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6323 - Ships
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6323 - West Virginia
6323 - West Virginia2
6323 - Wisconsin
6323 - Wisconsin2
6323 - Wrong Name p1
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West Virginia

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In re Charco, Inc., Debtor. Brenda Clydette Dove Collier, Appellant v. United States of America , by and through the Internal Revenue Service, Appellee.

U.S. District Court, So. Dist. W.Va. , at Bluefield ; Civ. 1:03-2323, October 25, 2004 .

Affirming an Unreported (BC-DC) decision.

[ Code Sec. 6323]

Tax liens: Priority: Judgment creditor: State law. --

The government's recorded federal tax lien took priority over a later recorded judgment creditor's lien in West Virginia . Federal law determines the priority among federal tax liens and other liens, and generally provides that the first lien perfected takes priority. State law determines whether a lien has been perfected. The West Virginia statute requires recording for a judgment to be a lien as against a "purchaser of real estate for valuable consideration without notice," but is silent as to whether recording is necessary to perfect a lien as against other claimants. However, the provision has been construed by the West Virginia courts to require recording in order for the lien to be valid against other claimants as well. Thus, the judgment creditor's lien was not perfected until recorded.





MEMORANDUM OPINION



FABER, Chief Judge: By Judgment Order entered on September 30, 2004, the court AFFIRMED the August 6, 2003 Order of the bankruptcy court granting the United States of America's motion to dismiss Brenda C. Collier's complaint to determine priority and extent of lien, DENIED appellant's motion to certify questions to the West Virginia Supreme Court of Appeals and DISMISSED Collier's appeal. The reasons for that decision follow.


Background



The appeal herein centers around a dispute concerning the bankruptcy court's conclusion that a federal tax lien took priority over Collier's judgment lien. The Federal tax lien against Charco's property and rights to property arose on the dates of assessment, June 10, 1996 and September 16, 1996 . See 26 U.S.C. 6321. The federal tax lien was perfected when the Notice of Federal Tax Lien was filed with the Mercer County Commission Clerk's Office on November 26, 1996 .

Collier obtained a judgment against Charco in Roanoke County Circuit Court on September 19, 1996 . She domesticated the judgment by filing it in the Circuit Court of Mercer County, West Virginia on October 21, 1996 . Collier's judgment lien was not filed with the Mercer County Commission Clerk's Office until January 23, 1997 .

Citing West Virginia Code 38-3-7 and 26 C.F.R. 301.6323(h)-1(g), the bankruptcy court found that, because Collier did not file her judgment lien with the Mercer County Commission Clerk's Office until after the Notice of Federal Tax Lien was filed, on January 23, 1997, Collier's lien could not take priority over the Federal tax lien.


Analysis



Pursuant to 26 U.S.C. 6321, the failure of any person to pay a tax liability after demand creates a lien upon that person's property. The lien arises "at the time the assessment is made." 26 U.S.C. 6322. Ordinarily, a federal tax lien takes precedence over all other interests in certain property. United States v. Brynes [ 94-1 USTC 50,180], 848 F.Supp. 1096, 1098 (D. R.I. 1994).

Federal law controls in determining the priority among federal tax liens and other liens. In the absence of a provision to the contrary, priority is governed by the common-law principle of "first in time, first in right." United State v. McDermott [ 93-1 USTC 50,164], 507 U.S. 447, 449 (1993). "A qualifying creditor's rights are superior as long as his judgment is perfected before the government gives constructive notice of its right to the delinquent taxpayer's assets." Air Power, Inc. v. United States [ 84-2 USTC 9732], 741 F.2d 53, 55 (4th Cir. 1984); see also 26 U.S.C. 6323(a) (providing that a tax lien "shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until" the federal tax lien is properly recorded.").

Under federal law, a "judgment lien creditor"

means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved. A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are established.... If recording or docketing is necessary under local law before a judgment becomes effective against third parties acquiring liens on real property, a judgment lien under such local law is not perfected with respect to real property until the time of such recordation or docketing....


