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[70-2 USTC ¶9463]Citizens Co-op Gin, et al., Plaintiffs-Appellees v. United States of America , Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 28136, 427 F2d 692, 6/16/70, Aff'g, rev'g and rem'g District Court, 69-1 USTC ¶9381, 300 F. Supp. 1193

[Code Sec. 6323(b)(5)]

Lien for taxes: Priority: Personal property subject to possessory lien: Cotton crop: Texas law: Superpriority status.--Despite the fact that the Government filed prior notices of its tax liens, an individual, who harvested the delinquent taxpayer's cotton crop and delivered it to a cooperative cotton gin, and the gin, which performed all labor and furnished all materials necessary to process the cotton, had superior possessory liens under Texas law. Although both had equitable liens under Texas law, nothing in Code Sec. 6323(b)(5) required that the lien under local law be one depending upon or authorizing possession. Both claimants had continuous possession of the cotton (the harvester through the gin's possession; the gin constructively through negotiable warehouse receipts issued when the cotton was stored). And both improved the cotton through their services rendered. District Court affirmed.
[Code Sec. 6323(e)]

Lien for taxes: Priority: Attorneys' fees: Texas law.--An individual who harvested a cotton crop and a cooperative cotton gin that processed the crop were not entitled to receive their attorneys' fees out of the cotton proceeds in preference to the Government's tax lien because, under Texas law, a lienholder's priority did not extend to include attorneys' fees incurred in collecting the obligation (charges for harvesting and processing the cotton). Remanded to determine the delinquent taxpayer's personal liability for attorneys' fees under state law.

J. R. Blumrosen, 1005 Citizens Tower, Lubbock, Tex., Thomas J. Griffith, Suite 6C Lubbock Nat'l Bank Bldg., Lubbock, Tex., for plaintiffs-appellees. Johnnie M. Walters, Assistant Attorney General, Lee A. Jackson, Stephen H. Hutzelman, Crombie D. Garrett, Department of Justice, Washington, D. C. 20530, Earl R. Allison, Levelland, Tex., Edward W. Napier, Citizens Tower, Lubbock, Tex., Eldon B. Mahon, United States Attorney, Fort Worth, Tex., for defendant-appellant.

Before WISDOM, GOLDBERG and INGRAHAM, Circuit Judges.

GOLDBERG, Circuit Judge:

The Commissioner of Internal Revenue contests an adverse judgment of the court below regarding the relative priority of a federal tax lien. The Commissioner asks us to narrowly construe the Federal Tax Lien Act, ignoring the fact that its very genesis was in generosity. Looking to the Congressional intent underlying the statute, we refuse to subvert its tolerant purpose in such a fashion.

[Lien Against Cotton Farm]

The taxpayers, J. B. and Leola Marion, were indebted to the United States for $37,261.51 in income taxes as a result of a Tax Court judgment entered on March 11, 1968 . The United States filed notice of the federal tax lien against the Marions ' property on July 16, 1968 , in Lubbock County , Texas and Hockley County , Texas . The Commissioner, however, apparently made no attempt to foreclose its lien against the taxpayers' property in these counties, and the Marions continued to operate, among other things, a cotton farm in Hockley County .

[Warehouse Receipts]

In the spring of 1968 the Marions purchased cotton seed from the Citizens Co-op Gin and thereafter planted this seed on the Hockley County farm. When this crop matured about the middle of October, 1968, the taxpayers obtained the services of J. D. Rackler to harvest the cotton and deliver it to a gin. Rackler and his one employee harvested and stripped the cotton and delivered it to the Citizens Co-op Gin. Upon delivery the gin marked the cotton with Rackler's name and issued Rackler a "gin ticket" showing his delivery of that cotton. The gin then cleaned the cotton, separated th seed and lint, and pressed, bagged, and banded the lint. Having completed all necessary services, the gin then delivered the bagged cotton to a warehouse for storage and received negotiable warehouse receipts in return.

[Levy Filed]

The customary procedure at this point was for the gin to hold the warehouse receipts until the cotton was sold or placed in government loan. In either case the gin would exchange the warehouse receipts for the proceeds, deduct the ginning fees, pay the storage and the farm labor fees, and then remit the net proceeds to the owner. In the present case, however, the normal procedure was interrupted on November 7, 1968 , when the Commissioner served the gin with a notice of levy on the Marions ' property and demanded the warehouse receipts which were in the possession of the gin.

[Interpleader]

The gin responded by filing an interpleader action in which it asserted that it faced conflicting demands for the cotton harvested from the Marions ' farm. The gin was claiming $120.52 for its own services, Rackler was claiming $1,178.60 for his harvesting services, and the government was claiming it all.

[District Court's Decision]

At trial the district court found that both Rackler and the gin had valid liens against the cotton which were superior under 26 U. S. C. A. §6323 to the government's tax lien. The government appeals, claiming that the trial court erred in its determination that the government's lien was inferior to the claims of Rackler and the gin. Agreeing with the judgment of the trial court, we affirm.

[Superpriorities]

I. In prior years the government clearly would have had a claim against the cotton superior to the claims of Rackler and the gin since the notice of the tax lien was filed before either competing claim became choate. See, e.g., United States v. White Bear Brewing Co., 1956, [56-1 USTC ¶9440] 350 U. S. 1010, 76 S. Ct. 646, 100 L. Ed. 871, rev'g 5 Cir. 1955, [55-2 USTC ¶9776] 227 F. 2d 359; United States v. Liverpool & London & Globe Ins. Co., 1955, [55-1 USTC ¶9136] 348 U. S. 215, 75 S. Ct. 247, 99 L. Ed. 268; United States v. Acri, 1955, [55-1 USTC ¶9138] 348 U. S. 211, 75 S. Ct. 239, 99 L. Ed. 264. However, Congress changed the well established priority rules when it passed the Federal Tax Lien Act of 1966, 26 U. S. C. A. §6323, et seq. In that Act Congress expanded the preferred class of claims, known as "super-priorities," which are valid against a federal tax lien even though notice of the tax lien has been filed before the claim arises. Rackler and the gin both assert that their claims are protected from the federal tax lien under this section.

[Personal Property Subject to Possessory Lien]

The particular superpriority involved is found in 26 U. S. C. A. §6323(b)(5), which provides:

"(b) Protection for certain interests even though notice filed. Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

* * *

(5) Personal property subject to possessory lien. With respect to tangible personal property subject to a lien under local law securing the reasonable price of the repair or improvement of such property, as against a holder of such a lien, if such holder is, and has been, continuously in possession of such property from the time such lien arose."

[Issue]

The question before us is whether the interests claimed by Rackler and the gin in the cotton harvested from the Marions ' farm are indeed protected from the tax lien by §6323(b)(5). We think they are.

[Congressional Intent]

In construing §6323(b)(5) we write on a clean slate, since no other court has heretofore been called upon to interpret this statute. The remedial purpose of the legislation, however, is quite clear. The statute was designed to protect those who add value to the government's tax lien by repairing or improving the property at their own expense in money or labor and who could not be expected to search the tax lien records. S. Rep. No. 1708, 89th Cong., 2d Sess., 3 U. S. Code Cong. and Adm. News 3722 (1966). With this salutary purpose in mind we begin our investigation of the effect of §6323(b)(5) on the relative priorities among the claimants in this case.

[ Texas Lien]

Congress limited the superpriority protection of §6323(b)(5) to claims against personal property by those who have a lien under local law securing the reasonable price of the repair or improvement of that property and who have been in continuous possession of the property from the time the lien arose. We have no difficulty in finding that both Rackler and the gin had the required liens against the cotton under local law. Texas , following the general rule, recognizes an equitable lien in favor of a party when the surrounding circumstances indicate that the parties to a transaction intended that certain property would secure the payment of a debt. The Texas role was stated in Williams v. Greer, Tex. Civ. App. 1938, 122 S. W. 2d 247, 248:

"After a transaction resolves itself into a security, whatever may be its form, and whatever name the parties may choose to give it, is in equity a lien. . . . It is not necessary that a lien is created by express contract or by operation of the statute; courts of equity will apply the relations of the parties and the circumstances of their dealings in establishing a lien based on right and justice."

Accord, Bradley v. Straus-Frank Co., Tex. Civ. App. 1967, 414 S. W. 2d 504; Edinburg Theatres, Inc. v. Richter, Tex. Civ. App. 1963, 367 S. W. 2d 354; First Nat'l Bank in Big Spring v. Conner, Tex. Civ. App. 1959, 320, S. W. 2d 391, writ ref'd n. r. e; Rountree Motor Co. v. Smith Motor Co., Tex. Civ. App. 1937, 109 S. W. 2d 296, writ dism'd.

[Equitable Lien Against Cotton]

In the instant case the testimony was uncontradicted that the usual custom in the Hockley County area was for the gin to hold the warehouse receipts until the cotton was sold, to pay off all charges against the cotton with the proceeds of sale, and then to remit only the net amount remaining to the landowner. The testimony indicates and the trial court found that the warehouse receipts would not have been given to Marion until the charges against the cotton were paid. Under such circumstances, we think it clear that all parties intended that the cotton would secure the debts owed for the harvesting and ginning of the cotton. Under Texas law, therefore, both Rackler and the gin have equitable liens against the cotton for the amount of their charges. ¹

[Right to Possession]

So clear in fact is the Texas law on this point that the government virtually concedes that both Rackler and the gin had valid equitable liens on the cotton harvested from the Marions ' farm. The government does argue, however, that such an equitable lien is insufficient to entitle the lienholder to a superpriority under §6323(b)(5). The government's argument in this respect is predicated upon its contention that the lien must be possessory in the sense that the state law creating the lien must give the claimants the legal right to withhold delivery of the property to the owner until payment is made. An equitable lien, the government asserts, confers no such right on the creditor. We do not agree.

