Virginia
[69-1 USTC
¶9251]United States of America, Plaintiff v. James A. Overman, Marie T.
Overman, a/k/a Mari Overman; Federal National Mortgage Association; The
Prudential Insurance Company of America; Circle J, Inc.; Patricia E.
Williams; and J. Brian Overman, Defendants
U.
S. District Court, West.
Dist.
Wash.
, No. Div., Civil No. 7309,
1/8/69
[Code Secs. 6321-6323]
Lien for taxes: Community property:
Washington
: Priorities: Statute of limitations: Lapse of time: Estoppel.--The
separate tax liabilities of the taxpayer husband were liens upon his
undivided one-half interest in property of his marital community.
However, a mortgage company's mortgage on certain community real
property and an insurance company's chattel mortgage on certain
community personal property had priority over the Government's tax lien.
Enforcement of the tax lien was not barred by the statute of
limitations, lapse of time, estoppel, laches or waiver.
Eugene C.
Cushing, United States Attorney, Albert E. Stephan, Assistant United
States Attorney, Seattle, Wash., for plaintiff. Loren D. Prescott, 1100
IBM Bldg.,
Seattle
,
Wash.
, for defendant.
Findings
of Fact and Conclusions of Law
GOODWIN,
District Judge:
This cause
came on for trial on
December 9, 1968
, before the Honorable William N. Goodwin, United States District Judge.
The plaintiff appeared by
Rob
ert L. Handros, Attorney, Department of Justice, Washington, D. C., and
Assistant United States Attorney William H. Rubidge. The defendants
James A. Overman, Marie T. Overman, Circle J, Inc., Patricia E. Williams
and J. Brian Overman, appeared by Loren D. Prescott, Esquire, and Keith
R. Baldwin, Esquire. Before completion of the trial, the Court decided
certain issues of law on the basis of the facts admitted in the
pre-trial order and determined to certify such issues to the Court of
Appeals for the Ninth Circuit, pursuant to 28 U. S. C., Section 1292(b),
staying proceedings and reserving decision and taking of evidence on the
remaining issues, until the decision of the Court of Appeals. Pursuant
thereto, the Court makes findings of fact and conclusions of law, as
follows:
Findings
of Fact
1. This is a
civil action to enforce federal tax liens on various real and personal
properties.
2. The
defendants James A. Overman and Marie T. Overman, are husband and wife
and reside at
524 Renton Avenue
,
Renton
,
Washington
, within the District of the Court. The defendant J. Brian Overman is
the son of the defendants James A. Overman and Marie T. Overman and
resides with them at the same address.
3. James A.
Overman and Marie T. Overman were married on
September 2, 1948
. J. Brian Overman was born on
October 1, 1949
. During the years 1946 and 1947, James A. Overman was a divorced man.
4. This action
has been dismissed as to the defendant Seattle-First National Bank,
Renton Branch, formerly First National Bank of
Renton
.
5. This action
has been dismissed as to the defendant Fairview Lumber Company.
6. The
defendant Federal National Mortgage Association is a corporation
organized under an Act of Congress and existing pursuant to the Federal
National Mortgage Association Charter Act (12 U. S. C., Sections 1716
through 1921), and is doing business within the District of the Court.
7. The
defendant The Prudential Insurance Company of
America
is a corporation which is doing business within the District of the
Court.
8. The
defendant Circle J, Inc., is a corporation organized under the laws of
the State of
Washington
, which has its principal place of business at Route 1,
Box 49B
,
Quincy
,
Washington
.
9. Circle J,
Inc., was incorporated on
August 2, 1963
.
10. The
defendant Patricia E. Williams resides at 21205 110th S. E.,
Kent
,
Washington
, within the District of the Court.
11. This
action has been dismissed as to the defendant Business Men's Assurance
Company.
[Assessments]
12. On
April 29, 1954
, the District Director of Internal Revenue at
Seattle
,
Washington
, made assessments of deficiencies in income taxes, additions to the
taxes for fraud under Section 293(b) of the Internal Revenue Code of
1939, and interest, against the defendant James A. Overman, as follows:
Taxable Income Tax Addition Total
Year Deficiency For Fraud Interest Assessment
1946 ....... $ 3,951.19 $ 1,975.60 $ 1,632.98 $ 7,559.77
1947 ....... 37,803.18 18,901.59 13,355.39 70,060.16
Totals ..... $41,754.37 $20,877.19 $14,988.37 $77,619.93
13. On
April 30, 1954
, the District Director of Internal Revenue gave the defendant James A.
Overman notice of the assessments described hereinabove, stating the
amounts and demanding payment thereof.
[Tax
Lien Filed]
14. On
August 20, 1954
, the District Director of Internal Revenue filed notice of federal tax
liens for the assessments described hereinabove, with the Auditor of
King County, Washington.
[Judgment]
15. On March
20, 1961, this Court, in Civil Action Number 5039, entitled United
States of America, Plaintiff, v. James A. Overman, Defendant,
entered judgment in favor of the plaintiff herein United States of
America and against the defendant herein James A. Overman, for the tax
assessments described hereinabove, in the amount of $77,619.93, together
with interest in the amount of $32,070.03 and costs in the amount of
$19.60, a total of $109,709.56. The judgment contains the interlineated
words "individually only, and not against his marital
community".
[Community
Real Property]
16. On
September 25, 1947
, James A. Overman received a deed to certain real property situated in
King County
,
Washington
, and described as follows:
PARCEL
"A":
The north 36
feet of the west 142 feet of Tract 22; and
PARCEL
"B":
That portion
of Tract 23, lying west of a line drawn from a point in the
southwesterly line of Cedar River Pipe Line right of way 2361/2 feet
northwesterly from intersection with the west line of Morgan Drive, as
shown on Morgan's Grand View Addition to Renton, according to plat
recorded in Volume 18 of Plats, page 74, records of said county, to a
point in the south line of said Tract 23, 147 feet west of the southeast
corner thereof; all in plat No. 1 of Renton Co-operative Coal Company's
Acre Tracts according to plat recorded in Volume 9 of Plats, page 29,
records of said county.
17. The
marital community of the defendants James A. Overman and Marie T.
Overman, also known as Mari Overman, is the owner of certain real
property situated in
King County
,
Washington
, and described as follows:
The north
66.00 feet of the following described tract:
A tract of
land in H. H. Tobin Donation Claim No. 37, described as follows:
Beginning at a
point 140.40 feet west and 335 feet north of the southeast corner of a
2-acre tract of land conveyed to D. C. Mitchell on April 26, 1900, by
Chas. Bruhn, by deed recorded in Volume 254 of Deeds, Page 140, records
of King County; thence north 200 feet; thence east 100 feet; thence
south 200 feet; thence west 100 feet to the beginning.
18. The
marital community of the defendants James A. Overman and Marie T.
Overman, also known as Mari Overman, is the owner of certain real
property situated in
King County
,
Washington
, and described as follows:
The south
66.66 feet of the north 132.66 feet of the following described tract:
A tract of
land in H. H.
Rob
in Donation Claim No. 37, described as follows: Beginning at a point
140.40 feet west and 335 feet north of the Southeast corner of a
two-acre tract of land conveyed to D. C. Mitchell on April 26, 1900 by
Charles Bruhn, by deed recorded in Volume 254 of Deeds, page 140,
records of King County; thence north 200 feet; thence east 100 feet;
thence south 200 feet; thence west 100 feet to the beginning; except
roads.
19. The
defendant Federal National Mortgage Association has a mortgage on each
of the real properties described in paragraphs 17 and 18 hereinabove,
which mortgages are prior and superior to the tax liens of the
United States
.
[Community
Personal Property]
20. At the
time that this action was filed, 50,000 shares of stock of Circle J.
Inc., were issued and outstanding, of which 24,749 shares were in the
name of James A. Overman, 24,749 shares were in the name of Marie T.
Overman, 500 shares were in the name of J. Brian Overman and the
remaining two shares were in the name of Patricia Williams.
21. The
defendant Circle J, Inc., is the owner of certain real property
described as follows:
Farm
Units 34 and 35, both in Irrigation Block #75, Columbia Basin Project,
Grant County, Washington, according to the Farm Units plat thereof as
recorded in the office of the Grant County Auditor, subject to
assessments, rights of way and encumbrances of record at the date
hereof.
22. The
defendant Circle J, Inc., is also the owner of various personal
properties, certain of which property is subject to a chattel mortgage
to The Prudential Insurance Company of
America
, which is superior to any rights of the plaintiff.
23. The
defendant The Prudential Insurance Company of
America
holds a mortgage on the real property of the defendant Circle J, Inc.,
described hereinabove, and a chattel mortgage on certain of the personal
properties of the defendant Circle J, Inc., which mortgages are superior
to any rights of the plaintiff.
24. Circle J,
Inc., is indebted to the marital community of James A. Overman and Marie
T. Overman in the amount of $345.70.
25. Defendant
Patricia E. Williams is the owner, as her separate property, of two
shares of the capital stock of defendant Circle J, Inc.
[Declaration
of
Homestead
]
26. A
declaration of homestead declaring and reciting that the real property
described in paragraph 16 hereinabove was community property of James A.
Overman and Marie T. Overman, a/k/a Mari Overman, was filed on
November 8, 1949
under King County Auditor's No. 3955407, recorded in Volume 2890 of
Deeds, page 184, Records of King County, Washington.
[Income
Tax Returns]
27. On or
about
March 25, 1965
, defendants James A. Overman and Marie T. Overman, a/k/a Mari Overman,
each filed an income tax return for the taxable year 1964 and each
claimed a refund in the sum of $679.01.
28. Plaintiff
credited said refunds claimed by James A. Overman and Marie T. Overman,
a/k/a Mari Overman, to the income tax liabilities of James A. Overman
for the taxable year 1946 pursuant to instructions from the United
States Department of Justice.
29. The 500
shares of stock of Circle J, Inc., issued to the defendant J. Brian
Overman were issued for a fair and adequate consideration.