26 C.F.R. 301.6323(h)-1(g). State law governs the determination as to whether a lien has been perfected. Air Power, Inc. v. United States [ 84-2 USTC 9732], 741 F.2d 53, 55 n.2 (4th Cir. 1984).

According to the United States , under West Virginia law, recording or docketing is necessary. West Virginia Code 38-3-7 provides:

No judgment shall be a lien as against a purchaser of real estate for valuable consideration without notice, unless it be docketed according to [ 38-3-5] of this article, in the county wherein such real estate is, before a deed therefor to such purchaser is delivered for record to the clerk of the county court of such county....


Collier argues that 38-3-7 is not the operative provision herein because it applies only to bona fide purchasers. However, as the government points out and Collier does not dispute, for lien purposes, under West Virginia law, a deed of trust creditor is considered to be a purchaser. Weinberg v. Rempe, 15 W. Va. 829 (1879); see also McClaskey v. O'Brien, 16 W. Va. 791 (1879) ("A deed of trust creditor is entitled to be held a purchaser for value within the meaning of the statute in relation to docketing judgments."). Accordingly, it is clear that the use of the phrase "purchaser of real estate for valuable consideration without notice" is not as limiting as Collier would suggest.

In support of her argument, Collier references a law review article by John W. Fisher, II. The article, however actually supports the government's position as Fisher writes: "[w]hile the lien created by Section 38-3-6 is effective as of the date of judgment, it is not valid against a purchaser for valuable consideration without notice or other lien creditors until it is 'docketed' pursuant to Section 38-3-5, ..." John W. Fisher, II, The Scope of Title Examination in West Virginia: Can Reasonable Minds Differ?, 98 W. Va. L. Rev. 449, 518 (1996) (emphasis added).


Motion to Certify



West Virginia Code 51-1A-3 provides in pertinent part:

The supreme court of appeals of West Virginia may answer a question of law certified to it by any court of the United States ... if the answer may be determinative of an issue in a pending cause in the certifying court and if there is no controlling appellate decision, constitutional provision or statute of this state.


The provisions of W. Va. Code 51-1A-3 are discretionary for both the certifying and the answering court, i.e., there is no requirement either that a court seek certification nor that the Supreme Court of Appeals answer a certified question. See Morningstar v. Black & Decker Manufacturing Co., 162 W. Va. 857, 860 (1979).

A party seeking certification has the burden of showing that there is no controlling West Virginia precedent regarding the potential certified question. See O'Brien v. Tri-State Oil Tool Industries, Inc., 566 F.Supp. 1119, 1122-23 (S.D. W.Va. 1983); see also Imperial Colliery Co. v. Cities Service Oil and Gas Corp., 1993 WL 241589, *2 (4th Cir. 1993) ("[T]he mere difficulty of ascertaining local law does not appear to be an adequate reason for remitting the parties to a state tribunal."). In this case, the court cannot say that no precedent exists to guide its decision. Indeed, as discussed supra, the issues herein are dictated primarily by federal law and there is sufficient West Virginia case law which will allow the court to reach a reasoned decision. Accordingly, the motion to certify was denied.


Conclusion



For the foregoing reasons, by Judgment Order dated September 30, 2004, the court AFFIRMED the August 6, 2003 Order of the bankruptcy court granting the United States of America's motion to dismiss Brenda C. Collier's complaint to determine priority and extent of lien, DENIED appellant's motion to certify questions to the West Virginia Supreme Court of Appeals and DISMISSED Collier's appeal.

The Clerk is directed to FAX and mail certified copies of this Memorandum Opinion to all counsel of record and to Judge Pearson.

IT IS SO ORDERED.

 

 

[44-1 USTC 9320]C. D. Hopkins, Plaintiff, v. Eureka Coal Company, a Corporation, et al., Defendants

In the Circuit Court of Kanawha County , West Virginia . In Chancery, February 25, 1944

Government lien: Priority against mortgagees and State taxes.--In a suit to establish priority of lien claims against certain real estate and the proceeds of its sale by Court order where the United States asserted its lien for payment of employment taxes and capital stock taxes, the State Court of West Virginia holds that the order of precedence of the several lien claims were, as to most of the property in question, as follows: (1) Costs of suit and receivership expenses, (2) prior mortgage liens, (3) lien claim of the United States, and (4) the sales tax claim of the State.

