $44,829.12, and an Internal Revenue Code, §293(b) penalty for said year in the sum of $22,627.15, against which there was credited on July 31, 1957 the sum of $67,456.27.

X. A jeopardy assessment was duly levied by the then Collector of Internal Revenue against Defendant Lawrence Santos on December 26, 1951 for the amounts of tax and penalty set forth in Paragraph IX above, together with accrued interest thereon to December 26, 1951 of $15,547.10, against which a credit was applied on September 26, 1956 of $27.00. A further credit of $9,635.20 was applied on July 31, 1957 , a payment of $440.85 was applied on October 14, 1957 , a payment of $300.00 was applied on November 7, 1957 , and a payment of $300.00 was applied on December 5, 1957 .

XI. Defendant Lawrence Santos was indebted to Plaintiff on December 26, 1951 , for 1946 income taxes in the sum of $14,558.09. A jeopardy assessment was duly levied by the then Collector of Internal Revenue against Defendant Lawrence Santos on December 26, 1951 for the said amount of taxes, together with accrued interest thereon to December 26, 1951 of $4,175.38, on which the following payments and/or credits were made on the dates hereinafter set forth: January 8, 1952--$1,108.83; June 12, 1952--$8,189.69; June 13, 1952--$275.00; June 20, 1952--$164.26; June 20, 1952--$35.55; July 10, 1952--$8.46; September 7, 1957--$129.79; October 1, 1957--$300.00; October 14, 1957--$897.25; and accrued interest in the amount of $460.07, paid October 14, 1957; that Defendant Lawrence Santos is indebted to Plaintiff for 1946 income taxes in the sum of $7,164.57.

XII. That on January 7, 1952 , a formal tax lien as provided by law was filed by the then Collector of Internal Revenue against Defendant Lawrence Santos with the Clerk of this Court, and was recorded with the Territory of Hawaii .

XIII. Defendant Lawrence Santos is the owner of 15,750 shares of the capital stock of Defendant Manufacturer's Shoe Company, Ltd., (hereinafter called the "Corporation") issued in 1947.

XIV. Defendant Lawrence Santos on November 1, 1948 , and at all relevant times subsequent thereto was indebted to the Corporation in the amount of $91,651.69, evidenced by Defendant Lawrence Santos' promissory note in that amount, dated November 1, 1948 , given by him to the Corporation.

XV. Prior to December 10, 1951 , defendant Lawrence Santos orally agreed with the Corporation to pledge to it, as security for the repayment of the debt evidenced by said promissory note, his Certificate No. 4 for said 15,750 shares of stock.

XVI. On December 10, 1951 , Defendant Lawrence Santos fulfilled his agreement to pledge by endorsing said stock certificate in the form on the reverse thereof provided and delivering the same to the Corporation, which endorsement and delivery constituted an assignment to the Corporation, by way of security, of all of his interest in said 15,750 shares of stock.

XVII. Plaintiff effected a tax lien on said 15,750 shares of stock on January 7, 1952 .

Conclusions of Law

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

II. Plaintiff is entitled to judgment against Defendant Lawrence Santos in the sum of $627,450.57, which said sum includes interest at the rate of 6% per annum on the taxes, penalties and interest for the years 1943, 1944, 1945 and 1946, from the date of notice of and demand for payment of said jeopardy assessment, December 27, 1951, to the date of entry of judgment herein, except upon such amounts as were paid or otherwise credited on said taxes, penalties and interest as set out in the Findings of Fact.

III. The Corporation has a valid lien on said 15,750 shares of stock to secure Defendant Lawrence Santos' repayment to it of said sum of $91,651.69 together with any interest thereon allowable under the statutes of the Territory of Hawaii .

IV. Said lien is prior in right to any claim of the Plaintiff against said shares of stock.

Let judgment be entered accordingly.

 

 

[57-2 USTC ¶9815] United States of America , Plaintiff v. W. Clyde Lucas, et al. Defendants

U. S. District Court, Mid. Dist. N. C., Civ. No. 960-G, 148 FSupp 768, 2/20/57

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

Lien for taxes: Validity against pledgee.--The lien of the United States against a taxpayer's stock was prior to the claim of a pledgee who did not have possession of the stock.

Edwin M. Stanley, United States Attorney, Post Office Building, Greensboro, N. C., for plaintiff. Richard S. Clark, Asheboro , N. C., for Lineberry. Horace Haworth, High Point , N. C., for receiver. W. E. Miller, H. M. Rob bins, Archie L. Smith, G. E. Miller, Ottway Burton, Asheboro, N. C., and Allen and Hipp, William B. Rodman, Attorney General, Raleigh, N. C., for defendants.