It is true, as the government argues, that an equitable lien does not depend upon possession for its validity. It does not follow, however, that in all cases an equitable lien gives the lienholder no right to possession. In the instant case the equitable lien arose because of the implied agreement among the parties that Rackler and the gin would in fact maintain possession of the cotton until the charges for harvesting and ginning were paid. Their continued possession of the cotton was therefore legal. We think this is sufficient under §6323(b)(5). To hold otherwise would require us to infer an intent on the part of Congress to protect only those lienholders who happened to live in a state which had explicitly pronounced a right of possession in the lienholder. We find nothing in the Act which indicates that Congress intended for the superpriority to depend on the vagaries of this aspect of the various state laws. The precise wording of §6323(b)(5) requires only that the property be subject to "a lien under local law"; it does not specify that the lien must be one depending upon or authorizing possession. Since this is clearly remedial legislation, we see no need to read such a restriction into the statutory scheme. Indeed, since Congress did specify continuous possession of the property as a prerequisite to superpriority protection, we think it was the maintenance of possession with which Congress was concerned, not the particular wording of the state lien laws. We conclude, therefore, that the equitable lien was sufficient under §6323(b)(5) to entitle both Rackler and the gin to priority over the federal tax lien.

[Continuous Possession]

The government contends, however, that even if the lien held by Rackler and the gin was sufficient to qualify for superipriority protection, they waived their protection because neither remained in continuous possession of the cotton as required by §6323(b)(5). The government's position stems from the fact that Rackler delivered the cotton to the gin and the gin later delivered the bagged cotton lint to a warehouse. Thus the government claims that neither had continuous possession of the property. Under the circumstances we think the government's position is without merit. The testimony plainly indicates that Rackler took the cotton to the gin with the knowledge that he would be paid for his harvesting either by Marion or the gin before the gin released the cotton or its proceeds to Marion . To this extent the gin's possession was possession for Rackler. If Rackler had retained the personal possession which the government alleges the statute requires, the cotton would have been completely bestroyed and Rackler would have rendered his security valueless in the attempt to protect his priority. We do not think Congress intended such an absurd result. The purpose of the superpriority provision was to protect the improver and thereby encourage the improvement of property in order to increase the value of the federal tax lien. This purpose would be completely defeated in every case in which the improvement requires the skill or services of more than one person if continuous personal possession were required of each improver. In circumstances where the improvement requires a chain of improvers, we think the possession of one is the possession of all so long as those in the chain intend to withhold the property from the owner until the improvement charges against the property are satisfied. We therefore hold that Rackler, through the gin, had continuous possession of the cotton as required by §6323(b)(5).

[Constructive Possession through Warehouse Receipt]

The government also argues that the gin relinquished its possession when it delivered the bagged cotton to a warehouse and accepted warehouse receipts in return. We conclude that this argument is without merit. It is well understood in commercial practice that possession of a negotiable warehouse receipt is constructive possession of the goods represented by that receipt and that delivery of the receipt is symbolic and legal delivery of the goods. Mims v. Hearon , Tex. Civ. App. 1952, 248 S. W. 2d 754; McLendon Hardware Co. v. J. A. Hill & Son. Tex. Civ. App. 1920, 226 S. W. 825; Morris v. Burrows, Tex. Civ. App. 1915, 180 S. W. 1108. Possession of the warehouse receipt so controls the right to actual possession of the goods represented by the receipt that possession of the receipt is for most purposes equivalent to possession of the property. In the instant case it is plain that the warehouse was obligated according to the bailment contract to release the cotton only upon presentation of the negotiable warehouse receipt. Tex. Bus. and Comm. Code art. 7.403. Since the gin had actual possession of the warehouse receipts, the gin effectively controlled the possession of the cotton. The only practical difference between possession of the cotton and possession of the receipts representing the cotton was the physical situs of the cotton. Instead of being stored on the property belonging to the gin, it was stored, subject to the gin's order, on property belonging to the warehouse. Common sense dictates that Congress could not have intended to protect from the federal tax lien only those creditors who have physical facilities large enough to allow on-premise storage of goods; constructive possession of goods in storage must be sufficient under the continuous possession requirement of the Tax Lien Act. We therefore conclude that the gin's constructive possession of the cotton through its actual possession of the warehouse receipts was sufficient under the "continuous possession" requirement of §6323(b)(5).

[Cotton Improved]

The government's final argument is that neither Rackler nor the gin qualifies under the superpriority section because neither "repaired or improved" the cotton. In order to be entitled to superpriority under §6323(b)(5) the lien under state law must secure the reasonable price of the repair or improvement of tangible personal property. The government concedes that the fees of Rackler and the gin were reasonable, but argues that both participated in the manufacturing or processing of raw materials rather than repair or improvement. We disagree. We think the "improvement" requirement means nothing more than that the lien claimant must add value to the property. Unquestionably both Rackler and the gin added much to the value of the crop growing in the Marions ' field. Significantly the government witness admitted that the value of the crop was enhanced by the services of both Rackler and the gin. Moreover, we note that the Tax Lien Act gives the Secretary authority to subordinate the federal tax lien to other creditors when the value of the tax lien will thereby be increased. 26 U. S. C. A. §6325(d). ² In recommending passage of the Act, the Senate Finance Committee mentioned the precise situation now before us as an example of the appropriate time to use the subordination procedure, commenting that the value of the tax lien would be increased "in the case of a crop which needs harvesting and without which the tax lien of the Government has little or no value." S. Rep. No. 1708, 89th Cong., 2d Sess., 3 U. S. Code Cong. and Adm. News 3737 (1966). (emphasis added.) We think it obvious, therefore, that Rackler and the gin both "improved" the cotton in question within the meaning of §6323(b)(5).

[Broad Interpretation of Statute]

In this concluding that Rockler and the gin are entitled to the superpriority protection afforded by the Tax Lien Act, we are aware that the Act is susceptible of a different interpretation. The statute could possibly be read to deny any protection to the claimants in this case. Faced as we are, however, with the task of construing a relatively new statute having a remedial purpose, we feel justified in giving the statute a broad interpretation which will achieve that purpose. The fact that the instant case arises in the context of an agricultural setting rather than an industrial atmosphere does not render the priority law inapplicable. The statute was designed to protect the small businessman who operates informally, depending upon an oral agreement and his possession to enforce his claim for a reasonable fee for services which rendered the property more valuable. He is not expected to check the tax lien notices before he proceeds to work.

Rackler and the gin both fall in this category. Neither even had an articulated contract for their services; both depended solely on the custom in the community. According to the testimony, the custom was so fixed that price was never even mentioned; everyone simply knew the price. The same was true regarding the time and methods of payment. It was precisely this sort of informal transaction which we think §6323(b)(5) was designed to protect. The person involved, because of the informality of the transaction and well established custom, is unlikely to check the tax notices or obtain a written security agreement, but he does by custom retain control of the property until he is paid. When such a transaction--whether it be the repair of an automobile or the harvesting and ginning of cotton--increases the value of the property, we think Congress intended that the workers' security be protected against the federal tax lien. To hold otherwise would create injustice and hardship, a result contrary to the remedial purposes of the statute. We therefore reject the Commissioner's narrow interpretation and grant superpriority status to both Rackler and the gin.

[Attorney's Fees]

II. The final issue involved in this appeal is the matter of counsel fees. The trial court awarded each claimant $500 for fees incurred at trial and ordered this amount paid out of the proceeds of the cotton. On appeal both have asked for an additional award for expenses incurred on this appeal. Rackler and the gin apparently have a legitimate claim against Marion for attorneys' fees under Tex. Rev. Civ. Stat. Ann. art. 2226. ³ The crucial question, however, is whether this claim may be satisfied out of the cotton or its proceeds in preference to the government's tax lien on that property.

[Equitable Lien Including Attorney's Fees]

The relevant section of the Tax Lien Act provides that if the federal tax lien is not valid against a competing lien, then the priority of the competing lien is extended to include attroney's fees incurred in collecting the obligation secured. 26 U. S. C. A. §6323(e)(3). ⁴ Had Congress stopped at this point, both Rackler and the gin would be entitled to a priority for the attorneys' fees incurred in this suit because we have held that both have a valid lien superior to the federal tax lien. Congress, however, did not make the priority regarding attorney's fees as broad as the parties here seem to have assumed. The extension of the priority to include attorney's fees is limited to those cases in which the fee under local law has the same priority as the lien being enforced. Thus Rackler and the gin are entitled to receive their attorneys' fees out of the cotton proceeds in preference to the government's tax lien only if under Texas law a lienholder's priority is extended to include attorney's fees incurred in collecting the obligation.

[ Texas Law]

We have found no case involving the extension of an equitable lien such as the one here involved to include attorney's fees. It is plain, however, that under Texas law the holder of a mechanic's lien is not entitled to have attorney's fees included in a foreclosure judgment unless the mechanic's lien contract specifically provides for attorney's fees. In the absence of such a contract for attorney's fees the creditor is entitled only to a personal judgment against the debtor since the lien securing the debt does not cover the attorney's fees. Diaz v. Trevino, Tex. Civ. App. 1968, 430 S. W. 2d 742; Wood v. Barnes, Tex. Civ. App. 1967, 420 S. W. 2d 425, writ ref'd n.r.e. In the present case there was no contract which included attorneys' fees in either claimant's equitable lien on the cotton proceeds. Perceiving no relevant distinction between the equitable lien here involved and the mechanic's lien, we conclude that the attorney's fees incurred by Rackler and the gin in this suit would not under Texas law be given the same priority as their liens. The attorneys' fees therefore do not qualify under 26 U. S. C. A. §6323(e)(3) for a priority superior to the government's tax lien. The trial court thus erred in ordering that the attorneys' fees incurred by Rackler and the gin be paid out of the cotton or its proceeds, and to this extent the judgment below must be reversed.

[Remand on Attorneys' Fees]

This is not to say, however, that Rackler and the gin are not entitled to a judgment for attorneys' fees. They may well be entitled to a personal judgment against the Marions for such fees under the provisions of Tex. Rev. Civ. Stat. Ann. art. 2226. Since the record is unclear as to whether the requirements of that section were met, we must remand to the trial court for a determination of this issue. The court on remand may also consider what additional amount, if any, should be awarded for counsel fees incurred as a result of this appeal.

[Judgment]

Affirmed in part, Reversed in part, and Remanded for further proceedings consistent with this opinion.

¹ Furthermore, since the gin and Rackler both furnished services in the ordinary course of their business, it appears that under Texas law their liens would take priority over an earlier perfected security interest. Tex. Bus. and Comm. Code art. 9.310.