Memorandum of Opinion of the Circuit Court

BOUCHELLE, J.:

After careful consideration of the second report of the special commissioner and the exceptions thereto, I have reached the following conclusions:

(1) The Eastern Gas & Fuel Associates is entitled to a forfeiture of the 1932 lease covering the 2,858-acre tract, under the express terms of that lease.

(2) The 1905-1907 2,300-acre leasehold is subject to be sold in this proceeding to satisfy the mortgage of the Bank of Athens. However, this leasehold is subject to a first lien for the receivership expenses and costs of this suit, and is also subject to a second lien in favor of the Eastern Gas & Fuel Associates for a year's minimum royalty of $8,000.00, as provided by the 1905-1907 lease. It follows that the mortgage lien of the Bank of Athens will be a third lien on this property.

(3) Under the prevailing facts and circumstances of this case, I am of the opinion that the Eastern Gas & Fuel Associates is not entitled to an allowance of $9,201.38 as part of the receivership expenses in this case during the period of receivership. The receivership here has been a non-operating receivership, and for at least a year prior thereto, and at the present time it has been and is apparent that neither the 2,300-acre or the 2,858-acre tracts could be feasibly mined. It was in recognition of this fact that the receivership here has been a non-operating one. It is further apparent that during the course of the receivership, the personal property and the fixtures on the 2,300-acre leasehold have been in the custody of the court's receiver, and have been protected by insurance and otherwise. All of which expenses have inured in a large measure to the benefit of the Eastern Gas & Fuel Associates. Furthermore, this expense of protecting the property has been allowed as a part of the receivership expense. I do not believe that ordinary principles are applicable under the peculiar facts present here, and therefore I believe this claim should be disallowed.

(4) The Bank of Athens has no lien on the 2,858-acre tract, and that leasehold being subject to forfeiture as heretofore indicated, the 2,858 leasehold, as such, cannot be sold in this proceeding.

(5) The conveyance of the 221/2 per cent. undivided interest in fee to Eureka Coal Company, which was also the lessee of the 979-acre tract, did not operate as a partial merger of the fee and the leasehold estate. 35 C. J., Section 542, page 1213.

(6) The record does not clearly disclose just what the interest of Eureka is in the 26-acre tract, and therefore the special commissioner could only provide for the sale of such an interest in that tract as Eureka may have.

(7) The claim of the Unemployment Compensation Department of West Virginia is not upon a parity with that of the United States for employment taxes, because as will be shown later, the government in this case has a lien for its employment taxes.

(8) The United States has a lien prior to all liens except receivership expenses and costs of this suit, and the lien of mortgages and judgments which attached prior to the filing of the government lien.

[Superior Claim of United States ]

The United States asserts that its claims for employment taxes and a small amount due for capital stock tax are entitled to be first satisfied under the provisions of Section 3466 of the Revised Statutes of the United States (31 U. S. C. A. Sec. 191), and too, that its lien rights are entitled to priority irrespective of the time of recordation over all persons, (including the State), except "mortgagees, pledgees, purchasers or judgment creditors," and as to them, chronologically from the time of recordation. (26 U. S. C. A. Sections 3670, 3671, 3672 and 3692.) The applicable portion of Section 3466 of the Revised Statutes of the United States, relied upon here, provides that, "Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or admin istrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied. * * *" It will be noted that under this section the preference given to the government does not depend upon a lien. In the case of United States v. Texas, 314 U. S. 480, 86 L. Ed. 357 [42-1 USTC 9162], the state statute provided that the state's claim for gasoline taxes should be given priority, and constituted a lien upon the debtor's property. The Supreme Court of the United States in that case took the position that the general provision stating that Texas had a lien upon the debtor's property was insufficient to prevent the government from obtaining priority afforded it under the provisions of Section 3466 of the Revised Statutes heretofore referred to. The basis of the decision seems to be that the mere fact that a state legislature provides that a state shall have a general lien on the property of the debtor does not create such a specific lien as would void the government's right to priority under Section 3466. Moreover, in the instant case the government not only relies upon the section just mentioned, but also upon the lien rights created in the United States by the provisions of U. S. C. A. 3670, 3671, 3672 and 3692. Those sections provide as follows:

Section 3670. Property subject to lien.