Conclusions
of Law
1. The
separate tax liabilities of James A. Overman constitute liens upon his
undivided one-half interest in property of the marital community of
James A. Overman and Marie T. Overman and such tax liabilities may be
collected out of such one-half interest.
2. Enforcement
of the tax liens is not barred by any statute of limitations.
3. The tax
liens have not become unenforceable by lapse of time.
4. Enforcement
of the tax liens is not barred by estoppel, laches or waiver.
5. The
judgment heretofore entered in Civil Action Number 5039 is not res
judicata or a collateral estoppel against the Government on the
question of whether the tax liabilities constitute liens upon the
taxpayer's interest in community property and may be collected
therefrom.
[76-1 USTC
¶9368]Glen Construction Company, Inc., Complainant v. Bank of Vienna,
and U. S. Internal Revenue Service, and Chantilly Crushed Stone, Inc.,
and Scott Kurt Construction Company, and Fairfax Equipment Rental
Corporation, and W. B. Clark, Defendants
U.
S. District Court, East. Dist. Va., Alexandria Div., No. 75-662-A, 410
FSupp 402, 4/2/76
[Code Sec. 6323]
Lien for taxes: Priority: Mechanics' liens: Virginia state law:
Assignment.--The government's tax liens against the taxpayer were
found to have priority over the perfected mechanics' liens by
subcontractors of the taxpayer and over an assignment of funds to a
bank. The government had properly filed its claims under state law in
June of 1975. The mechanics' liens were determined to have been
perfected in September and October of 1975. Thus, the tax liens were
first in time. Since the assignment to the bank was made in August and
the properly filed liens exceeded the interpleaded fund, the tax lien
also had priority over the assignment.
L. J. Miller,
2701 N. Pershing Dr.
,
Arlington
,
Va.
, for plaintiff. Douglas E. Bywater, 374 Maple Ave., Ea., Vienna, Va.,
Herbert L. Karp, 118 S. Royal St., Alexandria, Va., Frank D. Swart, P.
O. Box 400, Fairfax, Va., Dan S. Hollon, 10410 Main St., Fairfax, Va.,
John Ninian Beall, Suite 613, Honewell Center, 7900 Westpark Dr.,
McLean, Va., for defendants.
Memorandum
Opinion and Order
CLARKE,
District Judge:
This matter is
before the Court on the motion of the plaintiff, Glen Construction
Company, Inc., for summary judgment in its favor on its Complaint for
Interpleader filed against the United States of America, Bank of Vienna,
Scott Kurt Construction Company, Fairfax Equipment Rental Equipment
Corporation, and W. B. Clark, and on the motion of the United States for
summary judgment in its favor against all the defendants including
Chantilly Crushed Stone, Inc. Glen Construction Company, Inc. does not
seek summary judgment against Chantilly Crushed Stone, Inc. The action
arose on a Complaint for Interpleader brought by the plaintiff, a
general contractor, to resolve conflicting claims of its sub-contractor,
Scott Kurt, and Scott Kurt's assignee, Bank of Vienna, several
sub-sub-contractors and the
United States
. Jurisdiction is founded upon 28
U. S.
C. §1331, 1335, and 2410, the amount in controversy exceeding Ten
Thousand Dollars ($10,000) (exclusive of interest and costs).
Findings
of Fact
On
February 12, 1975
, Glen Construction Company, Inc. [hereinafter referred to as Glen], a
general contractor, and Scott Kurt Construction Company [hereinafter
referred to as Scott Kurt] entered into a sub-contract in which Scott
Kurt agreed to furnish labor and materials for a Glen project titled
Sherwood
Hall
Medical
Building
in
Alexandria
,
Virginia
. Scott Kurt, in turn, entered into verious sub-sub-contracts with
Fairfax Equipment Rental Corporation [hereinafter referred to as
Fairfax
], W. B. Clark [hereinafter referred to as Clark], and Chantilly Crushed
Stone, Inc. [hereinafter referred to as
Chantilly
] to furnish certain materials and/or services on the Sherwood Hall
construction project.
In July and
August, 1975, the
United States
levied on all sums due and owing to Scott Kurt from Glen for taxes due,
owed and unpaid to the
United States
from Scott Kurt. On
August 4, 1975
, Scott Kurt allegedly assigned its receivables to the Bank of Vienna.
On
September 9, 1975
, Glen filed an Interpleader on the Sherwood Hall project, paying the
alleged contract balance into the registry of the Court. Prior to the
filing of the Complaint, the defendant sub-sub-contractors had either
made demand upon Glen for payment or had outstanding vouchers for work
performed at the request of Scott Kurt.
The total
amount of the funds paid by Glen into the registry of the Court is
Twenty-One Thousand Nine Hundred Two and 78/100 Dollars ($21,902.78).
The claims of the defendant sub-sub-contractors and the dates of the
work performed or materials furnished as established by the admissions
of the parties in the pleadings are set forth below:
Dates Service/Material Amount
Claimant Furnished of Claim
Chantilly
Crushed
Stone, Inc. ...........
7-03-75
to
8-05-75
$9,653.23
W. B. Clark ...........
7-22-75
to
7-31-75
1,037.00
Fairfax
Equipment
Rental Corporation ....
7-24-75
to
8-28-75
2,030.00
The claim of
the
United States
is based on the following schedule of tax liens. Notice of the tax liens
was filed with the Clerk of the State Corporation Commission of the
Commonwealth
of
Virginia
in
Richmond
on the dates indicated. 1
Date of Tax Date Notice
Assessment Filed Amount
Apr. 14, 1975
June 9, 1975
..... $37,209.59
June 9, 1975
June 17, 1975
.... 6,523.00
June 16, 1975
June 20, 1975
.... 10,913.57
Aug. 5, 1975
Aug. 7, 1975
..... 15,264.26
The Court also
has for decision what claim, if any, the Bank of Vienna has to the fund
held in the registry of the Court.
Issue
The single
issue suitable for determination upon the motions of the
United States
and Glen for summary judgment is whether the tax liens asserted by the
Government have priority over the claims of the defendant contractors
and the bank to the interpleaded funds.
Conclusions
of Law
The
United States
asks that its tax liens acquired pursuant to 26
U. S.
C. §6321 be enforced against the interpleaded funds. Section 6321 of
the Internal Revenue Code provides in pertinent part:
"If any
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount . . . shall be a lien in favor of the United States
upon all property and rights to property, whether real or personal,
belonging to such person."
The
lien imposed by Section 6321 "shall continue until the liability
for the amount so assessed . . . is satisfied or becomes unenforceable
by reason of lapse of time." 26 U. S. C. §6322. However, the tax
lien is not valid against any judgment lien creditor or mechanic's
lienor of the taxpayer "until notice thereof which meets the
requirement of subsection (f) has been filed by the Secretary of his
delegate" 26
U. S.
C. §6323(a). Subsection (f) of Section 6323 contains the following
provision:
"(a)
Under State laws.--
*
* *
"(ii)
Personal Property.--In the case of personal property, whether tangible
or intangible, in one office within the State (or the county, or other
governmental subdivision), as designated by the laws of such state, in
which the property subject to the lien is situated;"
To comply with
the provisions of 26 U. S. C. §6323(f), the Government filed notice of
its tax liens against Scott Kurt with the State Corporation Commission
of the Commonwealth of Virginia in Richmond, Virginia, as provided for
in Va. Code Ann. §55-142.1(b) (1950 as amended):
"(b)
Notices of liens upon personal property, whether tangible or intangible,
for taxes payable to the United States and certificates and notices
affecting the liens shall be filed as follows:
"(1) If
the person against whose interest the tax lien applies is a corporation
or a partnership whose principal executive office is in this State, as
these entities are defined in the internal revenue laws of the United
States, in the office of the Clerk of the State Corporation
Commission."
It
is the opinion of the Court, based upon the applicable law and the
certified copies of the notices of tax lien submitted by the Government,
that the
United States
has properly asserted its tax liens against Scott Kurt.
The Government
argues that in contrast to its own position, the other claimants to the
interpleader funds are not mechanic's lienors; nor do they possess
perfected liens under
Virginia
statutes. Acceptance of the Government's argument would require the
Court to ignore the effect of two Orders entered in this case on
September 12, 1975
, and
October 10, 1975
, respectively. The September Order enjoined the defendants "from
instituting or maintaining any proceeding in any Court of any state of
the United States or any U. S. District Court, including the perfecting,
recording, or maintaining of any lien on plaintiff's construction
projects or property, real, personal or mixed, to enforce any debt
arising from the claims now before the Court." The October Order
added Clark and Fairfax as defendants, sustained the interpleader and
continued the injunction embodied in the September Order as to all
defendants, new and old, but modified its terms so as to exclude the
United States Revenue Service from the operation of the injunction.
The September
and October Orders precluded all the defendants from perfecting mechanic
liens and the October Order was entered before the expiration of the
time limit under
Virginia
statute for perfection of mechanic's liens. Va. Code Ann. §43-4 (1950,
as amended). Consequently, the defendant contractors were precluded by
the operation of the injunction from asserting their claims in the
normal fashion. Simple fairness would dictate that the entry of an
injunction pursuant to 28 U. S. C. §2361 barring filing of liens to
which sub-sub-contractors are entitled for the purpose of maintaining
the status quo pending a decision on the validity of the interpleader
should not be a bar to a determination of the merits of the
sub-sub-contractors' claims. The Court, therefore, concludes that the
defendants by being required to participate in this action are entitled
to avail themselves of the rights provided by
Virginia
statute to protect their claims for materials and services. The next
step is an examination of whether the defendants, or any of them, would
have been able to perfect mechanic's liens under
Virginia
law as of the date of the entry of the Court's injunctions of
September 12, 1975
, and
October 10, 1975
.