² Section 6325(d) provides:

"(d) Subordination of lien.--Subject to such regulations as the Secretary or his delegate may prescribe, the Secretary or his delegate may issue a certificate of subordination of any lien imposed by this chapter upon any part of the property subject to such lien if--

(1) there is paid over to the Secretary or his delegate an amount equal to the amount of the lien or interest to which the certificate subordinates the lien of the United States, or

(2) the Secretary or his delegate believes that the amount realizable by the United States from the property to which the certificate relates, or from any other property subject to the lien, will ultimately be increased by reason of the issuance of such certificate and that the ultimate collection of the tax liability will be facilitated by such subordination."

³ Article 2226 provides:

"Any person having a valid claim against a person or corporation for personal services rendered, labor done, material furnished, overcharges on freight or express, lost or damaged freight or express, or stock killed or injured, or suits founded upon a sworn account or accounts, may present the same to such person or corporation or to any duly authorized agent thereof; and if, at the expiration of thirty (30) days thereafter, the claim has not been paid or satisfied, and he should finally obtain judgment for any amount thereof as presented for payment to such person or corporation, he may also recover, in addition to his claim and costs, a reasonable amount as attorney's fees, if represented by an attorney."

⁴ Section 6323(e)(3) provides:

"(e) Priority of interest and expenses.--If the lien imposed by section 6321 is not valid as against a lien or security interest, the priority of such lien or security interest shall extent to--

* * *

(3) the reasonable expenses, including reasonable compensation for attorneys, actually incurred in collection or enforcing the obligation secured,

* * *

to the extent that, under local law, any such item has the same priority as the lien or security interest to which it relates."

 

[68-1 USTC ¶9296]United States of America, Plaintiff v. Truss Tite, Inc.; Alvin State Bank; Alvin State Bank as the Administrator of the Estate of Terry A. Newman, Defendants

U. S. District Court, So. Dist. Tex., Galveston Div., Civil Action No. 66-G-110, 285 FSupp 88, 3/13/68

[1954 Code Sec. 6323]

Lien for taxes: Priorities: Contractual landlord's lien: State law: Chateness.--Under Texas law, a contractual landlord's lien is to be treated as a chattel mortgage; it must be filed in order to entitle it to priority over another perfected lien. Since the government's lien for unpaid employment taxes had been perfected (i.e., the taxes had been assessed and notice of the lien had been filed), the government's lien was entitled to priority over the inchoate landlord's lien.

Joel Kay, Assistant United States Attorney, Houston , Tex. , for plaintiff. Olin G. Wellborn, Wellborn, Britt & Kelly, Alvin State Bank Bldg., Alvin, Tex., for defendants.

Memorandum and Order

NOEL, District Judge:

This is an often litigated area of the law in the United States District Courts--the battle of priorities between a tax lien of the United States and a competing lien of another party. This action was commenced as a suit whereby the government sought to obtain judgment against a taxpayer, Truss Tite, Inc., for employment taxes due and owing the United States . Default judgment was granted and entered on October 10, 1967 as to the taxpayer. Alvin State Bank, as the admin istrator of the estate of Terry A. Newman, was also named as a defendant in order that a determination could be made as to the priority of competing liens between the United States and the bank. The government and the bank have agreed to all the facts involved in the suit in a pre-trial stipulation entered on May 29, 1967 . The parties further agreed that there was only one issue of law remaining to be determined by the court. Both parties having filed briefs and reply briefs, the case is now before the court for decision.

The relevant facts as agreed by the parties are as follows: Defendant Truss Tite, Inc., entered into a one-year lease agreement with the Alvin State Bank, in its representative capacity, in March 1964. The lease contract provided, inter alia, that the lessor would have a lien as security for the rent upon all the personal property and fixtures on the demised premises. By November 10, 1964 , Truss Tite was in default, and has failed to pay any further amount to date.

In December 1964, the government made an assessment against Truss Tite (hereinafter called taxpayer) for past due taxes. Notice of federal tax lien was filed on December 11, 1964 . In January 1965, the bank filed suit against the taxpayer for the past due rent and breach of the lease agreement. In February, the plaintiff made a further assessment and filed a second notice of federal tax lien.

In March 1965, the taxpayer filed a general denial in the suit the bank had brought against it. In late April, with the approval of both a major stockholder of taxpayer and the Internal Revenue Service, the bank sold personal property located in the leased premises for a total amount of $3,203.02. This is the fund over which both the government and the bank claim priority. The bank is holding this sum in escrow pending the outcome of this suit.

In addition to the above facts, the parties also stipulated that, "The following issue of law, and no others, remains to be determined by the court herein:

Whether the federal tax liens for the third and fourth quarters of 1964 having a total unpaid balance of $3,275.49, plus interest as provided by law, are entitled to priority to the contractual landlord's lien contained in the lease agreement between the Alvin State Bank, as admin istrator of the estate of Terry A. Newman, and Truss Tite, Inc., as to the fund of money resulting from the sale of certain personal property located on the leased premises at the time of the default in the lease agreement." ¹ (Emphasis added).

Section 6321 of the Internal Revenue Code of 1954 provides for the imposition of a tax lien upon all property and rights to property in which a delinquent taxpayer has an interest. It arises as a secret lien, effective from the date of the assessment of the tax. In order to protect certain creditors, Congress passed Section 6323. This section requires that the government file notice of the lien before it is valid against purchasers, holders of security interests, mechanics lienors, or judgment lien creditors. ²

The federal courts look to state law to determine the nature of parties' interest in property in tax lien litigation. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958); United States v. Creamer Industries [65-2 USTC ¶9527], 349 F. 2d 625 (5th Cir.) 1965, cert. denied, 382 U. S. 957 (1965). The rule is usually stated that when the priority of a federal tax lien is asserted as against a state-created interest, state law will determine the existence and characteristics of the state lien, but federal law sets standards for priority, and determines whether the status of a holder of a security interest within the meaning of 6323(a) was attained before notice of tax lien was filed.

In regulating the competition between federal tax liens and non-federal liens, the Supreme Court has ruled that the common law rule of "the first in time is the first in right" will control. United States v. Equitable Life Assur. Soc. of U. S. [66-1 USTC ¶9444] 384 U. S. 323 (1966). However, in determining the priority of liens against a government tax lien, the one which is first in time will be deemed first in right, if and only if, the one first in time is specific and perfected in the federal sense. United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957). A lien is not choate or perfected in the federal sense, unless, inter alia, (1) it has at least complied with all state requirements for perfection, (2) the identity of the lienor is known, (3) the property subject to the lien is established, and (4) the amount of the lien is established. United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963).

For those classes of persons not protected by §6323, the "choateness" test is applied at the time of the tax assessment. For those that are protected, e.g., purchasers, holders of a security interest, etc., the test is applied as of the date notice of the tax lien is filed in the appropriate state office. Should the competing lien not meet anyone of the choateness standards, it is inchoate. In determining the priority of a federal tax lien over competing liens, there has been a persistent application of the "choate lien test," first in insolvency cases, then in statutory lien cases, and finally in non-statutory contractual lien cases. United States v. Bond [60-2 USTC ¶9532], 279 F. 2d 837 (4th Cir. 1960). Even though prior in time, an inchoate lien is inferior to a federal tax lien. Fore v. United States [65-1 USTC ¶9101], 339 F. 2d 70 (5th Cir. 1964), cert. denied, 381 U. S. 912 (1965). However, a choate state-created lien will take priority over later federal tax liens. United States v. Pioneer Am. Ins. Co., supra.

In the present case, defendant claims the status of a mortgagee or, under the amended statute, a holder of a security interest. Under state law, a contractual landlord's lien such as the one involved here has been held to have the same status as a chattel mortgage. Shwiff v. City of Dallas, 327 S. W. 2d 598 (Tex. Civ. App. 1959), writ ref. The state law requires that a chattel mortgage must be filed in the office of the county clerk in the county where the property is situated before it is valid as against creditors or subsequent lien holders. Tex. Rev. Civ. Stat. Ann. Art. 5490 (1947); Tex. Rev. Civ. Stat. Ann. Art. 5498.

Defendant states that the statutes of the State of Texas do not require the recording of a lease. This is quite correct. Defendant also argues that the basic purpose of the recording statutes is to give notice to intervening third parties of the existence of a prior claim or lien in order that these parties will not be misled to their detriment; that the government would not have acted differently if the lien in question had been recorded. While this may be true, it is almost black letter law that the federal government, like a private judgment creditor, must depend upon record title of property for the satisfaction of its lien. Parker Square State Bank v. Triangle Supply Co., 394 S. W. 2d 418 (Tex. Civ. App. 1963) writ refused; n.r.e.; Underwood v. United States [41-1 USTC ¶9296], 118 F. 2d 760, 761 (5th Cir. 1941); United States v. Creamer Industries [65-2 USTC ¶9527], 349 F. 2d 625 (5th Cir. 1965); Uhlhorn v. Owens [63-1 USTC ¶9149], 211 F. Supp. 798 (S. D. Tex. 1962). ³

It has already been held in this district that a contractual landlords lien should be filed as a chattel mortgage to entitle it to priority over another perfected lien. In re Allen, 92 F. Supp. 701 (S. D. Tex. 1950). Defendant does not dispute the fact that the contractual landlords lien at issue here was never filed under the state chattel mortgage recording statute. Therefore, having failed to comply with the state requirements for perfection, the lien is inchoate and all fully perfected liens will take priority over it. Since the contractual landlords lien is inchoate, the bank is not entitled to the status of a holder of a security interest within the meaning of Section 6323(a) of the Internal Revenue Code of 1954. Fore v. United States , supra. ⁴ The federal tax liens were fully perfected when assessed and the filing of notice had taken place. Therefore, the federal tax liens are entitled to priority over the contractual landlords lien of defendant bank.

Consel for the government will submit an appropriate order.

¹ By electing to rely on its contractual landlord's lien "and no others," the bank waived whatever rights it may have had under the statutory landlord's lien. Tex. Rev. Civ. Stat. Ann. Art 5238 (1889). However, it is extremely doubtful that this lien could have priority over the federal tax liens unless it was reduced to judgment. Cf. United States v. Scott and Gregg Real Estate Co., 229 S. W. 2d 888 (Tex. Civ. App. 1950), reh. den., err. dism'd. See Annot. 2 L. ed 2d 1853 (1958); 36 Tex. Jur. 2d §186. See also, Federal Liens and Priorities, 77 Yale Law Journal, 228, 230, n. 20 (1967).