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

Section 3671. Period of lien.

Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time.

Section 3672. Validity against mortgagees, pledgees, purchasers, and judgment creditors.

(a) Invalidity of lien without notice.

Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector. * * *

(1) Under State or Territorial laws.

In accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice.

Section 3692. Levy.

In case of neglect or refusal under section 3690, the collector may levy, or by warrant may authorize a deputy collector to levy, upon all property and rights to property, except such as are exempt by the preceding section, belonging to such person, or on which the lien provided in section 3670 exists, for the payment of the sum due, with interest and penalty for nonpayment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy.

It will be observed that West Virginia has provided for the filing of such a notice as heretofore set forth, by the provisions of Code, 38-10-1.

[ Superior to State Claim]

The government has filed its notices of lien as required by the said statutes and by West Virginia statute, and also levied a distress warrant upon certain of the personal property upon the 2,300-acre leasehold. As I view it, the preceding sections of the internal revenue code are sufficient to give the government a lien upon certain of the properties involved here. It is true that there is no provision in that part of the federal statutes dealing with employment taxes which gives a lien to the government for such taxes, but the lien rights provided by 26 U. S. C. A., Sections 3670, 3671, 3672 and 3692, apparently apply to all government taxes. And in the case of Filipowicz v. Rothensies, ( Dist. Ct. , Eastern Dist. of Pa.) 43 F. Supp. 619 [42-1 USTC 9300], it was held that these sections of the internal revenue code were applicable to the United States employment taxes. Apparently the same conclusion would have been reached in Barrs v. Barrs-Rent-A-Car Co., (Ohio App.) 50 N. E. (2d) 388, had the government filed its notices of lien.

It is thus apparent that, under the decisions of the United States Supreme Court, including that of United States v. Texas, supra, the government has a lien prior to the lien for state consumers and gross sales taxes, because for one thing, the statute giving the state a lien for these taxes is as general in tenor as that which gave a lien to the State of Texas in the case just mentioned, in which the Supreme Court refused to recognize so general a lien insofar as it affected the rights of the United States. Moreover, our own statutes and our state Supreme Court decisions seem to recognize the prior lien rights of the United States over the liens created by the gross sales tax and consumers sales tax statutes. Moran v. Coal Co., 122 W. Va. 405.

It seems clear, however, that the government tax liens here do not come ahead of the receivership expenses and costs of this suit.

[U. S. Subordinate to Mortgagee]

In connection with the government's priority, there is another thing to be noted, and that is that under the provisions of 26 U. S. C. A., Section 3672, the government's tax lien shall not be valid as against any mortgagee, pledgee, purchaser or judgment creditor, until notice has been filed by the collector. It is therefore apparent that the government's lien will not be entitled to priority as to such liens as the mortgage lien of the Bank of Athens. This creates a rather anomalous situation because the government recognizes the priority of such mortgage liens, and yet, on the other hand, under the decision in Moran v. Coal Co., supra, the State Supreme Court of Appeals takes the position that the consumer sales tax lien and that for gross sales taxes are prior to any mortgage. At this point I may say, parenthetically, that I do not believe the 1943 Acts of the Legislature changed the priorities in this case, which became fixed at the time of the appointment of the receiver. A solution to this anomalous situation is somewhat difficult. Probably the best suggestion to meet a situation of this kind is that inferentially made by the Supreme Court of the United States in the case of Spokane County v. United States, 279 U. S. 80, 73 L. Ed. 621 [1 USTC 387], at pages 624 and 625, in which the Supreme Court made this comment:

Petitioners rely on Ferris v. Chio-Mint Gum Co., 14 Del. Ch. 232, 124 Atl. 577, where there were several claimants--a mortgage, the state, and the United States . Under Rev. Stat. 3186, U. S. C. title 26, paragraph 115, the mortgagee was given priority over the United States . By state law, the state was preferred to the mortgagee. The chancellor allowed the claims in the order of the state, the mortgagee, and the United States , holding that, "when the government agreed by paragraph 3186 to take rank after the mortgagee, it must necessarily follow that it is subordinate in rank to those who are superior to its immediate senior." The chancellor observed that his conclusion arose out of the peculiar facts of the case, and that it was unnecessary for him to venture into the broad field of constitutional law. Without concurring in the conclusion of the chancellor, it is enough to say that as there is no such third creditor here, the case is not in point. Moreover it is contended by the government that the relative priorities could have been maintained in that case by setting apart sufficient funds to pay the mortgage before paying the Federal taxes and then providing for payment of the state tax out of the sum so set apart. (Italics mine).

[Order of Priority Claims]

As I view it, the suggestion there is probably the only practical one that could be adopted. In other words, to illustrate what is meant, take the case of the liens to be fixed upon the property designated in the special commissioner's report as Third (1)(c) covering the 979-acre leasehold, the proper procedure would appear to be to fix the liens as follows:

First--Costs of suit and receivership expenses

Second--The mortgage lien of the Bank of Athens

Third--The lien of the Spaulding deed of trust

Fourth--The United States lien for employment and capital stock taxes

Fifth--The lien of the State of West Virginia for consumers sales tax and gross sales tax

with a provision in the decree, however, for the setting aside of any amounts that would come to the Bank of Athens and those payable to satisfy the Spaulding deed of trust into separate funds, which would be payable to the State of West Virginia to satisfy its liens for gross sales tax and consumers sales tax before being actually applied to satisfy the lien of the Bank of Athens and that of the Spaulding deed of trust.

In determining the property subject to the liens of the various creditors in this suit, it becomes apparent that in view of my previous conclusions heretofore announced, that the 1932 leasehold estate covering the 2,858-acre tract, being subject to forfeiture by the Eastern Gas & Fuel Associates, cannot be sold in this proceeding. This eliminates the priority of liens affecting the property described in the report of the special commissioner under the heading Third (1)(b). It therefore follows that in view of this conclusion, the 2,300-acre tract covered by the 1905-1907 leases should be properly included under Third (1)(a). Also in view of the fact that I have held that the purchase by Eureka of the 221/2 acre tract in fee, being an undivided interest in the fee of the 979-acre leasehold, did not operate as a partial merger of the fee and of the leasehold, Third (1)(i) will be eliminated, and Third (1)(j) will be changed so as to include the interest of Eureka as lessee in the fixtures on the 979-acre leasehold estate.

It follows from what I have said that the first and second exceptions of the Bank of Athens are overruled; the third, fourth and fifth exceptions are sustained, and the sixth exception is overruled.

The exceptions of the West Virginia Unemployment Compensation Department will be overruled.

Exception No. 1 of the United States to the report of the commissioner in chancery is overruled; Exception No. 2 is sustained; Exceptions Nos. 3, 4 and 5 are sustained as to property subject to the government lien; Exception No. 6 is sustained; Exceptions Nos. 7 and 8 are overruled; Exception No. 9 is sustained in part and overruled in part, and Exception No. 10 is overruled.

[Compilation of Priorities]

In view of the complicated nature of this case, and in order that there may be no doubt in the minds of counsel as to what my holdings have been, and in view of the further fact that certain property has been eliminated and the priority of liens changed in some respects, I believe it advisable to describe the properties subject to the various liens and the order of priorities thereon. The following compilation will indicate my holdings with reference to these matters:

THIRD (1)(a)--1905-1907 Leasehold on 2300-acre tract:

First Lien--Receivership expenses and costs of suit

Second Lien--Eastern Gas & Fuel Associates, $8,000.00 for year's rental

Third Lien--Bank of Athens mortgage

THIRD (1)(b)--1932 Leasehold on 2858-acre tract:

Eliminated because of forfeiture

THIRD (1)(c)--979 acre leasehold:

First Lien--Receivership expenses and costs of suit

Second Lien--Bank of Athens mortgage

Third Lien--Spaulding deed of trust

Fourth Lien-- United States tax claims

Fifth Lien--W. Va. consumers sales and gross sales taxes

THIRD (1)(d)--221/2-acre tract (undivided fee interest in 979-acre tract)