Perfection of
a lien for work done and materials furnished under Virginia law occurs
when a sub-contractor or one performing labor or furnishing materials
for a subcontractor complies with the provisions of Va. Code Ann. §§
43-4, 43-7 and 43-9 (1950, as amended). Section 43-4 requires that a
contractor file his memorandum "at any time after the work is done
and the material furnished by him and before the expiration of sixty
days from the time such building, structure or railroad is completed, or
the work thereon otherwise terminated . . ." The admissions of the
parties in the pleadings establish that the project was completed on
September 5, 1975, and, therefore, all contractors, sub-contractors and
sub-subcontractors would have had sixty (60) days from that day in which
to perfect their liens. Both injunction orders of the Court were entered
within that sixty-day period. Accordingly, for the purpose of
establishing priority of the liens asserted by the sub-sub-contractors,
the date of perfection of their respective mechanic liens will be
September 12, 1975
, or
October 10, 1975
, depending upon when they became defendants.
The
sub-sub-contractor claimants to the interpleaded fund allege that Scott
Kurt has no interest in the fund to which a
United States
tax lien can attach. It is clear that state law governs the initial
question of whether the taxpayer (Scott Kurt) had "property"
or "rights to property" to which the tax lien could attach. Aquilino
v. United States [60-2 USTC ¶9538], 363
U. S.
509 (1960). Section 43-13 of the Code of Virginia states that a
contractor who receives payment for his work but retains the funds with
intent to defraud instead of satisfying his contractual obligation to
his sub-contractors shall be guilty of a misdemeanor. The defendants,
Fairfax
,
Chantilly
, and W. B. Clark, argue that Section 43-13 impresses a trust on any
payments due Scott Kurt in favor of all sub-contractors of Scott Kurt.
See United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363
U. S.
522 (1960). In Perrin & Martin, Inc. v. United States [64-2
USTC ¶9694], 233 F. Supp. 1016 (E. D. Va. 1964), the Court held that
Section 43-13 did not create a trust on behalf of the subcontractors.
The District Court cited the refusal of the Supreme Court of Virginia to
find a legal trust within the provisions of Section 43-13 and the
emphasis of the Virginia Court on the "intent to defraud"
element rather than the "existence of the indebtedness" as the
determinative factor of guilt under the statute. See Overstreet v.
Commonwealth, 193
Va.
104, 67 S. E. 2d 875 (1951). This Court holds, therefore, that
Virginia
law does not provide that funds retained by a contractor from payments
made by the owner and owing to the subcontractors are held in trust for
the benefit of the sub-contractors. From this, the Court further holds
that the theory that Scott Kurt has no property interest in the
interpleaded funds is refuted. Therefore, Scott Kurt did have an
interest in the fund due from Glen to which the Government could attach
its lien.
The priority
of the Federal tax lien as against a mechanic's lien is a question of
Federal law. United States v. Pioneer American Insurance Co.
[63-2 USTC ¶9532], 374
U. S.
84 (1962).
"The
priority of the federal tax lien provided by 26
U. S.
C. §6321 as against liens created under state law is governed by the
common-law rule--'the first in time is the first in right.'"
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81, 85-86.
Id.
at 87.
To
establish the priority of a state-created lien over a Federal tax lien,
the claimant must show that his lien has been perfected so as to be
deemed choate under Federal law. United States v. Pioneer American
Insurance Co., supra at 88-89. Utilizing September 12, 1975, and
October 10, 1975, as the dates on which the mechanic's liens of
Chantilly, Fairfax and W. B. Clark were perfected under state law and
became choate under Federal law, the tax liens filed by the United
States prior to September 12, 1975, and October 10, 1975, have priority
over the claims of the mechanic lienors and are in excess of the fund
paid into the registry of this Court. Consequently, the claims of
Chantilly,
Fairfax
and
Clark
against the fund are denied.
The Bank of
Vienna, in its Answer to the Complaint, stated that it secured from
Scott Kurt an assignment of the contract balance due Scott Kurt from
Glen on
August 4, 1975
. Such assignment affords no priority. Perrin & Martin v. U. S.,
supra. As set forth earlier in this Opinion, the Government had
properly filed three tax liens before
August 4, 1975
, the total of which amounted to more than the fund held in the registry
of this Court. The principle "the first in time is first in
right" previously referred to clearly establishes the priority of
the Government over the claim of the Bank of Vienna. The Court,
therefore, denies the Bank of Vienna a recovery from the fund.
For the
foregoing reasons, the Motion for Summary Judgment of the Government is
GRANTED and judgment is entered in favor of the Government in the amount
of $21,902.78 against the fund in the registry of the Court and the
Clerk is directed to pay to the
United States
said amount. The counterclaim of
Chantilly
against Glen and the Government's Cross-Claim against Scott Kurt
requesting judgment for all further taxes owed are not mooted by the
ruling thus far made. As a result granting of summary judgment in favor
of the Government cannot resolve all matters before the Court.
Accordingly, the case will be continued on the docket and counsel for
Glen, Scott Kurt and the Government are directed to contact Mrs. Casey
in the Clerk's Office to secure a date for hearing on the remaining
issues during the week beginning
June 1, 1976
.
The Motion of
Glen for Summary Judgment is DENIED.
1
The following tax liens were also recorded when the State Corporation
Commission according to exhibits attached to the Motion for Summary
Judgment of the
United States
. However, the tax liens listed below were not previously made a part of
this litigation nor were they enumerated in the "Affidavit of
Indebtedness" signed by James P. Boyle, District Director of
Internal Revenue, Richmond District, which accompanied the Government's
Motion for Summary Judgment. These additional tax liens, therefore, have
not been considered as a part of the present litigation.
Date of Tax Date Notice
Assessment Filed Amount
June 30, 1975
July 2, 1975
...... $ 1,735.03
Sept. 22, 1975
Sept. 26, 1975
.... 705.95
Oct. 29, 1975
Nov. 10, 1975
..... 9,583.28
Nov. 4, 1975
Nov. 12, 1975
..... 392.28
[70-1 USTC
¶9380]Theophil W. Streule, Appellant v. Gulf Finance Corporation,
Appellee
(CA-DC),
U. S. Court of Appeals, Dist. of Col., No. 4767, 5/5/70
[Code Secs. 6323 and 6339(a)(2)]
Tax liens: Priority: Buyer at tax sale v. security interest holder:
Security interest holder v. government: Perfection of lien.--
When Streule purchased an automobile at a tax sale, he took subject to
the unsatisfied portion of Gulf's lien. Gulf had priority over the
government, since Gulf was a security interest holder whose lien was
perfected under both Federal and State law before the government filed
notice of its lien, and a lien with priority over a Federal lien is not
extinguished by a tax sale.
Theophil W.
Streule, pro se, John B. Perna, for appellant. Bernard T. Levin,
1343 H. St., N. W.
,
Washington
, D. C., for appellee.
Before HOOD,
Chief Judge, and FICKLING and NEBEKER, Associate Judges.
HOOD, Chief
Judge: On
May 12, 1965
, the
United States
assessed a lien against the property of Russell E. Travis, Jr. for
unpaid income taxes, and on
May 18, 1966
filed notice of lien in the United States District Court for the
District of Columbia
. In enforcement of this lien the
United States
seized and thereafter sold on
June 20, 1966
in the
District of Columbia
an automobile as the property of Travis. The purchaser at the sale was
Theophil W. Streule, appellant here. He received a certificate of sale
purporting to convey to him "all right, title, and interest"
of Travis in and to the automobile. On the basis of the certificate of
sale Streule obtained a certificate of title from the District of
Columbia Department of Motor Vehicles dated
June 22, 1966
, bearing the notation, "No Liens Shown by Record."
On or about
September 10, 1966
the automobile was taken from Streule's garage by Gulf Finance
Corporation. On
December 4, 1965
Travis had obtained a loan from Gulf and as security therefor had
executed a chattel mortgage on the automobile, and on
December 15, 1965
had obtained a new certificate of title from the Division of Motor
Vehicles of the State of
Virginia
with Gulf's lien noted thereon in the amount of $1,080.00. As far as the
record discloses the automobile was still titled in
Virginia
at the time it was seized and sold.
Gulf took the
automobile from Streule on the theory that it was entitled to possession
because of a remaining unpaid balance of $899.00 under its lien.
Contending that he had bought the automobile free and clear of all
liens, Streule brought the present action in replevin against Gulf and
the automobile was seized under the writ of replevin. Gulf answered by
denying Streule's right to possession and counterclaimed for $899.00,
the balance due under its lien. The trial court found in favor of Gulf
and Streule has appealed.
The question
in the trial court and here is whether Streule purchased the automobile
free and clear of, or subject to, the unsatisfied portion of Gulf's
lien. Underlying that question is the question of priority between the
tax lien of the
United States
and Gulf's lien. 1
While state
law determines the nature of the taxpayer's interest in the property to
which a federal lien can attach, federal law determines the priority
among the competing liens asserted against such property. 2
When the Government assesses its lien for unpaid taxes it attaches to
the taxpayer's property and has priority over all liens not choate and
perfected as of the date of assessment, 3
except that pledgees, mortgagees, judgment creditors and purchasers
whose liens become choate and perfected between the date of assessment
and date of filing notice of the federal lien have priority over the
federal lien. 4
A lien with priority over the federal lien is not extinguished by a tax
sale but continues to be a lien on the property since what is sold is
the taxpayer's right, title and interest in the property when the later
federal lien attached upon filing. 5
The Supreme
Court has said that a lien is choate and perfected "when the
identity of the lienor, the property subject to the lien, and the amount
of the lien are established." 6
But the courts are divided over the question of whether it is also
necessary for a lien to comply with state recording laws in order to
become choate and perfected. We do not need to decide which position is
the better view because in either case we affirm the judgment below.
Assuming that
a lien can become choate and perfected without the need to record it
under state law, Gulf's lien was choate and perfected when Travis and it
entered into their agreement on
December 4, 1965
. At that time the identity of the lienor, the property subject to the
lien and the amount of the lien were all known. Since Gulf was a
mortgagee whose lien became choate and perfected after the date of
assessment but before the date of filing notice of the federal lien, the
federal lien attached to the vehicle only to the extent of Travis'
equity in the vehicle above the amount owed to Gulf and it was only this
interest that Streule bought at the sale. 7
Appellant thus purchased the vehicle subject to appellee's lien.