² Prior to 1966, the protected classes were mortgagees, pledgees, purchasers, and judgment creditors. The change in the statute did not affect the lien in question here. The statutory change did not aid the statutory landlord's lien either. See 77 Yale L. J. 228, 232, Note 32.

³ See the dissenting opinion of Chief Judge Brown in United States v. Creamer Industries, supra, and Note, 20 Sw. L. J. 186 (1966) for criticism of this rule.

⁴ Had the statutory lien not been waived, it too would fail the choateness test. United States v. Leventhall [63-1 USTC ¶9225], 316 F. 2d 341 (D. C. Cir. 1963).

 

 

[50-1 USTC ¶9293] United States of America and Frank Scofield, Collector of Internal Revenue, Appellants v. Scott and Gregg Real Estate Company et al., Appellees

In the Court of Civil Appeals, Third Supreme Judicial District of Texas, at Austin From District Court of Travis County, No. 9879, No. 83,699-A, April 26, 1950

Lien for taxes: Priority of creditors: Landlord.--The lien of the United States for income, withholding, employment, and Federal insurance contributions taxes was entitled to priority in payment over a landlord's statutory lien for delinquent rents out of a fund arising from the sale of personal property of the debtor located on the landlord's premises, where the landlord's lien was neither specific nor perfected on the date foreclosure, and receivership proceedings were instituted against the debtor by a creditor bank.

H. W. Moursund, United States Attorney, and Bradford F. Miller, Assistant United States Attorney, San Antonio, Texas, for appellant. J. W. Townsend, Austin , Texas , attorney for appellee.

ROY C. ARCHER, Chief Justice:

This appeal involves the sole question of the relative rights to priority of payment of claims of the United States for income, withholding, employment, and Federal insurance contributions taxes, and of a landlord for rent, in this receivership proceeding, wherein the fund from which payment is to be made arises from the sale of personal property of the debtor located on the landlord's premises.

The point relied on is that the United States is entitled to payment of its claim for taxes prior to payment of the claim of Scott and Gregg Real Estate Company for rent, in a receivership of the nature of this case, by virtue of the provisions of 31 U. S. C. 191 (Sec. 3466).

[Facts]

Scott and Gregg Real Estate Company was the owner of a building in which Pattons, Inc., had operated a taxicab and car storage business for a number of years, and had in the building equipment and furniture not subject to any recorded lien. The rental contract was for one year, which had been extended for additional annual periods from time to time.

On June 7, 1949 , a foreclosure and receivership proceeding was filed by a creditor bank against Pattons, Inc. The Real Estate Company intervened on the 16th of September, 1949 , and sought foreclosure of its statutory lien, and filed with the County Clerk a verified statement showing delinquent rents of $1,675.

On October 10, 1949 , the United States filed its motion for priority of payment of its claim (stated to be $5,344.25). The court denied priority of the claim, and entered judgment for the landlord.

Article 5238, R. S., grants landlords a preference lien as against certain other lienholders, and makes provision for collection by foreclosure, and a manner to fix this lien.

The furniture and equipment were sold by the receiver for $500, which was deposited in the registry of the court.

Prior to the institution of the suit and receivership the Real Estate Company had not taken any measures to fix or foreclose its lien.

[U. S. Lien Priority by Statute and Case Precedent]

There is no question of the insolvency of the debtor. A receiver had been appointed and had taken charge of the estate. This was an act of bankruptcy within the meaning of Section 3 of the Bankruptcy Act, thus entitling the United States to the priority given by Section 3466. Illinois v. Campbell, 329 U. S. 362; U. S. v. Waddill, 323 U. S. 353 [45-1 USTC ¶9126]; U. S. v. Texas, 314 U. S. 480.

31 U. S. C., 191, provides:

"Priority established. Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed. (R. S. Sec. 3466.)"

In the case of United States v. Waddill, Holland & Flinn, Inc., 323 U. S. 353, 65 Sup. Ct. , 304 (1945) [45-1 USTC ¶9126], the court in its opinion stated:

"Section 3466 of the Revised Statutes provides in pertinent part that 'the debts due to the United States shall be first satisfied' whenever any person indebted to the United States is insolvent or, 'not having sufficient property to pay all his debts, makes a voluntary assignment thereof.' We hold that this statute clearly subordinates the claims of both the landlord and the municipality to that of the United States . The judgment of the court below must accordingly be reversed.

"The words of Section 3466 are broad and sweeping and, on their face, admit of no exception to the priority of claims of the United States . * * * But this court in the past has recognized that certain exceptions could be read into this statute. The question has not been expressly decided, however, as to whether the priority of the United States might be defeated by a specific and perfected lien upon the property at the time of the insolvency or voluntary assignment. * * * It is within this suggested exception that the landlord and the municipality seek to bring themselves. Once again, however, we do not reach a decision as to whether such an exception is permissible for we do not believe that the asserted liens of the landlord and the municipality were sufficiently specific and perfected on the date of the voluntary assignment to cast any serious doubt on the priority of the claim of the United States .

* * *

"Tested by its legal effect under Virginia law, the landlord's lien in this instance appeared to serve 'merely as a caveat of a more perfect lien to come.'

* * *

* * * These interpretations of the Virginia statutes, as propositions of state law, are binding. But it is a matter of federal law as to whether a lien created by state statute is sufficiently specific and perfected to raise questions as to the applicability of the priority given the claims of the United States by an act of Congress. If the priority of the United States is ever to be displaced by a local statutory lien, federal courts must be free to examine the lien's actual legal effect upon the parties. A state court's characterization of a lien as specific and perfected, however conclusive as a matter of state law, cannot operate by itself to impair or supersede a long-standing Congressional declaration of priority."

[Conclusion]

In view of the statutes above noted and of the cases cited here, we do not believe that the landlord's statutory lien was either specific or perfected on June 7, 1949, the day of the institution of the receivership proceedings, and that the lien of the United States was entitled to priority in payment over that of the landlord.

The judgment of the trial court is reversed and judgment is rendered in favor of the United States .

 

 

[69-1 USTC ¶9381]Citizens Co-Op Gin, Plaintiff v. United States of America, J. B. Marion, Leola Marion, J. D. Rackler, and Earl Depue, Defendants

U. S. District Court, No. Dist. Tex. , Lubbock Div., Civil Action No. CA-5-541, 300 FSupp 1193, 4/15/69

[Code Sec. 6323]

Tax liens: Priority: Possessory lien under state law.--Despite the fact that the Government filed prior proper notices of its tax liens, an individual who, without actual notice of the Government's liens, harvested the delinquent taxpayer's cotton crop and delivered it to a cooperative cotton gin had a superior possessory lien under state law for his services (plus attorney's fee) on the proceeds to be realized from the disposition of the harvested cotton. Similarly, the cooperative gin which performed all labor and furnished all materials necessary to gin the cotton and to press, bag, and tie it had a lien for its services which was superior to the Government's liens. But the priority of the cooperative's lien did not extend to the cost of cotton seed which the cooperative furnished the taxpayer for planting the cotton.

J. R. Blumrosen, 410 Citizens Tower, Lubbock , Tex. , for plaintiff. Claude D. Brown, Assistant United States Attorney, 206 U. S. Courthouse, Fort Worth, Tex., for U. S.; Edward W. Napier, 1002 Citizens Tower, Lubbock, Tex., for J. B. and Leola Marion; Thomas J. Griffith, Suite 6C, Lubbock Nat'l Bldg., Lubbock, Tex., for J. D. Rackler; Earl R. Allison, Allison, Mann & Allison, 719 Houston St., Levelland, Tex., for E. Depue, for defendants.

Findings of Fact and Conclusions of Law

WOODWARD, District Judge:

In compliance with Rule 52(a) of the Federal Rules of Civil Procedure, I find the facts and state my conclusions of law as follows:

Findings of Fact

[Government's Tax Lien]

1. J. B. and Leola Marion are indebted for income taxes assessed with interest for the years ending June 30, 1960 and June 30, 1962 , in the total sum of $37,261.51, such sum being liquidated by a tax court judgment entered on March 11, 1968 , and said sum being assessed on May 3, 1968 . Statutory interest has accrued upon such taxes. The gross value of the 97 bales of cotton in controversy is substantially less than such tax liability.

2. The Government filed proper notices of federal tax liens on July 16, 1968 in Lubbock and Hockley counties in the State of Texas .

3. During the year 1968, J. B. and Leola Marion operated farms, including a 320 acre farm in Hockley County , Texas .

4. Citizens Co-Op Gin furnished J. B. and Leola Marion cotton seed upon open account in the spring of 1968 at the agreed and reasonable price of $295.69.

[Harvesting Services]

5. On October 20, 1968 , J. B. Marion requested that J. D. Rackler harvest the cotton crop growing upon his farm in Hockley County , Texas , and deliver the seed cotton to Citizen's Co-Op Gin approximately five miles west of Shallowater, Texas . The customary and agreeable price for this service was 50 cents per hundred weight.

6. Mr. Rackler furnished his personal labor, machinery, and the hire of one servant in performing such labor for J. B. Marion, from October 22, 1968 to November 5, 1968 . Such service was necessary to the preservation of the cotton crop and the value of the cotton produced. The services performed by J. D. Rackler enhanced the value of the cotton crop by 50 cents per hundred weight of seed cotton, and such sum was the reasonable value of the services rendered. J. D. Rackler had no actual knowledge of the tax lien which had been filed by the United States Government before completing such labor.

7. J. D. Rackler reasonably relied upon the universal custom in the vicinity of Hockley and Lubbock County , Texas pursuant to which cotton gins entered upon their accounts and books of records the name of J. D. Rackler as the person furnishing labor and machinery necessary to harvest and deliver the cotton for ginning. J. D. Rackler reasonably relied upon the universal custom in the vicinity of Lubbock and Hockley County, Texas, pursuant to which a cotton gin would, upon its lot, or upon the lot of a compress, hold possession of said crop until the same was placed in Government loan or was sold with the authority of the owner of the cotton and would then pay all charges for ginning services and storage furnished, all charges for custom farm labor, all interests of any tenant, and render to the owner an accounting and the net proceeds of such sale or loan.