Opinion

HAYES, District Judge:

Certificates of stock pledged, though not transferred on corporation's books, give pledges prior right over an attaching creditor. Bleakley v. Candler, 169 N. C. 16.

The reasoning in the above case is predicated squarely on the fact that the one in actual possession of the certificate of stock duly assigned by the registered owner has a right superior to those of an attaching creditor. But an attaching creditor would have rights superior to one who held no transfer accompanied by physical possession of the certificate or its equivalent.

The bank therefore, was in the actual physical possession of the certificate to secure its debt which still subsisted when the lien of the U. S. attached. The court, in which the bank was represented by counsel, finds that the balance due on the note is approximately $3600.00 and is the primary obligation of J. K. Marlour who had purchased 100 shares from W. C. Lucas and wife Pearlie, for which he assumed payment of the note, which left 145 shares belonging to Lucas as additional security. The Lucas 145 shares were sold by the Receiver and the claims transferred to the proceeds. The court finds that the 100 shares still in possession of the bank are worth far in excess of the balance on the note and determines that the lien of the United States for taxes attached to the 145 shares (or proceeds thereof) belonging to Lucas.

Claimant Lineberry filed a petition in this court against Receiver in which he asserted ownership of the Lucas 145 shares by virtue of a paper writing executed several years ago by Lucas and wife purporting to assign their interest in this stock subject to the bank's assignment, to secure Lineberry for a line of credit of $10,000.00 to Lucas National, Inc.

However, this paper was still in the possession of Lineberry when the lien of the United States attached to this property. The bank never accepted the attempted transfer and never had knowledge thereof. Under the facts it is manifest that the bank was not holding the certificate in any manner as a depository for the Lineberry claim.

The paper writing above might have become effective as a pledge to secure the Lineberry debt if the writing had been delivered to the bank and if the bank had agreed not to release the stock when its debt was paid and would then deliver it to Lineberry. Nothing less than this would constitute a valid pledge for it is universally held that a valid pledge must be accompanied by the delivery of the property pledged either to the pledgee or to a third party who holds it for the pledge. 41 American Jurisprudence, Pledge and Collateral Security, Section 19; Burrows v. Nimocks, 35 Fed. (2d) 152; Chemical Co. v. McNair, 139 N. C. 326.

The claim of Lineberry is therefore disallowed.

 

 

[63-1 USTC ¶9377]Mitchell Stevan, Trustee for Genie Craft Corporation, Bankrupt, Appellant v. Union Trust Company of the District of Columbia , a Banking Corporation, and the Munsey Trust Company, a Banking Corporation, Appellees

(CA-DC), U. S. Court of Appeals, District of Columbia Cir., No. 16865, 316 F2d 687, 3/28/63, Affirming unreported District Court decision

[1954 Code Secs. 6321-6323]

Lien for taxes: Validity against pledgee: Choate lien.--
A bank to which a taxpayer delivered customers' installment notes, endorsed in blank, as security for advances made by the bank, was a "pledgee" within the meaning of Code Sec. 6323, although the taxpayer made collections on the notes and deposited them in a special account which was to be used to reduce the taxpayer's debt to the bank. The bank's security interest was perfected before notice of the tax lien was filed, since the bank had dominion and control over the pledged notes, and in fact sold them pursuant to the terms of the loan agreement before notice of the tax lien was filed.

Frank J. Whalen, Jr., 2000 Massachusetts Ave., N. W. , Washington 6, D. C., for appellant. William A. Glasgow, Union Trust Bldg., Washington, D. C. (John L. Hamilton, Union Trust Bldg., Washington, D. C., on brief), for appellees.

Before MR. JUSTICE BURTON, retired, ^* FAHY and BURGER, Circuit Judges.

BURGER, Circuit Judge:

An action was brought by the Trustee in Bankruptcy of Genie Craft Corporation ¹ against a creditor ² of the bankrupt to set aside certain transfers of customers' accounts. The District Court, sitting without a jury, determined that the challenged transfers were valid pledges and denied the relief sought by the Trustee.