Even if we
deemed it necessary to look at state law to see if recording were
required to make a lien choate and perfected, Gulf still would be
entitled to the vehicle. In Virginia the certificate of title must show
on its face all liens disclosed by the application for the certificate
of title 8
and when the title is issued with the lien noted on it, the title is
notice to the Commonwealth, creditors and purchasers that a lien exists
against that vehicle. 9
Gulf's lien was noted on the certificate of title issued
December 15, 1965
, after the federal lien was assessed but before notice of this lien was
filed. This gave Gulf's lien priority over the federal lien and for the
reasons previously stated, Gulf's lien continued to be a lien against
the vehicle when it was purchased by Streule.
Streule does
not challenge the validity of the Virginia certificate of title 10
but he contends that Gulf's lien lost its perfected status before the
federal lien was filed. Since the vehicle was located in the District of
Columbia for a period of time previous to the filing of the federal lien
in the District of Columbia, 11
argues Streule, Gulf had, under D. C. Code 1961, §28:9-103(3) (1966
Supp.), 12
only four months to perfect its lien in the District of Columbia. This
not being done, Gulf's lien ceased to be perfected after the four
months' period expired and before notice of the federal lien was filed.
We do not agree.
Subsection (3)
is inapposite. The controlling section is subsection (4) which provides:
Notwithstanding
subsections (2) and (3), if personal property is covered by a
certificate of title issued under a statute of the District or any other
jurisdiction which requires indication on a certificate of title of any
security interest [lien] in the property as a condition of perfection,
then the perfection is governed by the law of the jurisdiction which
issued the certificate.
This
subsection has been severely criticized for its lack of clarity and the
Official Comments to this subsection fail to shed any light on its
intended meaning. We then look to the purpose of this subsection as
stated by the editorial Board of the Uniform Commercial Code:
Subsection
(4) is new to avoid the possible necessity of duplicating perfection in
the case of vehicles subject to a certificate of title law requiring
compliance therewith to perfect security interests. The certificate of
title law requirements are adopted as the test for perfection.
Unfortunately,
the draftsmen of the Uniform Commercial Code did not delineate clearly
the purposes of this subsection when it was adopted in final form. Since
this court must interpret this subsection as it appears in our Code, we
think that once a security interest [lien] is noted upon a certificate
of title in a state which requires notation of a security interest
[lien] on the certificate of title as a condition of perfection, the
security interest [lien] remains perfected when the vehicle is removed
to another state even if the debtor has not obtained a new certificate
of title with the security interest [lien] noted on the certificate of
title in the other state. 13
Here the
vehicle was covered by a certificate of title with Gulf's lien noted on
it as required by
Virginia
law to perfect the lien and therefore
Virginia
law governs the perfection of the lien. Gulf having complied with the
law of
Virginia
, the lien maintained its perfected status while the vehicle was located
in the
District of Columbia
even though Travis did not obtain a
District of Columbia
certificate of title. Since Gulf's lien was properly perfected before
notice of the federal lien was filed, the vehicle was sold subject to
Gulf's lien and Streule could not, by his unilateral act in obtaining a
District of Columbia
certificate of title, cut off Gulf's lien. 14
Although we
affirm, the case must be remanded for the entry of a proper judgment.
The judgment as entered was:
Automobile . .
. must be returned by plaintiff to defendant, upon failure to do so
within 5 days, the defendant may have judgment against plaintiff in the
amount of $899.00, plus costs and interest.
Our Code 1967,
§16-3740 provides that in an action of replevin, if the defendant
prevails, "the judgment shall be that the goods, if delivered to
the plaintiff, be returned to the defendant, with damages for their
detention, or, on failure, that the defendant recover from the plaintiff
and his surety the damages sustained by him." 15
In case
Streule fails to deliver the automobile, the amount of damages sustained
by Gulf is not necessarily measured by the unpaid balance of its lien,
because the value of the automobile may not equal that amount. 16
If Streule fails to return the automobile, Culf's damages must be
computed and judgment therefor entered against Streule and his surety.
The case is
remanded for entry of judgment in accordance with D. C. Code 1967, §16-3740.
Affirmed
and remanded.
1
On
November 2, 1966
, certain amendments to the Internal Revenue Code relative to federal
tax liens became effective. This case is decided under federal tax law
as it existed prior to those amendments.
2
Aquilino v. United States [60-2 USTC ¶9538], 363
U. S.
509 (1960).
3
United States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81 (1954); Stevan v. Union Trust Co., 115
U. S.
App. D. C. 36, [63-1 USTC ¶9377] 316 F. 2d 687 (1963).
4
26 U. S. C. §6323 (1964).
5
26
U. S.
C. §6339(a)(2) (1958); Treas. Reg. 301.6335-1(c)(4)(iii) (1954). See Blacklock
v. United States, 208
U. S.
75 (1908); Pargament v. Fitzgerald [67-2 USTC ¶9524], 272 F.
Supp. 553 (S. D. N. Y. 1967), aff'd, [68-1 USTC ¶9301] 391 F. 2d
934 (2nd Cir. 1968). Cf. Commercial Credit Corp. v. Schwartz
[55-2 USTC ¶9589] 130 F. Supp. 524 (E. D. Ark. 1955).
6
United States v. City of New Britain [54-1 USTC ¶9191], 347
U. S.
81, 84 (1954).
7
See United States v. Lebanon Woolen Mills Corp. [65-2 USTC ¶9571],
241 F. Supp. 393 (D. N. H. 1964). Cf. General Motors Acceptance Corp.
v. Stotsky, 60 Misc. 2d 451, 303 N. Y. S. 2d 463 (1969).
8
Va. Code Ann. 46.1-69 (1958).
9
Va. Code Ann. 46.1-71 (1958).
10
On his application for the
Virginia
certificate of title Travis gave his home address as being in the
District of Columbia
. When issued the
Virginia
certificate of title stated that Travis' address was in
Newport News
,
Virginia
. In the absence of evidence to the contrary we must assume the Virginia
Division of Motor Vehicles acted properly in issuing the certificate of
title. See Stone v. Stone, 78 U. S. App. D. C. 5, 136 F. 2d 761
(1943).
11
No evidence was introduced as to when the vehicle was removed from
Virginia
to the
District of Columbia
and as to the length of time the vehicle was actually located in the
District of Columbia
. For purposes of this opinion it does not matter how long the vehicle
was located in the
District of Columbia
after the certicate of title was issued on
December 15, 1965
.
12
This section is part of the Uniform Commercial Code as enacted in the
District of Columbia
.
13
See General Motors Acceptance Corp. v. Whisnant, 387 F. 2d 774
(5th Cir. 1968); In re White, 266 F. Supp. 863 (N. D. N. Y.
1967).
14
See, e.g., Capital Automobile Co. v. Continental Credit Corp.,
117
Ga.
App. 451, 160 S. E. 2d 836 (1968).
15
Although Gulf "counterclaimed" against Streule for $899.00,
the unpaid balance due on the loan from Travis, it was merely asserting
a lien in that amount on the automobile--not a claim against Streule
personally.
16
The court made no finding as to the value of the automobile. Streule in
his complaint alleged a value of $1,500.00, although he paid only $25.00
for it at the tax sale. When seized under the writ of replevin the
automobile was appraised at $450.00.
[76-1 USTC
¶9402]Pine Builders, Incorporated v. The
United States of America
U.
S. District Court, East. Dist. Va., Richmond Div., Civil Action Nos.
75-0250-R, 75-0251-R, 413 FSupp 77, 3-19-76
[Code Secs. 6321 and 6323]
Lien for taxes: Security interest under state law: Priority: Creation
of contract rights: Bilateral contract.--The rights of a secured
creditor are entitled to priority over a competing federal tax lien only
if such rights came into existence and became valid first. Because the
court in this case factually determined that the conrtracts between two
builders and an installer of carpeting were bilateral rather than
unilateral, the installer's right to payment, and the security interest
of the installer's supplier in such funds, came into existence upon the
exchange of mutual promises, not upon completion of the installation and
payment therefor. Consequently, since these promises were made well
before any of the federal tax lien notices were filed, the supplier's
rights as a secured creditor were entitled to priority over the federal
tax liens on the funds interpleaded by the builders.
Walter F.
Witt, Jr., T. S. Ellis, III, Frank A. Thomas, III, Hunton, Williams, Gay
& Gibson, Post Office Box 1535, Richmond, Va., for plaintiff. N.
George Metcalf, Assistant United States Attorney, Richmond, Va., Eddie
Cantor, 3300 West Broad St., Henry A. Conner, Jr., Conner, Hooker &
Ritchie, 2702 Parham Road, Suite 210, Richmond, Va., for defendants.
Memorandum
WARRINER,
District Judge:
This suit is a
consolidation of two actions of interpleader filed pursuant to 28
U. S.
C. §1335 and Fed. R. Civ. P. 22 whereby defendants United States and
Joseph M. Zamoiski Co., are adverse claimants to a sum of money which
plaintiff Pine Builders, Inc., and Parham Company have paid into the
registry of this Court so that we may resolve the conflicting claims
between defendants relative thereto. Jurisdiction is envoked under 28
U. S.
C. §§ 1335, 1340, 2410.
On
30 December 1975
Pine and Parham filed their respective motions for summary judgment
requesting that they be discharged from this proceeding and from any
further liability with regard to the interpleader funds. With all
interested counsel consenting this Court entered an order granting said
motion. By agreement of counsel for the remaining parties the issue of
priority in the funds has been submitted to the Court for a decision on
the merits as evidenced by the pleadings, stipulations and depositions.
The Court
makes the following findings of fact: In late June or early July of 1974
Industrial Carpet Sales, Inc. (Industrial) entered into an oral contract
with Pine Builders, Inc. (Pine) and a separate oral contract with Parham
Company (Parham). Industrial contracted to install carpeting and the
necessary padding in approximately 1,000 apartments, 500 located at
Chelsea Square
and 500 located at Jarrett Apartments, constructed by Parham and Pine,
respectively. The pricing of Industrial's services was on a per
apartment unit basis. Pine and Parnham were to pay Industrial on Friday
of each work week for the number of apartments Industrial had completed
through Wednesday of that work week. The contract between Industrial and
Pine was identical to the contract between Industrial and Parham with
variations only in the price per apartment unit.