8. J. D. Rackler harvested 235,720 pounds of seed cotton and is entitled to judgment and payment from J. B. and Leola Marion in the amount of $1,178.60 for such services.

[Ginning Services]

9. Citizen's Co-Op Gin performed all labor and furnished all materials necessary to gin the J. B. Marion cotton and to press, bag, and the such cotton. Citizen's Co-Op Gin also transported the same to Farmer's Co-Operative Compress at Lubbock , Texas , for storage.

10. The cotton seed separated from lint has been sold, and the proceeds have been applied to the account for ginning services owed to Citizen's Co-Op Gin by J. B. and Leola Marion. The balance of $120.52 is the balance owed the gin for such service. Ginning charges made are reasonable.

11. The 97 bales of cotton subject to the lien of the United States of America would have suffered total and irreparable loss and damage had the same not been harvested and delivered to the cotton gin. Such cotton, delivered to the cotton gin, would have suffered total and irreparable loss and damage had it not been ginned, baled, bagged, tied, and placed for storage.

12. Payment for all services and materials furnished by J. D. Rackler and furnished by Citizen's Co-Op Gin was due upon sale of the cotton or upon placing it in the Government Loan Program.

13. Market conditions and Government regulations make it unreasonable to hold the cotton in storage, and the same should be placed in Government Loan to realize the greatest economic advantage as early as possible.

14. The cotton subject to the lien of the United States of America has been continuously in the possession of J. D. Rackler, either in person or through his servants or agents, and the same has been continuously in the possession of Citizens Co-Op Gin, both for itself and as agent for J. D. Rackler, upon its premises and upon the premises of its agent for such possession, Farmer's Co-Operative Compress. Citizens Co-Op Gin received conflicting claims for the possession of such cotton and the warehouse receipts therefor before filing this suit.

15. Legal services rendered by Thomas J. Griffith, attorney for J. D. Rackler in this case, are reasonably worth $500.00.

16. Legal services rendered by J. R. Blumrosen, attorney for Citizens Co-Op Gin in this case, are reasonably worth $500.00.

Conclusion of Law

1. This Court has jurisdiction and venue over the parties and the subject matter.

2. All parties necessary to complete and final disposition of the property subject to the lien of the United States of America are before the Court.

3. The United States of America has a valid lien by virtue of notice properly filed against the 97 bales of cotton identified by the schedule of warehouse receipts attached as Exhibit A to Plaintiff's Original Petition in this cause.

[Lien for Harvesting Services]

4. However, such lien of the United States of America is inferior and subject to the prior lien of J. D. Rackler for the sum of $1,178.60 for services rendered and attorney's fees in the amount of $500.00, and is further subject to the prior lien and claim of Citizen's Co-Op Gin for services rendered in the amount of $120.52 and for reasonable attorney's fees in the amount of $500.00. The suit pending is a stakeholder's suit.

5. The 97 bales of cotton were subject to a lien of J. D. Rackler under the laws of the State of Texas for his harvesting services.

6. J. D. Rackler has a lawful possessory lien superior to that of the United States of America under the provisions of 26 U. S. C. A. 6323.

7. J. D. Rackler has an equitable lien superior to the lien of the United States of America .

8. The lien of J. D. Rackler extends to reasonable attorney's fees under the provisions of Article 2226, Revised Civil Statutes of Texas, on account of personal services rendered with priority to the lien of the United States of America under the provisions of 26 U. S. C. A. 6323(b)(8).

9. Attorney for the plaintiff is entitled to priority of payment over the lien of the Government, having filed a valid and bona fide stakeholder's suit.

10. By virtue of labor, materials, and services creating, preserving, and protecting the property subject to the tax lien of the United States of America and enhancing its value in the reasonable sum of $1,178.60, J. D. Rackler is subrougated to the lien of the United States of America for taxes in such amount.

[Cooperative's Lien]

11. Citizen's Co-Op Gin has a lawful possessory lien superior to that of the United States of America under the provisions of 26 U. S. C. A. 6323.

12. Citizen's Co-Op Gin has an equitable lien superior to the lien of the United States of America .

13. By virtue of labor, materials, and services creating, preserving, and protecting the property subject to the tax lien of the United States of America and enhancing its value in the reasonable sum of $120.52, Citizen's Co-Op Gin is subrogated to the lien of the United States of America for taxes in such amount.

14. Citizen's Co-Op Gin has no lien on such cotton for the seed furnished in the amount of $295.69, but J. B. Marion and Leola Marion are indebted to Citizen's Co-Op Gin for such amount.

15. To preserve the property, and by consent of all parties, all cotton subject to the liens described should be placed in government loan immediately, and the proceeds should be apportioned as follows:

A. To J. D. Rackler, for services rendered and attorney's fees, $1,678.60.

B. To Citizen's Co-Op Gin, for services rendered and attorney's fees, $620.52.

C. To the United States of America , the balance of all proceeds received, to be credited on its judgment against J. B. Marion and Leola Marion.

 

 

[62-1 USTC ¶9221]First National Bank of Lubbock v. Myrtle Jenkins, et al.

Texas Civil Court of Appeals, No. 7078, 9/18/61

[1954 Code Secs. 6321 and 6323]

Priority of liens: Homestead: Bank holding note v. Suppliers of labor and materials v. U. S. tax lien.--The lien of a bank, which was transferee of decedent-taxpayer's $18,000 note given to the builder with the contract for the construction of the house, and the claims of suppliers of labor and materials were held by the trial court to be of equal rank and superior to the U. S. tax lien. Proceeds of the foreclosure sale of the house were prorated between the bank and the suppliers to the extent of the note, leaving the balance for the U. S. tax lien. Upon appeal by the bank and the government, the Texas Civil Court of Appeals held that (1) the bank's lien was entitled to first priority because the note was a valid negotiable instrument, (2) the U. S. tax lien, which had been perfected by notice, was next in rank, and (3) the suppliers had no lien because a lien against a homestead could be acquired only through a statute-prescribed contract, which they did not have after the transfer to the bank.

Crenshaw, Dupree & Milam, Great Plains Life Bldg., Lubbock, Tex., W. B. West III, United States Attorney, Rob ert S. Travis, Assistant United States Attorney, Fort Worth, Tex., Abbott M. Sellers, Assistant Attorney General, Lee A. Jackson, A. F. Prescott, John A. Bailey, Washington, D. C., for the appellants. Howard & Tucker, Key, Carr, Carr & Clark, Lubbock National Bank Bldg., Evans, Pharr, Trout & Jones, Great Plains Life Bldg., A. W. Salyars, Lubbock National Bank Bldg., Edward W. Napier, Myrick Bldg., James F. Moore, 1001 Great Plains Life Bldg., Hugh Anderson, 414 Lubbock National Life Bldg., O'Connor & Brister, Lubbock National Bank Bldg., Treadaway & Blumrosen, 1201 Great Plains Life Bldg., Lubbock Tex., for appellees.

CHAPMAN, Justice:

This suit was instituted by First National Bank of Lubbock, hereafter called Bank, to recover upon a note held by it and to foreclose a mechanic's and materialman's lien contract made simultaneously with the note to secure its payment. The lien was on a residence in Lubbock and was executed by J. T. Jenkins and wife, Myrtle Jenkins, as owners of the property. J. T. Jenkins was deceased at the time of the trial so the defendants are Myrtle Jenkins, the heirs and legal representatives of the estate of J. T. Jenkins, deceased; the United States of America , claiming under a notice of tax lien filed; and various suppliers of labor and materials, claiming, by their cross-actions, liens under affidavits filed by them.

[Issues]

The questions for decision by the Court below were the amounts to be awarded to the various claimants and the priority of their respective liens asserted. The case was tried upon an agreed stipulation of facts. Various money judgments were awarded with foreclosure of all liens asserted. The proceeds of the foreclosure sale were ordered prorated between the Bank and the various affidavit claimants in proportion to the respective amounts of their judgments up to the face amount of the note, plus interest and attorney's fees, and the balance of the proceeds above the amount represented by the note was ordered paid to the United States of America up to the amount of the tax lien claimed by it. In other words, the liens of Bank and the various affidavit claimants were held to be of equal standing and superior to the lien of the United States of America . Bank and the United States of America have appealed from the court's judgment. The former asserts its lien is entitled to priority over all claimants. The latter admits the priority of Bank's lien but urges the priority of its lien over all the affidavit claimants.

[Factual Background]

On August 4, 1958 , J. T. Jenkins and wife, Myrtle Jenkins, entered into a contract with W. M. Averitt for the construction of a residence upon property located in Ranch Acres, an addition to the city of Lubbock . The contract was the usual form of a mechanic's and materialman's lien contract in use in Texas and was properly signed and acknowledged by both Mr. and Mrs. Jenkins before any work was done or materials furnished for the construction. The lien provided for in the contract secured payment of a note for $18,000.00 executed simultaneously therewith payable to W. M. Averitt. The contract was filed for record on August 5, 1958 , and duly recorded the next day. The note was transferred by Averitt to appellant bank on August 4, 1958 , by endorsement and delivery and by written transfer.

At the time the subject contract was made it was, by stipulation of the parties hereto, the intention of the Jenkins to occupy the residence to be built on the unimproved lot described therein as their homestead and they moved into the house on September 9, 1958 . J. T. Jenkins died three days later and the residence was completed on about November 1, 1958 .

"By arrangements with the said W. M. Averitt, said J. T. Jenkins, at all pertinent times up to the date of his death, supervised the construction of the improvements contemplated by the contract . . . procured the materials and the labor for such construction, and paid for such labor and materials as were paid for from the funds advanced for that purpose by First National Bank at Lubbock . . ." ¹ Bank paid over a total of $14,000.00 plus certain insurance premiums.

The various affidavits of the suppliers of labor and materials were filed during a period from about October 8, 1958 , through December 11, 1958 , except that of J. Leon Henry, which was filed on January 19, 1959 .

