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/o