Shortly after
work on the contracts commenced Industrial's supplier of carpeting and
padding, Joseph M. Zamoiski Company (Zamoiski), demanded security from
Industrial as a prerequisite to continued supply, apparently because
Industrial owed a considerable sum of money on an open account it had
with Zamoiski. This demand was met by an agreement amongst Zamoiski,
Industrial, Pine and Parham whereby Zamoiski continued to furnish the
necessary carpeting materials to Industrial while Pine and Parham made
the weekly checks payable jointly to Industrial and Zamoiski. Upon
receipt of each check Zamoiski deducted a predetermined amount as
indicated by specified invoices for materials furnished. This
arrangement was substantially complied with from its inception through
completion of the Chelsea and Jarrett projects. Zamoiski set up an
account separate from the delinquent open account covering these
transactions.
As additional
security Zamoiski, required Industrial to enter into a Security
Agreement that secured "all of the obligations" of Industrial
to Zamoiski. Such obligations included the delinquent open account as
well as the Pine-Parham account. On
15 July 1974
Zamoiski filed with both the State Corporation Commission of Virginia
and the Clerk's Office of the
County
of
Henrico
a Financing Statement and Security Agreement describing the collateral
as follows:
All
of Debtor's present and future accounts receivable, general intangibles,
contract rights, returned, repurchased, repossessed goods, and monies
due and to become due from banks, credit card companies, and other
issuers of credit cards.
All
of Debtor's contract rights now and hereafter arising from all present
and future contracts and agreements between Debtor and Gumenick
Properties for the furnishing by Debtor of goods and/or services for
Chelsea Square Apartments and Jarrett Apartments and all of Debtor's
accounts receivable now and hereafter arising from the aforesaid
agreements, contracts or furnishing of goods and/or services and all
returned, repurchased and repossessed goods.
During the
course of these projects, Industrial suffered servere financial reverses
and consequently was unable to pay federal withholding and other taxes
which were, as of their assessment dates, in the amounts as follows: 10
February 1975--$7,438.04; 24 March 1975--$4,755.35; 12 May
1975--$218.40. As a result federal tax liens, pursuant to 26
U. S.
C. §6321, arose in favor of the
United States
for the amount of Industrial's tax liability.
Subsequently
the government filed notice of these liens, in compliance with the
Federal Tax Lien Act, Code §6323, with the State Corporation Commission
of Virginia on the respective dates of
20 February 1975
,
27 March 1975
and
13 May 1975
.
On
20 May 1975
the government served, pursuant to 26
U. S.
C. §6155, Notice of Final Demand on both Pine and Parham. At that time
Pine and Parham owed a sum total of $19,900.36 to Industrial for
services rendered under the aforementioned contracts. Being confronted
with demands from the government, Industrial, and Zamoiski and realizing
reasonable doubt existed as to which party was entitled to what portion,
if any, of the funds, Pine and Parham filed interpleader actions with
this Court which have been consolidated into one suit.
The sole issue
for the Court to resolve is whether Zamoiski has rights as a secured
creditor which are entitled to priority over the federal tax liens on
the funds deposited herein by Pine and Parham. 1
Where the
federal government is a competing lienor the question of priorities is
determined by reference to federal law. Agsten and Sons, Inc. v.
Huntington Trust and Savings Bank, 388 F. 2d 156 (4th Cir. 1967) cert.
denied 390
U. S.
1025 (1968); Purcell v. Henson, No. 75-0390-R (E. D. Va. Dec. 10,
1975). It is undisputed that the Federal Tax Lien Act of 1966 (FTLA) 26
U. S.
C. §§ 6321, 6323 is controlling in this case. The purpose of the Act,
we believe, was to fit tax liens into the priority scheme of the UCC. 2
The priority
of a federal tax lien provided by Code Section 6321 as against liens
created by State law is governed by the rule-first in time first in
right. United States v. City of New Britain [54-1 USTC ¶9191],
347
U. S.
81 (1954). In order to apply the first in time first in right rule the
times at which the federal tax lien and the competing State created lien
came into existence and became valid must be determined. United
States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374
U. S.
84 (1963).
A federal tax
lien arises when the tax is assessed, 26
U. S.
C. §6322. However, it is not valid as against a holder of a
"security interest" until notice thereof has been filed in
accordance with 26
U. S.
C. §§ 6323(a), (f). The dates are clear with respect to the filing of
the government's tax lien notices. Thus, the issue narrows down to a
determination of the time at which Zamoiski became the "holder of a
security interest" in the funds deposited with the Court within the
meaning of Code Section 6323(a).
Code Section
6323(h)(1) defines the term security interest as follows:
(1)
Security interest.--The term "security interest" means
any interest in property acquired by contract for the purpose of
securing payment or performance of an obligation or indemnifying against
loss or liability. A security interest exists at any time (A) if, at
such time, the property is in existence and the interest has become
protected under local law against a subsequent judgment lien arising out
of an unsecured obligation, and (B) to the extent that, at such time,
the holder has parted with money or money's worth.
The
House Ways
and Means Committee Report states further in this regard, H. R. Rep. No.
1884, supra at 49:
A
security interest must be in existence, within the provisions of section
6323(h)(1), at the time as of which its priority as against a Federal
tax lien is determined. For example, a security interest, to be afforded
priority under section 6323(a), as amended by the bill, must be in
existence within the meaning of subsection (h)(1) before notice of tax
lien is filed.
For
purposes of subsection (h)(1), a security interest becomes protected
against a subsequent judgment lien on the date on which all actions
required under local law to establish the priority of the security
interest against such a judgment lien have been taken, or, if later, the
date on which all such actions are deemed effective, under local law, to
establish such priority . . ..
The undisputed
facts show that on 15 July 1974 Zamoiski, pursuant to an agreement with
Industrial and for the purpose of securing present and future
obligations of Industrial to Zamoiski, perfected its security interest
in the "property" of Industrial then in "existence"
that was subject to the security agreement filed on that date. It is
undisputed that under
Virginia
law such perfection would protect Zamoiski's interest in existing
property of Industrial from a subsequent judgment lien arising out of an
unsecured obligation. It is also undisputed that, although the nature of
Industrial's right in the funds in question, if any, is controverted,
that right, whatever it may be, was subject to the security agreement if
and when the right accrued to Industrial. Additionally, the undisputed
facts show that Zamoiski departed with "money or moneys worth"
prior to the filing of the tax lien notices.
Hence, the
issue further narrows down to whether or not, prior to the filing of the
tax lien notices, Industrial's rights, if any, in the funds deposited
with this Court constituted "property" in
"existence" under FTLA Code Section 6323(h)(1).
Code Section
6323(h)(1) is silent as to whether federal or State law is applicable in
determining whether property is in existence under its provisions. This
Court finds that State law should be applied.
Nevada
Rock and Sand Co. v.
United States
, 327 F. Supp. 161, 168 (D.
Nev.
1974). But see Texas Oil and Gas Corp. v. United States [72-2
USTC ¶9653], 466 F. 2d 1040, 1049 (5th Cir. 1972). The FTLA was enacted
with the intent of conforming federal tax lien laws to the concepts
developed in the Uniform Commercial Code (UCC). H. R. Rep. No. 1884,
89th Cong. 2d Sess. 1 (1966). Since the UCC has been adopted by
virtually every State, naturally State legislatures and courts are
better suited than Congress and federal courts to further develop the
law of secured transactions insofar as harmonizing the UCC with the FTLA
so that the concepts developed in the UCC are not thwarted and the
purpose behind FTLA is furthered.
In light of
the foregoing reasoning and of the context in which the phrase
"property in existence" is used, the Court finds that Virginia
UCC provides a sufficient and most appropriate source for deciphering
its meaning. Va. Code Ann. §§ 8.9-105(c), 106 (Cum. Supp. 1975) as
amended, respectively, state in pertinent part:
"Collateral"
means the property subject to a security interest, and includes accounts.
. . . (emphasis added).
Id.
§105(c).
Accounts means
any right to payment for . . . services rendered which is not evidenced
by an instrument or chattel paper whether or not it has been earned
by performance. . . . (emphasis added)
Id.
§8.9-106.
The above
definition of collateral describes accounts as property thus presuming
that existing accounts constitute property in existence under the
Virginia UCC. Clearly the contracts between Industrial and Pine and
Parham come within the meaning of the term account as defined above in
that they created rights for services rendered. 3
Equally clear, these contracts come within the above definition of
collateral in that they constitute accounts covered by the security
agreement between Industrial and Zamoiski and thus were subject to
Zamoiski's security interests in them. Thus, when these contracts were
created, that is when the rights to payment for services rendered were
established, whether conditionally or absolutely, property of an
incorporeal nature came into existence for the purposes of the Virginia
UCC and, we find, for the purposes of the FTLA.
The right to
payment for services rendered, whether or not earned by performance, is
property in existence under the FTLA. An existing right to property (in
this case a contractual right to receive money for services to be
rendered) is itself property in existence under the Act. It
matters not that fruition of the right is in futuro or
conditioned upon a corresponding duty on the part of the holder of the
right. The subject of the right, that is, the money to be received for
services to be rendered is part and parcel of that right at the time the
right is created (in this case when the contracts were entered into)
regardless of when the money is actually to be paid or when the right
thereto becomes absolute:
There is
supporting legislative history, if any is needed, for the interpretation
just urged. For example, it is clear from more than one source that
contract rights are a species of property envisioned as being a proper
subject of a security interest under the Act. While the specific
discussion of contract rights in the legislative history relates to
subsection (c) of Section 6323, it should be stressed that the
recognition of security interests in contract rights as qualifying for
the "superpriority" provided by subsection (c) necessarily
involves recognition that they qualify for the normal priority of
subsections (a) and (h)(1). Contract rights, by definition under the
U. C. C., are rights to payment under a contract "not yet earned by
performance." Thus, Congress necessarily embraced the concept
that rights to payments not yet earned by performance arising under
existing assigned contracts are in esse and such a security interest
will prevail over a later federal tax lien. Any other interpretation
would necessarily involve rejection of the idea that contract rights are
proper subject for a security interest because, if the payment under the
contract had to be unconditionally payable or earned by performance, we
would no longer be dealing with contract rights. (emphasis
added-citations omitted). Cresdon, Assignments For Security and
Federal Tax Liens, 37 Fordham L. Rev. 535, 563 (1969).