First Lien--Receivership expenses and costs of suit

Second Lien--Bank of Athens mortgage

Third Lien--Spaulding deed of trust

Fourth Lien-- United States tax claims

Fifth Lien--W. Va. consumers sales and gross sales taxes

Sixth Lien--Property taxes

Seventh Lien--West judgment

Eighth Lien--Atlas Powder Company judgment

Ninth Lien--State of W. Va. judgment, (Unemployment compensation taxes)

THIRD (1)(e)--1/2 Interest in No. 5 Block Seam, 71.05 acres:

First Lien--Receivership expenses and costs of suit

Second Lien-- United States tax claims

Third Lien--W. Va. consumers sales taxes

Fourth Lien--West judgment

Fifth Lien--Atlas Powder Company judgment

Sixth Lien--State of W. Va. judgment, (Unemployment compensation taxes)

THIRD (1)(f)--Verbal lease on other 1/2 interest in No. 5 Block Seam, 71.05 acres:

First Lien--Receivership expenses and costs of suit

Second Lien-- United States tax claims

Third Lien--W. Va. consumers sales taxes

THIRD (1)(g)--Interest in 26 acres:

First Lien--Receivership expenses and costs of suit

Second Lien-- United States tax claims

Third Lien--W. Va. consumers and gross sales taxes

Fourth Lien--Property tax

Fifth Lien--West judgment

Sixth Lien--Atlas Powder Company judgment

Seventh Lien--State of W. Va. judgment, (Unemployment compensation taxes)

THIRD (1)(h)--Fixtures on 1905-1907 2300-acre leasehold:

First Lien--Receivership expenses and costs of suit

Second Lien--Eastern Gas & Fuel Associates, $8,000.00 for year's rental

Third Lien--Bank of Athens mortgage

THIRD (1)(i)--221/2 Interest in fixtures on 979-acre tract leasehold:

Eliminated as included in Third (1)(d)

THIRD (1)(j)--Interest as leasee in fixtures on 979-acre leasehold:

First Lien--Receivership expenses and costs of suit

Second Lien--Bank of Athens mortgage

Third Lien--Spaulding deed of trust

Fourth Lien-- United States tax claims

Fifth Lien--W. Va. consumers sales and gross sales taxes.

THIRD (2)(a)--Personal property on 1905-1907 2300-acre leasehold:

First Lien--Receivership expenses and costs of suit

Second Lien-- United States tax claims

Third Lien--W. Va. consumers sales and gross sales taxes

Fourth Lien--Eastern Gas & Fuel Associates, $8,000.00, for one year's rental

Fifth Lien--The Logan & Kanawha Coal Company's conditional sale against 1-10 foot drum; 2--Monitors; 2--Ropes 11/8 1,000 feet; 1--Dump

THIRD (2)(b)--Accounts Receivable:

First Lien--Receivership expenses and costs of suit

Second Lien-- United States tax claims

Third Lien--W. Va. consumers sales and gross sales taxes

It will be observed from the foregoing compilation that the liens on the properties listed under Third (1)(a)--the 1905-1907 2,300-acre leasehold--and under Third (1)(h)--the fixtures upon the 2,300-acre leasehold--have been restricted to receivership expenses and costs of suit, the lien for one year's rental of Eastern Gas & Fuel Associates, and that of the Bank of Athens. The reason for this is that, as to other creditors, this lease merged with the 1932 leasehold of 2,858 acres, which later lease became subject to forfeiture, under its terms, as hereinbefore indicated.

[Payment of State Taxes]

It will be noted also that, although the liens of the State of West Virginia have been subordinated to that of the Bank of Athens and the Spaulding deed of trust as to the liens listed under Third (1)(c), Third (1)(d) and Third (1)(j), as hereinbefore noted any amounts payable to the Bank of Athens and under the Spaulding deed of trust will be set aside in separate funds and before payments are made to either of these creditors therefrom, payment from such funds will first be made to satisfy the lien claims of the State of West Virginia against these respective properties.