[Bank Has First Priority]

We hold that the contract lien held by Bank was entitled to priority over the lien of all other claimants. The $18,000.00 note executed by Mr. and Mrs. Jenkins to Mr. Averitt for the full contract price of the residence shows to be a negotiable instrument in customary form and there is no probative evidence to the contrary. Immediately upon its transfer to Bank the indebtedness of Jenkins to Averitt ceased. They not being indebted to him any further the appellees suppliers could fix no lien against the homestead except by contract executed as prescribed by Sec. 50 of Art. 16 of the Constitution of Texas . ² McCutcheon v. Union Mercantile Co. , 267 S. W. 2d 916 (Writ Refused); Bordon v. Tapp, 333 S. W. 2d 417.

Appellees suppliers urge Newman v. Coker, 310 S. W. 2d 354 and Oriental Hotel Co. v. Griffiths, 33 S. W. 652 as authority for sustaining the trial courts' findings of equal priority between the liens of the suppliers and Bank. Those cases are clearly distinguishable upon the facts to the instant case and we believe are not proper authority for the court's holdings in this case. We find no substantial distinguishing features in our case and the McCutcheon case just cited and feel bound by its holding. There the court said:

"There should be no serious contention that the original note for $16,950.00 was not a negotiable note. It has all the requirements of a negotiable instrument as prescribed by the Negotiable Instrument law, Art. 5932, R. C. S. The fact that it refers to the mechanic's lien contract by express provision of the statute is unimportant. It is nevertheless an unconditional promise to pay. Art. 5932, Sec. 3(2). The owners, the Dinglers, had therefore paid the full amount of the lien contract by execution and delivery of the negotiable promissory note to the contractor. They owed him nothing at the time the notices were served on them, since at that time he had transferred the note and lien contract to the bank.

"Appellees could fix no liens against the homestead except by contract executed as prescribed by Section 50 of Article 16 of the Constitution, Vernon 's Ann. St .

"They had no such contract. Therefore, any right to a lien in their favor could be only derivative from the lien created by the contract which the owners executed with Jack McCutcheon. Since that contract had been assigned by Jack McCutcheon to the bank to secure the $16,950.00 negotiable note the owners owed Jack McCutcheon nothing. Their debt was to the bank, the holder in due course of the $16,950.00 note. Therefore appellees acquired no lien against the property." (Italics ours.)

[U. S. Tax Lien v. Suppliers' Liens]

We now turn to a consideration of the priority of liens as between the United States of America and the affidavit claimants. The dates in the processes employed for perfecting liens by the government and the affidavit claimants have been stated above. Under such facts we hold the lien of the United States of America has priority over the affidavit claimants. United States of America v. Security Trust and Savings Bank of San Diego [50-2 USTC ¶9492], 340 U. S. 47, 95 L. ed. 53; United States of America v. Michael P. Acri [55-1 USTC ¶9138], 348 U. S. 211, 99 L. ed. 264.

Though the two cases just cited involve attachment liens they originated in states which made them choate and perfected at the time of filing. Additionally, the United States Supreme Court has applied this rule to statutory mechanic's liens. United States of America v. White Bear Brewing Co. [56-1 USTC ¶9440], 350 U. S. 1010, 100 L. ed. 871. There the court held:

"A federal tax lien has priority over a statutory mechanic's lien not yet reduced to judgment, even though the mechanic's lien was specific, prior in time, perfected in the sense that everything possible under state law had been done to make it choate, and was being enforced before the federal tax lien arose."

Accordingly, the judgment of the trial court is reversed and rendered wherein it held the affidavit claimants were entitled to equal priority with Bank and that all those liens were superior to the lien of the United States of America . The trial court will reform its judgment to hold Bank's lien has priority over all others and that the lien of the United States of America had priority over the affidavit claimants. Bank and the government having prevailed on their contentions the costs are adjudged against the affidavit claimants.

¹ The quote above shown is part of the stipulation of facts made by the parties.

² It was stipulated by the parties that the property was a homestead. Additionally, our Supreme Court has held since an early date that the homestead comes into existence when the intention to occupy the premises as a homestead is concurrent with the execution of a contract for erection of a dwelling. Cameron v. Gebhard, 22 S. W. 1033; West End Town Co. v. Grigg, 56 S. W. 49.

 

 

[45-2 USTC ¶9415] United States of America ex rel. M. T. Ivy et al. v. A. Farnell Blair et al.

District Court of the United States for the Western District of Texas, Waco Division, Civil No. 323, September 10, 1945 , [Priority of lien for unpaid excise taxes.]

 

 

[88-1 USTC ¶9219] Scott Lynn Roland, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-5), U.S. Court of Appeals, 5th Circuit, 87-2246, 3/8/88, 838 F2d 1400, Affirming an unreported District Court decision

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

Liens: Texas: Fraud.--The IRS could rightfully levy on real property fraudulently conveyed to the taxpayer by his parents to satisfy back taxes that his parents owed. Under state ( Texas ) law, the debtor's intent at the time of the conveyance was crucial as to whether a subsequent creditor could reach a grantor's interest in property conveyed to others if that transfer was made with intent to defraud that particular creditor. In the instant case, the government proved that the taxpayer's father intended to defraud the IRS when he transferred the property to the taxpayer. The appellate court agreed with the lower court's finding that the taxpayer's parents had a fraudulent intent when they transferred legal title to a home they owned in Irving , Texas to themselves and to the taxpayer, then 15 years old, as trustees for a church that existed only on paper. Part of the proceeds from the sale of this property were used to purchase another property near Detroit , Texas . The father had signed the taxpayer's name as buyer to the pertinent documents. Since the proceeds from the sale of the original ( Irving ) property were used in part to purchase the disputed Detroit property, the taxpayer retained his interest in that property upon which the government could levy.

Frank D. Moore, 41 W. Side Sq., Cooper , Tex. 75432 , for plaintiff-appellant. William S. Rose, Jr., Acting Assistant Attorney General, Roger M. Olsen, Assistant Attorney General, Michael L. Paup, William S. Estabrook III, Janet A. Bradley, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before TIMBERS, ^* KING, ^** and HIGGINBOTHAM, Circuit Judges.

TIMBERS, Circuit Judge:

Scott Lynn Roland ("Scott") appeals from a judgment entered February 12, 1987 in the Eastern District of Texas, Judith K. Guthrie, Magistrate, holding that the Internal Revenue Service rightfully could levy on real property fraudulently conveyed to Scott by his parents to satisfy back taxes owed by his parents. Scott claims that, at the time of the alleged fraudulent transfer, the IRS was not a creditor; his father was not solvent and did not intend to defraud the government; and he had no knowledge of his father's tax problems. We find that the government proved the relevant factor--the father's intent to defraud the government at the time of the transfer. We affirm the judgment of the magistrate.

I.

We shall summarize only those facts believed necessary to an understanding of the issue raised on appeal.

In 1976 and 1977, the Internal Revenue Service assessed tax deficiencies against Charles and Renee Roland ("Charles and Renee" or "the Rolands"), the parents of Scott, for the taxable years 1975 and 1976. In 1977, Charles and Renee established a chapter of the Life Science Church--a "church" existing solely on paper. Charles took a "vow of poverty" and gave all his assets to the "church". In a deed dated April 3, 1978 , Charles and Renee transferred legal title to a home they owned in Irving , Texas (" Irving property") to themselves and to Scott, then 15 years old, as trustees for the church. Scott was unaware of the transfer. The deed was recorded April 18, 1978 . Scott paid no consideration.

In October 1980, the Rolands sold the Irving property. To satisfy its liens for the 1975 and 1976 deficiencies, the IRS took a portion of the proceeds. The leftover balance of $8,028.20 from the sale was distributed to the Rolands.

Those proceeds were used to purchase another property near Detroit , Texas (" Detroit property"). The contract of deed refers to Scott, then 18 years old, as the buyer. At the closing on November 1, 1980 , Charles signed Scott's name to the pertinent documents. Scott's true signature appears only on the contract of deed, signed subsequent to the closing.

Since the closing, Charles and Renee have lived continuously at the Detroit property, while Scott remained in Irving to finish high school. After graduating in 1981, Scott only occasionally lived with his parents. Charles and Renee made the mortgage payments directly to the seller. They also either paid or helped Scott pay the taxes, the utility bills, and the insurance on the property. Scott never reported any rental income on his tax returns.

In March 1983, the IRS issued Charles and Renee another notice of deficiencies for the 1977, 1978 and 1979 taxable years. For these years, Charles and Renee had not filed tax returns which were due on April 15 of each of the following years. The Tax Court dismissed their petition for redetermination on March 30, 1984 for failure to prosecute. On August 16, 1984 the IRS assessed the additional tax deficiencies.

The instant grievance arose when, in June and July of 1985, the IRS posted a notice of seizure and levied on the Detroit property, as well as on personal property, to satisfy the back taxes owed.

Scott then commenced the instant action in the federal district court for injunctive relief, for damages, and for removal of the lien. By agreement of the parties, the case was referred to Magistrate Guthrie. At trial, Charles admitted, when asked why he did not want any property in his name, that

"I had decided some time prior that I did not want to own any real estate or tangible assets. . . . [b]ecause of the conflict that I had had with the internal revenue."

Scott testified that the property belonged solely to him; that, prior to the sale of the Irving property, his parents gave him a portion of the equity; that the down payment for the disputed property came from his share of the proceeds of the sale; that his father was acting as his agent; and that he, Scott, had an oral agreement to rent the property to his parents for an amount equal to the mortgage payments.

The magistrate was not persuaded by Scott's claims. In a memorandum opinion filed February 13, 1987 , she upheld the government's right to levy on the property. ¹ She held that the initial transfer of the Irving property to the Rolands and Scott as "trustees" for the church was intended to defraud the government which was a creditor at the time of the conveyance. Since the proceeds from the sale of that property were used in part to purchase the disputed Detroit property, she further held that Charles retained his interest in that property upon which the government could levy.

This appeal followed.

II.

The sole issue before us is whether the court property held that the government rightfully could levy on the property as proceeds of a fraudulent conveyance.