To the same
effect is Consolidated Film Industries v. United States, 17 U. C.
C. Rep. 1354 (D. Utah, 1975); Contex Construction Co. v. Kennedy,
332 F. Supp. 1213, 1215 (S. D. Texas 1971). It should be noted that the
term "contract right" referred to in the above quotation is
now subsumed within the term "account" under Va. UCC
definitions.
Va.
Code Ann. §8.9-106 (Cum. Supp. 1975).
The Court
still has to resolve the factual question--at what point in time were
Industrial's rights to payment of the funds herein, whether conditional
or otherwise, created? In so doing the Court deems it important to note
a crucial exception to the above quoted passage reading "if the
payment under the contract had to be unconditionally payable or earned
by performance we would no longer be dealing with contract rights."
Creedan, supra at 563.
The exception
is unilateral contracts. With this type of contract acceptance is
performance. Thus a unilateral contract, and the rights created therein,
arise only when the contracting party completes performance of the acts
called for. At no point is he bound to perform nor does he have any
contractual rights prior to completion.
All parties
concerned agree that the subject of the contracts herein was payment for
services rendered--the carpeting of the apartments. The factual issue is
whether the contracts came about as a result of mutual promises on the
part of Industrial and Pine and Parham whereby Industrial was to perform
all the carpeting services required in both projects at a set
price per unit or whether the initial agreements were only as to price
per unit with the effect that the completion of each apartment unit by
Industrial amounted to acceptance of a unilateral contract offered by
Pine and Parham. If the former is correct then Industrial's rights in
the funds herein were created in July of 1974 when the agreements
between Industrial and Parham and Pine were entered into. If the latter
is correct then Industrial's rights in the funds were created when the
carpeting for which the funds were payment was completed. In other words
if the agreements constituted bilateral contracts covering each project
in its entirety, Industrial's rights to the funds were created and
Zamoiski's corresponding security interests therein came into existence
well before any of the tax lien notices were filed. But if the
agreements merely set the price for a series of unilateral contracts
then there remain serious questions over priorities between Zamoiski and
the government as to the funds.
With respect
to this issue the government states in its reply brief on page 4 that:
There is
positively no evidence of any binding obligation on the plaintiffs to
engage Industrial for the entire project, nor on Industrial that it
bound itself to complete 500 apartments in each complex.
Despite the
emphatic posture of the government's contention the evidence is to the
contrary. Thomas T. Vincent, president and sole stockholder of
Industrial, who negotiated the contracts in question, was deposed on
behalf of the government and stated the following:
The Contract
or agreement was to carpet approximately a thousand apartments, 500
located in the Jarrett Apartments and 500 located at
Chelsea Square
; we were to use Mohawk Carpet and Cushion; they were to pay us a stated
price for each unit and were to pay us on Friday for work done through
Wednesday. They were to make the checks payable to Industrial Carpet
Sales and Joseph M. Zamoiski Company.
Ignoring
Vincent's deposition, the government relies on the depositions of Abe
Pfeffer who negotiated the contracts in issue on behalf of Pine and
Parham. Even so, we find that Pfeffer's account of the negotiation
substantiates Vincent's account.
Pfeffer was
deposed twice on behalf of the government, once with regard to the
Industrial-Pine agreement and once with regard to the Industrial-Parham
agreement.
In the
Industrial-Pine deposition the following colloquy occurred in response
to counsel's questions:
Q.
When did performance under the agreement commence and end. When
did it begin and how long did it take place and when was it completed?
(Emphasis added)
A.
It was completed the week of
May 14, 1975
, and it commenced the early part of July, 1974.
In the
Industrial-Parham deposition this exchange ensued between the counsel
and Pfeffer:
Q.
Now this work commenced in July of 1974?
A.
Yes, Sir.
Q.
I just want to cover the scope of the contract; for how long did
this continue? (emphasis added)
A.
This practice?
Q.
The contract, the installation of the carpeting. (Emphasis added)
A.
Until the job was completed. Talking about
Chelsea
now?
Q.
Yes.
A.
This job was completed in May of 1975.
The Court
submits that if all it had to go on were the Pfeffer depositions the
question of the nature of the contracts might be a close one
notwithstanding the above quoted passages. But reading the Pfeffer and
Vincent depositions together, the Court finds them clearly supportive of
the conclusion that the contracts were bilateral in nature and covered
each project in its entirety. Thus, Industrial's contractual rights, and
Zamoiski's corresponding security interest, in the funds in question
were unconditionally established, and for the purposes of the FTLA, in
existence in July of 1974, the month in which the Industrial-Pine and
Parham contracts were made and the Zamoiski-Industrial security
agreement was filed. Only performance remained to bring the account to
fruition. The earliest tax lien notice being filed in February of 1975,
Zamoiski's lien was prior in time and superior in right to that of the
government's lien.
For these and
the foregoing reasons the Court will enter judgment in favor of Zamoiski
adjudging that it has a superior right over that of the government to
the funds held in the registry of this Court.
An appropriate
order shall issue.
1
The Court acknowledges the arguments presented in the briefs relative to
federal lien priority "choatness." However, we have serious
doubts as to its applicability under FTLA Code §6323, which we find to
be controlling in this case. In any event we hold that within the
context of tax liens, collateral consisting of a right to payment for
services rendered, whether or not earned by performance, is choate. Hammes
v. Tucson Newspapers, Inc. 324 F. 2d 101, 103 (9th Cir. 1963); H. R.
Rep. No. 1884, 89th Cong. 2d Sess. 1 (1966). The Court thus dispenses
with this issue.
2
H. R. Rep. No. 1884, 89th Cong., 2d Sess. 1 (1966).
3
This is true regardless of whether the Court finds as a matter of fact
that those contracts were created pursuant to Industrial's promise to
perform, with the rights therein established prior to but conditioned
upon performance, or that they were created in serial form, with
separate and distinct rights established respectively and absolutely,
upon completion of each apartment unit by Industrial.
[95-2 USTC
¶50,631] In re Edgar Ballard, In re Beulah H. Ballard, Debtors. Jeffrey
Fairfield, Trustee, Plaintiff-Appellant v.
United States of America
, Defendant-Appellee,
Commonwealth
of
Virginia
, Appellee
(CA-4),
U.S. Court of Appeals, 4th Circuit, 94-2199, 9/20/95, 65 F3d 367,
Affirming an unreported District Court decision
[Code Secs. 6321 and
6323 ]
Tax liens: Bankruptcy: Property held in tenancy by the entireties:
Right of survivorship: Joint vs. individual creditors: Priority.--Proceeds
from the sale of debtors' residence held in tenancy by the entireties
became the sole property of the surviving debtor upon the death of his
spouse, and, thus, the joint or individual character of creditors'
claims did not affect their priority. Accordingly, the proceeds were
required to be applied first to unsecured priority claims, including the
IRS's claim for a trust fund recovery penalty, regardless of whether
both or just the surviving debtor was liable for the penalty. The
proceeds were not required to be applied exclusively to payment of the
debtors' joint creditors, despite the trustee's contention that, under
state (
Virginia
) law, entireties property is available in bankruptcy
admin
istration solely for the benefit of joint creditors. Upon the death of
his spouse, the right of survivorship released the surviving debtor and
his bankruptcy estate from all such conditions of the tenancy conceived
to preserve unity of entireties property.
Jeffrey John
Fairfield, Jeffrey J. Fairfield, P.C.,
1175 Herndon Parkway
,
Herndon
,
Va.
22070
, for plaintiff-appellant. Helen F. Fahey, United States Attorney,
Loretta C. Argrett, Assistant Attorney General, Patricia McDonald
Bowman, Gary R. Allen, Gary D. Gray, Department of Justice, Washington,
D.C. 20530, for defendant-appellee.
Before: HALL
and WILLIAMS, Circuit Judges, and PHILLIPS, Senior Circuit Judge.
OPINION
WILLIAMS,
Circuit Judge:
In this
appeal, we confront an admittedly arcane but interesting question of
first impression in this circuit concerning the interaction between
federal bankruptcy law and
Virginia
property law. More specifically, we consider the effect of the
termination of the marital estate and resulting devolution of tenancy by
the entireties property upon the death of a spouse following the
commencement of the couple's joint bankruptcy case. Ruling on the motion
of the
United States
for summary judgment, the bankruptcy court concluded that the proceeds
derived from the sale of debtors' property, held by tenancy in the
entireties, became the sole property of Edgar Ballard upon the death of
his wife, Beulah Ballard. The court held that the proceeds from the sale
of the Ballards' entireties property must be applied to pay the
unsecured priority claims before a distribution may be made to unsecured
general creditors regardless of the joint or individual character of the
claim. Trustee, Jeffrey Fairfield, appeals the entry of summary judgment
by the United States Bankruptcy Court and affirmance by the United
States District Court for the Eastern District of Virginia. For the
reasons discussed below, we affirm.
I.
The parties do
not dispute the underlying facts in this action. The debtors, Edgar and
Beulah Ballard (the Ballards), filed a joint Chapter 11 petition on
February 26, 1990
. On the date of filing, the Ballards' principal asset consisted of
residential real property located at
1841 Clachan Court
,
Vienna
,
Virginia
. They owned this real property in fee simple as tenants by the
entireties. On the List of Twenty Largest Creditors Holding Unsecured
Claims, the Ballards included the following as undisputed,
non-contingent debts: withholding taxes in the amount of $45,000 owed to
the United States Internal Revenue Service and withholding taxes in the
amount of $17,000 owed to the
Commonwealth
of
Virginia
, Department of Taxation.