 

 

[48-1 USTC 9125]The Tildesley Coal Company v. American Fuel Corporation et al.

In the West Virginia Supreme Court of Appeals, No. 9921, 45 SE2d 750, Filed November 11, 1947

Lien for taxes: Priority of creditors: "Purchaser."--One who receives personal property from the conditional seller thereof (after taxpayer's default as the conditional buyer) prior to the filing of notice possible existing tax liens is a "purchaser," within the meaning of Code Sec. 3672.

F. E. Parrack, Kingwood, W. Va. ; Floyd Anderson Cincinnati, Ohio: R. Doyne Halbritter, Kingwood, W. Va. , for the appellant. Milford L. Gibson, Kingwood, W. Va.; Theron L. Caudle, Assistant Attorney General of the U. S., Washington, D. C.; Sewall Key, Special Assistant to Attorney General, Washington, D. C.; A. F. Prescott, Fred Youngman, Assistants to Attorney General, Washington, D. C.; C. Lee Spillers, U. S. Attorney, Clarksburg, W. Va., and Howard Caplan, Assistant U. S. Attorney, Clarksburg, W. Va., for the appellees.

[The Facts]

FOX, President:

The American Fuel Corporation was engaged in a strip coal mining operation in Preston County, West Virginia, and on the 18th day of August, 1942, the West Virginia Tractor and Equipment Company, a corporation, hereinafter designated as "Tractor Company," by a conditional sales contract, delivered to said American Fuel Corporation, hereinafter designated as "Fuel Corporation," a tractor and scraper at the price of $13,509.50, of which $3,359.50 was paid, and for the residue ten notes of $1,015.00 each, payable to the Tractor Company monthly, with interest, were executed by the purchaser. This contract was filed in the office of the Clerk of the County Court of Preston County on November 7, 1942 . No question is raised as to the validity of this contract, the lien thereof, or its filing in due time. Under the provisions of Code, 40-3-5, it was filed before any liens had accrued, or had been filed, which in any wise affected the property involved in the said sale.

A number of payments were made on the notes mentioned above, but they were not made regularly, as required by the contract. In the meantime, the Fuel Corporation had become indebted to the Tractor Company for supplies and repairs; and, on September 13, 1943, in the Circuit Court of Monongalia County, the Tractor Company recovered a judgment against the Fuel Corporation for the sum of $1,835.00, and $15.00 costs, which judgment is alleged in the answer of the Tractor Company to have been docketed in Preston County on the . . . day of September, 1944, and execution issued thereon and recorded in the execution docket of said county, but there is no support for said allegation in the record.

In this situation, an agreement was reached between the Tractor Company and the Fuel Corporation some time prior to January 25, 1944, under which there was to be returned to the Tractor Company the scraper mentioned in the conditional sales contract aforesaid, at the sum of $4,309.20, with the understanding, as contended by the Tractor Company, that its judgment against the Fuel Corporation should be paid, and the balance applied to the payment, in part, of past due notes mentioned in the conditional sales contract aforesaid, and said payment was so applied. This alleged understanding as to the application of the return price of the scraper and the application aforesaid is contested by the Fuel Corporation, on the contention that the entire sum agreed to be paid for the return of the scraper should have been applied on the conditional sales contract notes. The testimony and circumstances bearing on this proposition will be hereinafter discussed. Subsequent to this transaction, and on June 1, 1944 , the Fuel Corporation made a payment to the Tractor Company in the sum of $750.00, to be applied on note No. 6, under the conditional sales contract, but which note had, in fact, theretofore been paid to the Tractor Company. This being true, the Tractor Company, on the theory that no effective Direction as to the application of the payment had been made, applied said payment, first, to the settlement of a current account against the Fuel Corporation, amounting to $373.30, and the residue on the unpaid outstanding notes under the sales contract. The application of this payment is of material interest only in respect to the ascertainment of the amount due from the Fuel Corporation to the Tractor Company under the conditional sales contract aforesaid.