[Customers' Notes Pledged as Collateral]

Genie Craft sold at retail various household staples and appliances, including cooking utensils, sewing machines and encyclopedias in Maryland, Virginia and Washington, D. C. A large volume of its sales were made on conventional consumer installment credit terms with a small down payment and a negotiable promissory note for the balance. Beginning in June 1956, Genie Craft in turn financed its operations in part by pledging the installment notes to the Bank, which advanced funds up to 65% of the face amount of installment notes pledged. ³ The installment notes of customers were endorsed by Genie Craft in blank and delivered to the Bank, with recourse. Genie Craft gave its note to the Bank for the amount of advances made from time to time. As indicated the pledged customers' notes were collateral for the notes given by Genie Craft to the Bank. When the notes were endorsed in blank and delivered to the Bank, Genie Craft stamped its books and records showing the transfer to the Bank under the pledge. In addition the Bank designated Genie Craft as its agent for collection of the pledged installment notes, and routine collections continued to be received by Genie Craft in the regular course of business. However, as installments were received by Genie Craft on pledged notes they were deposited in a special account at the Bank under the designation "Genie Craft Corporation Loan Account." These deposits were applied to reduce the amount of the debt owed by Genie Craft to the Bank. At quarterly intervals Genie Craft submitted "aging" reports to the Bank listing the balance owing at the end of the quarterly period on each pledged customer's contract and note and the length of time since the last payment from each debtor. Periodically, the Bank sent one of its officers to the Genie Craft offices to check these quarterly reports against the ledgers maintained there.

Genie Craft had become insolvent on December 15, 1957 , and remained insolvent until bankruptcy. The District Court found that the Bank had reasonable grounds to believe Genie Craft was insolvent on January 15, 1958 . On that date the Bank called upon Genie Craft to pay its demand notes, with interest, not later than January 21, and advised the debtor that nonpayment would cause the Bank to resort to the installment notes pledged as collateral security for payment. On January 22 the Bank gave notice that the collateral, i.e., the pledged installment contracts and notes, would be sold on January 24. The sale was had and the proceeds were applied in partial satisfaction of Genie Craft's demand notes to the Bank. Between January 15 and 28, the Bank applied in partial satisfaction of the debts evidenced by the demand collateral notes, $9,750 from the special loan account and $119,586 from the proceeds of the sale of the collateral, leaving an unsatisfied balance of indebtedness of $94,866. As a result of this transaction the Bank received a greater percentage of payment on its demand notes than it would have received as a general creditor from a subsequent distribution in a bankruptcy proceeding.

A federal tax lien of $720 was assessed against Genie Craft on November 22, 1957 , and notice of lien was filed in the District Court on February 11, 1958 , after the Bank had foreclosed on its collateral. The tax lien was not paid by Genie Craft. Meanwhile on February 4, 1958 , the petition in bankruptcy had been filed. The United States filed proof of claim for taxes on April 18, 1958 .

[Transfer to Bank Not Preferential]

I. The primary contention made by appellant Bankruptcy Trustee is that the credit transactions between Genie Craft and the Bank resulted in a preferential transfer as defined in the Bankruptcy Act §60(a) and should have been set aside by the District Court for the benefit of the bankrupt estate under §60(b). 11 U. S. C. §96(a), (b). Appellant contends that the case of Corn Exchange Bank v. Klauder, 318 U. S. 434 (1943) is dispositive of this appeal. In support of his contentions appellant argues: (1) the credit transaction between Genie Craft and the Bank was an assignment of accounts receivable; (2) the local law of the District of Columbia gives greater right among successive assignees of the same fund to the one who first notifies the underlying debtor of the assignment; (3) the Bank was the first of a possible succession of assignees of the consumer notes and did not perfect its interest by giving notice to the underlying installment note debtors; (4) the assignment to the Bank was unperfected at the date of bankruptcy; as a result of these factors appellant urges that no transfer took place before the date of bankruptcy and thus the payment was a preferential transfer. ⁴

The question presented resolves itself into a determination of when the transfer of installment notes from Genie Craft to the Bank occurred. The Bankruptcy Act §60(a)(2), 11 U. S. C. §96(a)(2), provides:

a transfer of property other than real property shall be deemed to have been made or suffered at the time when it became so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee.

This subsection requires us to examine the character of the transfer under local law. Although there is a dearth of authority on the point in this jurisdiction, a pledge and transfer of installment notes and contracts for purposes of security become perfected against a subsequent lien obtainable in legal proceedings on a simple contract, when the transferor has surrendered all dominion and control over the property considering the character of the property and provided such surrender of dominion establishes a situation which will give notice to possible subsequent creditors of the transferor that the property has been pledged to another as security for a loan. Cf. Dollar v. Land, 87 U. S. App. D. C. 214, 184 F. 2d 245, cert. denied, 340 U. S. 884 (1950).