Federal law governs the right of the United States to enforce a tax lien, but state law determines the taxpayer's interest in the property to which the lien attached. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-14 (1960). Neither party disputes that at the time of the alleged fraudulent transfer, the controlling statute was Section 24.02 of the Taxas Fraudulent Transfers Act, Tex.Bus. & Com.Code Ann. ( Vernon 1968). Section 24.02(a) provides, generally, that a transfer of property is void with respect to a creditor if the transfer was intended to delay, hinder or defraud that creditor from obtaining "that to which he is, or may become, entitled." ² In United States v. Chapman [85-1 USTC ¶9337 ], 756 F.2d 1237 (5th Cir.1985), we applied this statute in a similar factual setting. In Chapman, the IRS had obtained judgment against a taxpayer, an admitted heavy gambler, and sought execution against real property it alleged belonged to the taxpayer. The taxpayer asserted that the property belonged to his daughter. The taxpayer had conveyed his residence to his 19 year old son for no consideration except assumption of the mortgage, an amount far less than its value. The son subsequently conveyed the property to his sister, then age 18, for a nominal sum. Throughout this period, the taxpayer and his wife continued to live on the property and to make the mortgage payments purportedly in lieu of rent. A few years later, the sister, who had no appreciable income at the time, exchanged the residence and cash for another piece of property. The parents lived on this property and made the mortgage payments. Utility services were provided in the taxpayer's name. The taxpayer made substantial improvements to the property. This property was at the heart of the dispute. The IRS was not a creditor when the first property was exchanged for the second property.

At trial, the taxpayer and his family testified that the purpose of the transfer to his children was to protect the family against losing property from his gambling activities.

We held that under the Texas Fraudulent Transfers Act the debtor's intent at the time of the conveyance was the crucial element. Chapman, supra, 756 F.2d at 1241; see also Stout v. Clayton, 674 S.W.2d 821, 826-27 (Tex.Civ.App.1984). A subsequent creditor could reach a grantor's interest in property conveyed to others is that transfer was made with intent to defraud that particular creditor. Chapman, supra, 756 F.2d at 1242. Since direct proof of fraud often is not available, courts may rely on circumstantial evidence to establish the fraudulent intent. Id. at 1240-41; Williams & Chastain v. Laird, 32 S.W.2d 502, 505 (Tex.Civ.App.1930).

Based on the admission of the taxpayer at trial regarding his desire to keep his assets beyond the reach of the IRS and based on other indicia of fraud, we affirmed the district court's finding of fraud as not clearly erroneous.

When several of these indicia of fraud are found, they can be a proper basis for an inference of fraud. Chapman, supra, 756 F.2d at 1243; United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609, 613 (5th Cir.1981). Such indicia of fraud, we stated, include (1) the debtor's transfer of valuable property without consideration; (2) a close personal relationship between the parties to the conveyance; (3) the debtor's retention of possession and indicia of ownership of the property; and (4) the debtor's transfer of all of his property, especially if to different members of his family, leaving him unable to pay his debts. Chapman, supra, 756 F.2d at 1243 n.4.

III.

We turn now to the application of these principles to the facts of the instant case.

Under the intent test referred to above, whether Charles was solvent at the time of the transfer is not dispositive. The crucial element was his intent at that time. We are satisfied that the magistrate was not clearly erroneous in finding that Charles intended to defraud the IRS. He made admissions similar to those made by the taxpayer in Chapman. Scott paid no consideration for the initial transfer. Although Charles and Renee asserted that their mortgage payments were in lieu of rent, Scott never reported rental income on his tax returns. Indeed, the only significant indicium of fraud lacking in the instant case and found in Chapman was that the Rolands did not transfer all of their assets. When viewed in the context of all of the other indicia of fraud present, however, this difference does not suffice to distinguish Chapman.

The government indisputably was a creditor on April 15, 1978 when Charles and Renee failed to file a tax return for the taxable year 1977. Assuming arguendo Scott's assertion that the initial transfer to the trust (later converted into the property at issue) occurred on April 3, 1978 when the papers were signed--before the government became a creditor--the government nevertheless sustained its burden of establishing that the transfer was intended to defraud it as a future creditor. ³ The government therefore was entitled to levy on the conversion of that property into other property. Chapman, supra, 756 F.2d at 1241.

Finally, we reject Scott's argument that his lack of knowledge of his father's intent to defraud the IRS defeats the lien. Scott was not a purchaser for value--the element necessary to make his lack of knowledge a relevant consideration. Tex. Bus. & Com.Code Ann. §24.02(b); see supra note 2.

IV.

To summarize:

We hold that the magistrate was not clearly erroneous in finding that, under the controlling Texas statute, Charles Roland had an interest in the disputed property that the IRS could attach. Based on his admissions at trial and the other indicia of fraud present, the magistrate had sufficient evidence on which to base a finding of fraudulent intent.

AFFIRMED.

^* Circuit Judge of the Second Circuit, by designation.

^** formerly Carolyn Dineen Randall.

¹ The magistrate did hold that the personal property was wrongfully levied upon. The government did not appeal from this holding.

² Tex.Bus. & Com.Code Ann. §24.02 ( Vernon 1968) (current version at Tex.Bus. & Com.Code Ann. §§24.005, 24.009 ( Vernon 1987)) provides:

"(a) A transfer of real or personal property, a suit, a decree, judgment, or execution, or a bond or other writing is void with respect to a creditor, purchaser, or other interested person if the transfer, suit, decree, judgment, execution, or bond or other writing was intended to

(1) delay or hinder any creditor, purchaser, or other interested person from obtaining that to which he is, or may become, entitled; or

(2) defraud any creditor, purchaser, or other interested person of that to which he is, or may become, entitled.

(b) The title of a purchaser for value is not void under Subsection (a) of this section unless he purchased with notice of (1) the intent of his transferor to delay, hinder, or defraud; or

(2) the fraud that voided the title of his transferor."

³ Moreover, the government argues persuasively that under relevant Texas law it was a present creditor. Although the deed is dated April 3, 1978 , Scott was unaware of the transfer. Thus his acceptance did not occur until the deed was recorded on April 18, 1978 , after the government became a creditor.

 

 

[67-2 USTC ¶9745]Creditors Exchange Service, Inc., Plaintiff v. United States of America , et al., Defendants

U. S. District Court, So. Dist. Tex., Houston Div., Civil Action No. 66-H-338, 277 FSupp 885, 10/24/67

[1954 Code Sec. 6323]

Tax liens: Priority: Perfected security interest.--A perfected and choate lien arising from delinquent taxpayers' assignments of their accounts receivable as security for loans and a perfected and choate lien under trust receipts which secured a promissory note took priority over later recorded federal liens for income taxes owed by the taxpayers.

Myron M. Sheinfeld, Strickland, Gordon & Sheinfeld, 1121 Chamber of Commerce Bldg., 914 Main St., Houston, Tex., for plaintiff. Morton L. Susman, United States Attorney, Houston, Tex., for U. S.; Richard H. Cocke, Texas Nat'l Bank Bldg., Houston, Tex., J. D. Owens, Detroit, Mich., for Chrysler Credit Corp., defendants.

Memorandum

[Nature of Action]

INGRAHAM, District Judge:

I This is an action in interpleader instituted by the plaintiff, Creditors Exchange Service, Inc., in the District Court of Harris County, Texas, and removed to this court by the United States of America under the provisions of 28 U. S. C. 1442(a)(1). The principal question involved is that of determining the relative priorities between a federal tax lien and a perfected security interest under assignments of accounts receivable and trust receipt financing.

[Facts]

The facts show that on March 18, 1965 , Art Grindle OST Chrysler-Plymouth, Inc. (hereinafter called Grindle) by its president executed to Chrysler Credit Corporation an assignment of "all notes and trade accounts receivable." Notice of assignment of accounts receivable was filed on March 23, 1965 , in the office of the Harris County Clerk as required by Art. 260-1, Sec. 4 (V. A. T. S. 1959). The assignment stated that it was security for a loan of the same date in the amount of $50,000 and for "any other indebtedness now or hereafter owing . . ." Grindle repaid the $50,000 loan in full, but is indebted to Chrysler Credit Corporation to the extent of $92,242.79 as a result of other transactions. On March 2, 1966 , Grindle made an assignment for the benefit of its creditors, appointing Creditors Exchange Service, Inc. as its trustee. In liquidation of Grindle's assets, $15,102.79 was collected. Of the amount collected, Chrysler Credit claims $4,348.40, while the United States claims the entire amount by virtue of an assessment made on April 8, 1966 , against Grindle in the amount of $17,401.05 for income taxes owing. Notice of a federal tax lien was filed with the Harris County Clerk on April 15, 1966 .

On December 7, 1964, Westheimer Dodge (hereinafter called Westheimer), by its president, Arthur E. Grindle, executed to Chrysler Credit Corporation an assignment of "all accounts receivable now owned or which may hereafter be acquired." The assignment stated that it was security for a loan of the same date in the amount of $100,000 and for "any other indebtedness now or hereafter owing." On the same date Westheimer also assigned to Chrysler Credit "all credits which are now or may hereafter become due" to Westheimer from Chrysler Motors Corporation. This latter assignment was made in contemplation of reduction of the Excise Tax which was subsequently enacted on June 21, 1965 , P. L. 89-44. On December 8, 1964 , a notice that Westheimer has assigned or intends to assign to Chrysler Credit one or more accounts receivable was filed with the Harris County Clerk in conformity with Art. 260-1, Sec. 4 (V. A. T. S. 1959). The $100,000 loan has been reduced to $1,957.58, but Westheimer is indebted to Chrysler Credit in the amount of $89,877.63 arising from other transactions.

In connection with a "floorplanning" agreement, a statement was filed on December 10, 1965 , with the Texas Secretary of State to the effect that Chrysler Credit expects to be engaged in trust receipt financing of new and used motor vehicles with Westheimer. Filing was under the provisions of Art. 5499a-51 (V. A. T. S. 1966). On January 25, 1966 , Westheimer executed a promissory note secured by a trust receipt in favor of Chrysler Credit in the amount of $1,709.86, covering a Dodge truck. On February 8, 1966 , Westheimer executed a promissory note secured by a trust receipt in the amount of $1,894.52, covering another Dodge truck. The trucks were sold by Westheimer for $1,171.50 and $1,917.72, respectively, and the proceeds were collected by Creditors Exchange and are part of the funds interpleaded in this action.