On or about
May 31, 1990
, the IRS timely filed a proof of claim which was amended on
February 13, 1992
when the IRS filed an amended proof of claim in the amount of
$23,303.56, which consisted solely of a claim for a 100% penalty for the
period ending
December 31, 1989
. 1
Upon
conclusion of the investigation into the employment tax liabilities of
Ballene Services, Inc., 2
the IRS determined that both Edgar and Beulah Ballard were responsible
persons who failed to collect and pay over federal employment taxes
withheld from the wages of the employees of Ballene Services, and that
both should be held liable for the $23,303.56 penalty, pursuant to 26
U.S.C. §6672 .
On
December 28, 1990
, the bankruptcy court entered an order authorizing the debtors to sell
their residential real property. Also on that date, the court entered a
separate order requiring that the proceeds derived from the sale of the
Ballards' residential real property "be paid by the settlement
attorney in the form of a check payable to Edgar Ballard, Beulah H.
Ballard and [their attorney] James G. Smalley; [and] that the check ...
be deposited in an interest bearing account requiring the signatures of
the Debtors and their counsel to release the funds." (J.A. 49.) The
Ballards sold their property, realizing approximately $43,000 from the
sale.
On March 18,
1991, Leanne Njus and Associates, Inc. (Njus), an unsecured joint
creditor represented by the later-appointed and now-current Trustee,
Jeffrey Fairfield, objected to the proofs of claim filed by other
claimants and moved to determine the extent of consolidation of the
debtors' estates for disallowance of certain claims and for related
relief. Specifically, Njus objected to the IRS proof of claim on the
basis that Beulah Ballard "was not a responsible person [as defined
in IRC §6672(b) ]
required to collect, truthfully account for, and pay over trust fund
payroll taxes." (J.A. 50.) Njus further requested that the court
enter an order allocating"one-half of the net sales proceeds
resulting from the sale of the debtors' residence to each of the
respective estates of the joint petitioners;" directing "that
the respective estates of the debtors be held separate and apart;"
and disallowing "the proofs of claim including the proof of claim
filed by the United States." (J.A. 50-51.) Following a
May 14, 1991
, hearing, the bankruptcy court determined that Njus lacked standing to
contest the tax claims of the
United States
and the
Commonwealth
of
Virginia
and dismissed Njus's motion with prejudice.
Beulah Ballard
died after the May 14, 1991, hearing but before the bankruptcy case was
converted to a Chapter 7 proceeding. Thereafter, by order entered
April 6, 1993
, Mr. Fairfield was confirmed as Chapter 7 trustee. On or about
July 27, 1993
, the Trustee, in his new capacity, renewed the motions and objections
he had presented to the court on behalf of the Njus creditors in March
of 1991. The
United States
, in turn, moved for summary judgment requesting dismissal of the
Trustee's motion to segregate the debtors' estates and to overrule the
Trustee's objection to the IRS's proof of claim. The United States
argued that in light of Mrs. Ballard's death, whether she was personally
liable for the §6672 penalty
was a moot question.
In its entry
of oral findings from the bench, the bankruptcy court granted summary
judgment to the
United States
, finding that upon Mrs. Ballard's death, Mr. Ballard's estate acquired
the entire amount of the proceeds from the sale of their home, based on
the Ballards' tenancy by the entireties interest in the proceeds. Thus,
the court reasoned, whether Mrs. Ballard was also liable for the IRS tax
claim was moot because, after her death, all the proceeds from the sale
must be allocated to Mr. Ballard's estate. In its brief written order
granting summary judgment to the
United States
, the bankruptcy court stated:
... the
proceeds derived from the sale of the debtors' tenants by the entireties
property was held by the debtors as tenants by the entireties, that such
proceeds became the sole property of Edgar Ballard upon the death of
Beulah Ballard, that such proceeds must first be applied to pay the
unsecured priority claims before a distribution may be made to unsecured
general creditors regardless of whether such creditors hold joint or
non-joint claims and that the United States of America's motion for
summary judgment should be granted.
(J.A.
15-16.) The Trustee appealed and the district court, in an oral ruling
from the bench, affirmed the judgment of the bankruptcy court. The
Trustee now appeals, articulating two arguments in support of reversal:
(1) only joint creditors are entitled to distribution from the
bankruptcy estates; and (2) that the sale of the Ballards' house under
§363 of the Bankruptcy Code terminated their tenancy by the entireties
and mandated an allocation of the sale proceeds between the two
bankruptcy estates.
II.
We review de
novo the bankruptcy court's grant of summary judgment and the
district court's affirmance thereof. Savers Fed. Sav. & Loan
Ass'n v. McCarthy Constr. Co. (In re Knightsbridge Dev. Co.), 884
F.2d 145, 147 n.3 (4th Cir. 1989).
A.
The Trustee's
first contention need not detain us long. In support of his claim, the
Trustee asserts that the sale of the Ballards' house under §363 of the
Bankruptcy Code terminated their tenancy by the entireties and mandates
an allocation of the sale proceeds between the two bankruptcy estates. 3
The record reflects that upon authorization of the bankruptcy court, the
Ballards sold the property which they held as tenants by the entireties.
The $43,000 proceeds from the sale were placed in an interest bearing
account requiring the signatures of the Ballards and their counsel to
release the funds.
Like the
bankruptcy court, we discern no intent by Mr. and Mrs. Ballard to
terminate their tenancy by the entireties upon the sale of their home.
Again, looking to
Virginia
law, absent "an agreement or understanding to the contrary, the
proceeds derived from a voluntary sale of real estate held by the
entireties are likewise held by the entireties." Oliver v.
Givens, 129 S.E.2d 661, 663 (
Va.
1963). The Trustee cannot point to any evidence in the record of this
appeal which reflects an intent by the Ballards to sever their
entireties interest in the proceeds from the sale of their home. Indeed,
the manner in which the proceeds were paid and retained by order of the
bankruptcy court preserved the tenancy by the entireties. Given the
absence of any agreement or other indicia of the Ballards' intent to
sever the entireties tenancy upon the sale of the real estate, we affirm
the determination of the bankruptcy court that the entireties interest
continued in the proceeds.
B.
The Trustee
next contends that the bankruptcy court erred in concluding as a matter
of law that the proceeds from the sale of the Ballards' residence, held
as tenants by the entireties, became the sole property of Edgar
Ballard's bankruptcy estate upon the death of Beulah Ballard, thus
placing such proceeds within the reach of the IRS to satisfy a priority
tax claim against Mr. Ballard. Specifically, the Trustee contends that
because only joint creditors are entitled to distribution from the
bankruptcy estates, the bankruptcy court's refusal to entertain his
objection to the tax claim against Beulah Ballard must be reversed even
if the tenancy by the entireties in the sale proceeds of the Ballards'
residence endured until the death of Mrs. Ballard. The United States,
however, contends that the bankruptcy court properly concluded that the
Trustee's arguments are foreclosed by the death of Beulah Ballard and
the resulting devolution by operation of Virginia property law of the
entireties property in fee simple to her husband, Mr. Ballard, and
consequently to his bankruptcy estate. Thus, whether the IRS is a joint
creditor or merely a creditor of Mr. Ballard is irrelevant for the
purpose of determining the priority of the various creditors. For the
following reasons we agree with the conclusions of the bankruptcy court
and, therefore, affirm.
The Bankruptcy
Code broadly defines the property interests included in the bankruptcy
estate to comprise "all legal or equitable interests of the debtor
in property as of the commencement of the case," 11 U.S.C.A. §541(a)(1)
(West Supp. 1995), and, in pertinent part, "[a]ny interest in
property that the estate acquires after the commencement of the
case." 11 U.S.C.A. §541(a)(7)
(West Supp. 1995). This general rule of inclusion applies with equal
force to the debtor's interest in entireties property, Chippenham
Hosp., Inc. v. Bondurant (In re Bondurant), 716 F.2d 1057, 1058 (4th
Cir. 1983); Napotnik v. Equibank and Parkvale Sav. Assoc., 679
F.2d 316, 318 (3d Cir. 1982) (construing §541
to include the debtor's interest in entireties property), although
state law determines the particular features of this property interest. Butner
v.
United States
, 440
U.S.
48, 55 (1979).
It is
undisputed that at the time of the Ballards' joint filing for
bankruptcy, they owned their home as tenants by the entireties, a form
of concurrent ownership of property recognized by the
Commonwealth
of
Virginia
. Pitts v.
United States
, 408 S.E.2d 901, 903 (
Va.
1991); First Merchants Nat'l Bank v. Richmond Lumber & Bldg.
Supply Co. (In re Norris), 5 B.R. 799, 802 (Bankr. E.D. Va. 1980); Vasilion
v. Vasilion, 66 S.E.2d 599, 602 (
Va.
1951). Tenancy by the entireties comprises "four essential
characteristics, that is, unity of time, unity of title, unity of
interest, and unity of possession." Pitts, 408 S.E.2d at
903. In particular, neither spouse can effectuate a severance of the
tenancy by his or her sole act either by conveying or disposing of any
part of the property.
Id.
; Vasilion, 66 S.E.2d at 602. This restriction on alienation
stems from the common-law recognition of the husband and wife as a
"juristic person separate and distinct from the spouses
themselves." Pitts, 408 S.E.2d at 903 (citation and
quotation marks omitted).
The Trustee
argues that the anti-alienation feature of entireties property requires
that the proceeds from the sale of the Ballards' residence be applied
exclusively to payment of joint creditors. He relies upon the general
rule that entireties property under
Virginia
law is available for bankruptcy
admin
istration solely for the benefit of joint creditors. Sumy v.
Schlossberg, 777 F.2d 921, 925 (4th Cir. 1985) (characterizing
Maryland entireties property as an asset of debtors' joint bankruptcy
estates and permitting liquidation only for the benefit of joint
creditors); Ragsdale v. Genesco, Inc., 674 F.2d 277, 279 (4th
Cir. 1982) (applying the same principle to Virginia entireties
property); Virginia Nat'l Bank v. Martin (In re Martin), 20 B.R.