We turn then to an examination of the record relating to Genie Craft's divestiture of dominion and control over the installment notes and contracts: (1) Genie Craft obtained negotiable installment notes from its consumer-debtors, rather than extending open account credit; (2) Genie Craft negotiated to the Bank the promissory notes of the consumers and delivered the installment notes and contracts of sale to the Bank; (3) the account books which remained at Genie Craft's place of business were plainly marked to indicate that the payee's property in those notes had been transferred to the Bank.

There was present, of course, some measure of apparent control in Genie Craft. Genie Craft was the Bank's agent for collection of the notes receivable which had been negotiated to the Bank. The obvious and primary purpose of this arrangement was to avoid the expense involved in having the Bank directly collect the numerous small installments from a large number of customers when the machinery for collection by Genie Craft was already in existence.

Our determination is necessarily influenced by the realities of business life. Multiple consumer accounts are not as readily made the subject of a bank pledge as a few large commercial accounts but the need for financing them is no less important. It is neither feasible nor necessary that the pledgee duplicate collection facilities in order to collect accounts from the installment note makers directly. The Bank's use of Genie Craft as its agent for collection would come into question only if that arrangement misled other creditors to their detriment because of some concealment or lack of disclosure. There is no evidence that any creditor made inquiry or was misled by appearances.

The facts of this case establish thatGenie Craft was the agent for collection of the notes receivable, but was required by contract and did in fact remit collection promptly to a special account in the Bank. As an agent of the Bank, Genie Craft's failure to account to the Bank would be attended by consequences more severe than simple failure of a debtor to make payments on a contract debt. As collector, Genie Craft was a fiduciary.

The requirements that the debtor divest himself of dominion and control of the property which is security for the debt, in order to perfect the pledge lien, exist for the protection of subsequent creditors of the debtor. The rationale is that a second creditor cannot possibly rely on property for security when it is not under the dominion and control of the debtor and where reasonable inquiry directed to the apparent owner or to the pledgee of the property would establish that it is security for a prior debt. The mere fact that a note has been given affords no basis for a presumption that the payee remains the holder, especially where it is common business practice for installment sellers to finance their operations by pledges of installment notes. The relationship of the parties in light of known commercial custom was sufficient to put the creditors on notice of the possible existence of an intervening interest. A subsequent creditor could not in good faith assume the installment notes to be available to him as security without requiring them to be delivered into his possession. Obviously this could not be done in these circumstances without discovery of the existence of the security interest of the Bank. Even if the subsequent creditor did not demand the evidence that Genie Craft owned the notes, it would at least be bound to make some inquiry, such as examining the books of Genie Craft which would at once have revealed actual notice of the Bank's interests. See M. M. Landy, Inc. v. Nicholas, 221 F. 2d 923, 929 (5th Cir. 1955); Gins v. Mauser Plumbing Supply Co., 148 F. 2d 974, 977 (2d Cir. 1945).

The Trustee argues that the Bank's security interest was not perfected because of its failure to notify the underlying debtors, the consumers. The collateral security which ran from Genie Craft to the Bank consisted of negotiable promissory notes which were negotiated and as to which the Bank became a holder in due course and there was no further duty on the Bank to give notice to the makers to perfect its lien. D. C. Code Ann. §§ 28-203, 204 (1961); Thompson v. Franklin Nat'l Bank, 45 App. D. C. 218, cert. denied, 242 U. S. 637 (1916).

[Federal Tax Lien]

II. The Trustee's second theory is based on his powers under §70(e)(1) of the Bankruptcy Act, 11 U. S. C. §110(e)(1). ⁵ The Trustee contends that he may exercise the rights of the United States under its lien for taxes, Internal Revenue Code §§ 6321-23, because the government filed proof of claim for $720 in taxes, on April 18, 1958 .

The federal lien for taxes, arising before bankruptcy, will prevail over the trustee when the Collector has taken possession of the personal property of the bankrupt. Goggin v. Division of Labor Law Enforcement [49-1 USTC ¶9142], 336 U. S. 118 (1949); United States v. Sands [49-1 USTC ¶9264], 174 F. 2d 384 (2d Cir. 1949). When the Collector has not taken possession as of the date of bankruptcy, as was true in this case, the tax lien is preserved, Bankruptcy Act §67(b), 11 U. S. C. §107(b), but is subordinated in priority, §67(c), 11 U. S. C. §107(c). Since the federal government is a creditor of the bankrupt, Genie Craft, for unpaid taxes and did file proof of claim within the meaning of Section 57n of the Bankruptcy Act, 11 U. S. C. §93n,