[Assignment for Benefit of Creditors]

Westheimer executed an assignment for the benefit of its creditors on March 16, 1966 , and Creditors Exchange was appointed trustee. Creditors Exchange liquidated the assets of Westheimer and has interpleaded in this action $24,513.26. On the basis of the various transactions noted above, Chrysler Credit is claiming a total of $10,056.63. The United States is claiming the entire amount paid into the court on Westheimer's account by virtue of assessments made on April 8 and June 2, 1966, for unpaid federal income taxes totaling $217,265.33, plus interest. With respect to $53,306.58 of the unpaid taxes, notice of a federal tax lien was filed with the Harris County Clerk on April 15, 1966 .

The court finds that Chrysler Credit had possession of both Grindle's and Westheimer's accounts receivable books prior to the time either made an assignment for the benefit of creditors and that Creditors Exchange never had possession of the original entry ledgers or books of accounts receivable. On the basis of uncontradicted evidence, the court finds that a few days after making their respective assignments for the benefit of creditors, both Grindle and Westheimer instructed the Post Office to forward all of their mail to Creditors Exchange. As a result, Creditors Exchange received checks payable to Grindle or Westheimer, the proceeds of which are part of the funds interpleaded in this action. Finally, the evidence shows that Chrysler Credit demanded an accounting of all collections made by Creditors Exchange in a letter received by the latter on March 28, 1966 . Moreover, in its Answer filed on June 6, 1966 , Chrysler Credit specifically demanded an accounting for the sale proceeds of the two trucks under trust receipts.

[Perfected Security Lien]

II The first question which must be resolved by the court is whether Chrysler Credit had a perfected lien on the accounts receivable of Grindle and Westheimer prior to the time they made their respective assignments for the benefit of creditors on March 2 and March 16, 1966 . This is a question of state law. Poe v. Seaborn [2 USTC ¶611], 282 U. S. 101 (1930). The United States contends that the assignments of accounts in question are defective because they do not describe the accounts assigned with sufficient particularity to identify the same as required by Art. 260-1, Sec. 2 (V. A. T. S. 1959). The assignments of accounts receivable were in terms of "all the notes and trade accounts receivable now owned or which hereafter may be acquired . . . together with all monies due or to become due thereon." The court holds that the description used was sufficiently particular since it gives ample notice of what was assigned. Seligmann v. Hill & Combs, 338 S. W. 2d 178 (1960), relied on by the United States , is not controlling because in that case the assignment was of "current accounts receivable." Compare Keeran v. Salley, 244 S. W. 2d 663 (Tex. Civ. App., San Antonio, 1951, writ ref'd).

The United States also contends that the Notice of the assignment of accounts receivable was ineffective because the assignments secured an indebtedness other than that referred to in the Notice. Neither Sec. 3 of Art. 260-1 (V. A. T. S. 1959) nor the cases construing it require that the Notice recite the debt secured and for this reason the government's contention is rejected. Moreover, both assignments of accounts receivable specifically provide that they are security for the named promissory note and for "any other indebtedness now or hereafter owing . . ." Abramson v. Boedeker [67-2 USTC ¶9598], 379 F. 2d 741 (5 CA 1967), cited by the United States, concerns an unrecorded assignment and is not in point.

It is the court's opinion that under the law of Texas , Chrysler Credit had a perfected lien on the accounts receivable of Grindle and Westheimer prior to the time either made an assignment for the benefit of creditors.

[Lien Was Choate]

III Having determined that Chrysler Credit had a perfected lien on the accounts receivable, the next question is whether the claims of the United States must nevertheless be given priority on the basis of Section 3466 (31 U. S. C., Section 191). This section provides, in substance, that "whenever any person indebted to the United States is insolvent, . . . the debts due to the United States shall be first satisfied; . . ." Taxes due the United States are "debts" within the meaning of Section 3466. Price v. United States [1 USTC ¶158], 269 U. S. 492 (1926). Further, it is stipulated that both Westheimer and Grindle are insolvent.

While the priority accorded by Section 3466 appears absolute on its face, the Supreme Court has held in cases involving state liens for unpaid taxes that such liens are exempt from Section 3466 provided that they are choate. United States v. Vermont [64-2 USTC ¶9520], 377 U. S. 351 (1964). Assuming that the requirement of choateness applies to private lienors, the court must determine as a preliminary matter whether Chrysler Credit's lien is choate. In order for a lien to be choate, three requirements must be satisfied: (1) the identity of the lienor must be ascertained; (2) the amount of the lien must be fixed; and (3) the property to which the lien attaches must be reduced to the possession of the lienor. United States v. Vermont, 377 U. S. 351 (1964); United States v. Gilbert Associates [53-1 USTC ¶9291], 345 U. S. 361 (1953); Illinois v. Campbell, 329 U. S. 362 (1946).

The United States contends that Chrysler Credit's lien on the accounts receivable and the factory credits was inchoate because Chrysler Credit did not obtain possession of the specific accounts and credits involved. The government argues that the seizure by Chrysler Credit of the taxpayers' books of accounts receivable did not constitute possession since Creditors Exchange was subsequently able to obtain possession of the payments made on such accounts by having the taxpayers' mail directed to it.

The government's contention is rejected because the assignments of accounts receivable gave Chrysler Credit the right "to receive, collect, sue for, compromise and receipt the payment for all monies due or to become due; . . ." Thus, under the provisions of the recorded assignments, Creditors Exchange had no right to collect payments on the accounts and the fact that the taxpayers' mail was directed to it did not prejudice the preexisting superior rights of Chrysler Credit.

Moreover, in bankruptcy cases involving a claim of summary jurisdiction, the courts have held that where, as here, the assignee of an account receivable has given notice to the account debtors of the assignment and has initiated collection of the accounts, then the assignee is deemed to be the possessor of the assigned accounts. Schwartz v. Horowitz, 131 F. 2d 506 (2 CA 1942).

Finally, in In re I. Greenbaum & Sons Co., Inc., 6 F. Supp. 245 (S. D. N. Y. 1933), the court held that where ledger sheets were deposited with the assignee of accounts receivable, he would be deemed to be in possession of the accounts.

For the above reasons, it is the finding of the court that Chrysler Credit's lien was choate.

[Priority of Security Interest Lien]

The court must now decide whether a perfected and choate lien constitutes an exception to the priority afforded to the United States under Section 3466. While the Supreme Court has expressly reserved decision on this question, Illinois v. Campbell, 329 U. S. 362 (1946), the Fifth Circuit has held that a perfected and choate lien defeats the federal priority. Exchange Bank & Trust Co. v. Tubbs Manufacturing Co. [57-2 USTC ¶9803], 246 F. 2d 141 (5 CA 1957), cert. den., 355 U. S. 868 (1957); United States v. Atlantic Municipal Corp. [54-1 USTC ¶9392], 212 F. 2d 709 (5 CA 1954). The theory of these cases is that to the extent that the taxpayer has alienated a property interest, that property interest is no longer his and cannot be made subject to a subsequent lien for taxes owed by him. In the instant case, the taxpayers have alienated their interests in the accounts receivable by means of the assignments and a lien for unpaid taxes cannot attach to the proceeds collected on the accounts. United States v. Lebanon Woolen Mills Corp. [65-2 USTC ¶9571], 241 F. Supp. 393 (D. C. N. H. 1964). See also United States v. Lester [65-1 USTC ¶9221], 235 F. Supp. 115 (S. D. N. Y. 1964). Accordingly, the court holds that Chrysler Credit's prior perfected lien on the accounts receivable takes priority over the subsequent attaching federal tax lien.

[Lien under Trust Receipts]

IV The final question before the court is whether Chrysler Credit's lien on the proceeds from the sale of the two vehicles under trust receipts was choate and, if so, whether Chrysler Credit waived its right to demand an accounting.

Turning to the question of choateness, under the terms of the trust receipts, Westheimer had possession of the vehicles with the right to sell them and remit the proceeds to Chrysler Credit. The government contends that Chrysler Credit's lien was inchoate at the time of the assignment for the benefit of creditors because the amount of the proceeds from the sale of the vehicles was not certain. This contention must be rejected in view of the government's concession in Crest Finance Co. v. United States [62-1 USTC ¶9105], 368 U. S. 347 (1961), that a lien is not rendered inchoate because the amount to be derived from a sale is not immediately ascertainable. See also Corigliano v. Catla Construction Co. [64-2 USTC ¶9657], 231 F. Supp. 245 (S. D. N. Y. 1964).

Section 10(c) of Article 5499a-51 (V. A. T. S. 1966) provides that the entruster waives his right to an accounting by failure to demand such within ten days after knowledge of the existence of proceeds is acquired. The government's contention that Chrysler Credit waived its right to an accounting is rejected on the basis of the court's finding that Chrysler Credit demanded on accounting on March 28 and June 6, 1966 . See, supra, pages 3-4 [p. 85,502]. Both of these demands were made long before September, 1966, the date on which Chrysler Credit first learned of the existence of the proceeds in question.

In summary, the court holds that Chrysler Credit's lien under the trust receipts was choate and perfected by filing and that, for the reasons given in the discussion of the lien on the accounts receivable, it takes priority over the subsequent attaching federal tax lien.

[Priority Recognized]

V It has been stipulated by the parties that Creditors Exchange is to be paid the sum of $309 from the funds in the Registry of the Court. It has also been stipulated that Creditors Exchange is to receive as its attorney's fees the sum of $2,000 from any money recovered by Chrysler Credit. A judgment will be entered in favor of Creditors Exchange for these amounts. In accord with the reasons heretofore given, the court finds that Chrysler Credit has priority to the extent of $4,348.40 in the $15,102.79 paid into the court for the account of Grindle. The court further finds that Chrysler Credit has priority to the extent of $10,056.63 in the $24,513.26 deposited in the Registry of the Court for the account of Westheimer. Included in the $10,056.63 is the sum of $420 derived from the sale of the Reed automobile which all parties concede is subject to Chrysler Credit's priority. Judgment will therefore be entered in favor of Chrysler Credit for the sum of $14,405.03 minus the $2,000 due Creditors Exchange as its attorney's fees.

The clerk will notify counsel to draft and submit an appropriate judgment. Counsel should also draft a transmittal order authorizing the removal of the $37,264.39 still on deposit in the District Court of Harris County to the Registry of this Court.