374, 376 (Bankr. E.D. Va. 1982) (same); Reid v. Richardson, 304
F.2d 351 (4th Cir. 1962) (same). In this appeal, however, we confront a
distinguishing factual development--the death of Mrs. Ballard following
the joint filing of bankruptcy--which implicates another equally
important attribute of entireties property, the right of survivorship
vested in the remaining spouse: 4
Upon the death
of either spouse the whole of the estate by the entireties remains in
the survivor. This is so not because he or she is vested with any new
interest therein, but because in the first instance he or she took the
entirety which, under the common law, was to remain to the survivor.
Vasilion,
66 S.E.2d at 602 (citing Lang v. Commissioner [3
USTC ¶1088 ], 289 U.S. 109, 111 (1933)). Of course, we recognize
that the unique character of entireties property is such that the death
of one spouse does not vest the other with interests he or she did not
already hold. The termination of coverture does, however, extinguish
the"separate and distinct" juristic personality that underlies
those restrictions on alienation unique to entireties property. Thus,
Mrs. Ballard's death released her surviving spouse, and thus, his
bankruptcy estate, from all conditions of the tenancy conceived to
preserve unity of entireties property. See Dollinger v. Bottom (In re
Bottom), 176 B.R. 950, 953 (Bankr. N. D. Fla. 1994) ("[t]here
is no question that the debtor's right of survivorship is part of the
estate"); Waldschmidt v. Shaw (In re Shaw), 5 B.R. 107,
109-10 (Bankr. M.D. Tenn. 1980) (same). More simply put, when the dust
settles, by operation of law, Mr. Ballard's bankruptcy estate holds a
fee simple interest in the proceeds of the sale of their home.
Although no
doubt disappointing to the Trustee and the joint creditors of the
bankruptcy estate, it should come as no surprise that upon the
destruction of the tenancy by the entireties, in this case by the death
of Mrs. Ballard, their status as joint creditors would accord them no
greater priority than that enjoyed by any non-joint creditor. Indeed,
had Mrs. Ballard died prior to the bankruptcy filing, the joint
creditors would fully expect to be in the same position they find
themselves today. This result is not dictated by any provision of
bankruptcy law but rather by the unique character of property held in
tenancy by the entireties. We agree with the Trustee's contention that
the commencement of a joint bankruptcy case does not disrupt a debtor's
co-ownership of property as a tenant by the entireties. The Trustee,
however, must accept all those features peculiar to this form of
concurrent property ownership, those that inure to the benefit of joint
creditors, such as preferred status during coverture, but also rights of
survivorship that upon the death of a spouse collapse any meaningful
distinction between joint and non-joint creditors. On this basis,
therefore, we agree with the district court and affirm the decision of
the bankruptcy court.
III.
In summary, we
conclude that the bankruptcy court did not err in its determination that
the proceeds derived from the sale of the Ballards' property held by
tenancy in the entireties became the sole property of Edgar Ballard upon
the death of his wife, Beulah Ballard. Thus, the funds must be applied
first to pay the unsecured priority claims regardless of the joint or
individual character of the claim.
AFFIRMED.
1 The original proof of claim was in the amount of
$29,975.65, listing two estimated claims in the amount of $2,236.00 for
the debtors' federal income tax liability for the 1989 taxable year and
in the amount of $27,739.65 for a 100% penalty for the period ending
March 31, 1990
. The sums claimed on the original and amended proofs of claim relate to
unpaid federal withholding taxes withheld from the wages of the
employees of Ballene Services, Inc. during the fourth quarter of 1988
and the second, third, and fourth quarters of 1989.
2
The Ballards were the sole stockholders in Ballene Services, Inc.
3
Section 363 defines the rights and powers of the trustee with respect to
the disposition of the property of the estate. It also articulates the
rights of third parties asserting an interest in the subject property.
11 U.S.C.A. §363 (West Supp. 1995). See 2 Collier on
Bankruptcy ¶363.01, at 363-6 (15th ed. 1995). The Ballards as
Chapter 11 debtors-in-possession held the powers and duties of the
Trustee. 11 U.S.C. §1107(a) (1988).
4
Until the moment of Mrs. Ballard's death, the Trustee would have been
correct in his assertion. The Trustee, however, in his select focus on
the anti-alienation provision, has ignored an equally important feature
of tenancy by the entirety: the right of survivorship enjoyed by the
spouse of the deceased.
[Dissenting
Opinion]
HALL,
Circuit Judge
I
dissent because I believe that the sale of the property had the effect
of severing the tenancy by the entireties, and, as a result, each
bankruptcy estate should be deemed to contain half of the proceeds. It
is therefore necessary to determine whether Mrs. Ballard was liable on
the tax claims; if she was not, the tax creditors would be limited to
the proceeds in her husband's estate.
At
filing, all property of the debtors came into their respective estates.
11 U.S.C. §541(a)(1)
. Filing
alone did not sever the tenancy by the entireties. See In re DeMarco,
114 B.R. 121, 123 (Bankr. N.D.W.Va. 1990). However, the
debtors-in-possession, who act as trustees, 1
are charged with
admin
istering the estate, and the sale of the house severed the tenancy by
the entireties. See id. at 124 ("The trustee has no title to
property of the estate until he elects to take affirmative action and
proceedings are had or orders made."). In the absence of an
exemption that might dictate a different result, 2
the money is simply allocable between the two estates.
I
would agree that, had the sale occurred outside bankruptcy, there is
support in
Virginia
law for finding a new tenancy by the entireties in the proceeds. See
Oliver v. Givens, 129 S.E.2d 661, 663 (
Va.
1963) ("It is true ... that the sale of the real estate which the
husband and wife owned as tenants by the entireties terminated such an
estate in that property.... [I]n the absence of an agreement or
understanding to the contrary, the proceeds derived from a voluntary
sale of real estate held by the entireties are likewise held by the
entireties."). However, the sale of the Ballards' residence was not
a "voluntary sale" by a husband and wife. Instead, it was a
liquidation of bankruptcy estate assets by debtors-in-possession,
undertaken with the "agreement or understanding" that
creditors would eventually consume the entire amount. By focusing on how
state law would view the transaction, the majority loses sight of the
bankruptcy context in which the sale took place.
"[A]
debtor in possession shall have all the rights, ... and shall perform
all the functions and duties ... of a trustee serving in a case under
[chapter 11]." 11 U.S.C. §1107(a). One of a trustee's duties is to
"collect and reduce to money the property of the estate ...."
11 U.S.C. §704(1)
. The
bankruptcy court ruled that the sale of the Ballards' residence was
authorized under 11 U.S.C.§363(b)(1), which provides that "[t]he
trustee, after notice and hearing, may ... sell ... property of the
estate ...." 3
The debtors-in-possession gave notice of the proposed sale pursuant to
Bankr. R. 6004, which is required for the sale of estate property by a
trustee or debtor-in-possession. The debtors' initial reorganization
plan, filed after the sale, stated that the plan was one "of
liquidation." The net proceeds, which were earmarked in the plan
for payment to their creditors, constitute property of the estate that
was being temporarily held by them in their role as
debtors-in-possession.
The
pivotal fact underlying the bankruptcy court's ruling that the tenancy
by the entireties survived the sale of the residence was that "the
proceeds were deposited into an interest-bearing account requiring the
signature of both parties and their attorney." J.A. 25 (bench
ruling on IRS's summary judgment motion). The majority likewise holds
that "the manner in which the proceeds from the sale were paid and
retained by order of the bankruptcy court preserved the tenancy by the
entireties." Majority op. at 6. I believe this logic elevates form
over substance.
A
trustee "may make such deposit or investment of the money of the
estate ... as will yield the maximum reasonable net return on such money
...." 11 U.S.C. §345. Debtors-in-possession, in the performance of
their
admin
istrative duties, may do the same. Had the proceeds been placed in
separate accounts, would the majority's analysis be different? Inasmuch
as the debtors had not identified any individual debts of either of
them, it simply made sense to require that the proceeds be kept in a
single account. This mere
admin
istrative detail should not be permitted to eclipse the substance of the
sale.
I
would vacate the judgment below and remand with directions to determine
whether Mrs. Ballard was liable on the tax claims.
1
A trustee was not appointed until after the cases were converted to
chapter 7.
2 With regard to the residence, the only exemption claimed
was the state homestead exemption; the debtors did not claim the
exemption under 11 U.S.C. §522(b)(2)(B). The majority notes that had
Mrs. Ballard not died, liquidation of the entireties estate would have
been for the benefit of the joint creditors only. See majority
op. at 8 & n.4. The majority seems to assume that this result would
obtain even without a §522(b)(2)(B) exemption having been claimed. Only
when the exemption option has been exercised, however, does the
entireties property stand available for the satisfaction of only
the joint debts. See
Sumy
v. Schlossberg, 777 F.2d 921, 927-29 (4th Cir. 1985); In re Ford,
3 B.R. 559, 570 (Bankr. D. Md. 1980) ("The trustee merely obtains
and retains custody of the debtor's undivided interest consisting of the
same unities, intact and unaltered, as they existed immediately prior to
the filing of the petition, until such time as that interest, still
intact and unaltered, is exempted from the estate under §522(b)(2)(B)."),
aff'd Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981). In each of
the cases cited by the majority--
Sumy
, Ragsdale, Martin and Reid (see majority
op. at 8)--the debtor(s) had in fact claimed the exemption.
Even
if only Mr. Ballard is liable for the tax claims, the IRS and other
individual creditors would still be able to reach his portion of
the sale proceeds. This result, however, is dictated by his failure to
claim the §522(b)(2)(B) exemption and not, as the majority holds, by a
dissolution of the tenancy by the entireties occasioned by Mrs.
Ballard's death.
3
Whether the sale was conducted pursuant to §363(b)(1) or (h) is
irrelevant. Inasmuch as both co-tenant spouses had filed for bankruptcy,
there was no need to invoke §363(h) to consider the benefits of
partition in kind or sale of one debtor's undivided interest. Subsection
(h) was clearly written with non-debtor co-owners in mind.