In the meantime plaintiff, hereinafter called the "Coal Company," had made a loan to the Fuel Corporation in the amount of $15,000.00, to be repaid at the rate of fifty cents a ton for each ton of coal mined by the Fuel Corporation. Latter, by a so-called deed of trust, dated September 1, 1943, acknowledged September 11, 1943, and recorded in the office of the Clerk of the County Court of Preston County on September 22, 1943, the Fuel Corporation conveyed to the Coal Company certain personal property, including the tractor and scraper covered by the conditional sales contract in favor of the Tractor Company aforesaid. It will be noted that no trustee is named in this so-called deed of trust; and, also, that while the certification of the acknowledgment is made under the seal of the notary public, there is no memorandum as to the date of the expiration of her commission as such.

On February 15, 1944, the Fuel Corporation sold the property included in the so-called deed of trust, aforesaid, to the plaintiff, the Coal Company, and executed a bill of sale to the said Coal Company, which has not been recorded. On the same day the Coal Company sold the same property to the Fuel Corporation, under a conditional sales contract, at the price of $14,000.00, which sales contract was filed in the office of the Clerk of the County Court of Preston County on March 13, 1944 . In view of the claims for taxes, filed by the State and Federal Governments, it is important to keep in mind the date when the conditional sales contract last aforesaid was made, and the date when it was filed in the Preston County Court Clerk's Office.

In the meantime, certain property taxes for the years 1944 and 1945, on the property of the Fuel Corporation involved in this suit, amounting, as of the date of the decree appealed from, to $176.13; contributions in the amount of $1,589.16 assessed by the West Virginia Department of Unemployment Compensation; and taxes in the amount of $1,255.78 assessed by the State Tax Commissioner of West Virginia, had accrued at the date of the institution of this suit, and taxes in favor of the United States, through its Collector of Internal Revenue, originally aggregating $4,876.09, but somewhat reduced by payments and consisting of taxes assessed as victory taxes, withholding taxes, unemployment taxes, and capital stock taxes. These taxes were made up in separate years and had accrued at separate dates. The assessments of these taxes were filed in the office of the Collector of Internal Revenue of the District of West Virginia, on dates beginning September, 1942, and at succeeding dates to November 13, 1944, but none of these assessments was filed in the office of the Clerk of the County Court of Preston County prior to April 15, 1944. On that date, and on succeeding dates up to December 15, 1944 , the liens of these assessments were filed in said clerk's office. It will be noted that none of said assessments was filed in said Clerk's office prior to the 13th day of March, 1944, when the conditional sales contract aforesaid from the Coal Company to the Fuel Corporation was filed in the office of the Clerk of the County Court of Preston County.

Judgments were recovered by various persons, and in various amounts, against the Fuel Corporation, but it is not considered necessary to go into detail as to these judgments, inasmuch as, so far as this record discloses, there is no property involved in this case out of which in any aspect thereof, they can be paid; for, as will be hereinafter noted, the property here involved was sold for the sum of $14,000.00, and claims, admittedly preferred, amount to much more than that sum.

[Prior Decision]

In this situation, plaintiff, The Tildesley Coal Company, filed its bill at February rules, 1945, against the American Fuel Corporation and others, setting up the several transactions as hereinbefore stated and praying that "process may issue against all of the above named defendants, and that said defendants be required to come into this suit and assert claims they make in the premises, and that the plaintiff may have a decree fixing and determining its rights and settling all matters and differences between all of the parties hereto, and that the plaintiff may have such other and further relief, both general and special, as its cause merits, * * *." The property as to which the conflicting claims are made is specifically set up in the bill, and includes the tractor sold under the conditional sales contract, executed by the Tractor Company to the Fuel Corporation, on August 18, 1942, and covers other property not included in said sale. An answer was filed by the Tractor Company, setting up its claim, which it asserts amounted to $2,738.19 as of June 15, 1944 . The cause was referred to a commissioner for the ascertainment of the liens of the various parties, and their priorities; and there was filed before the commissioner, not only the claim of the Tractor Company, but the claims of the State and Federal Governments, and various other creditors. On the report of the commissioner and exceptions thereto, the court entered a decree dated August 5, 1946, by which there was decreed to the following named persons, firms and corporation, in the order of priority of payment hereinafter stated the following sums of money: West Virginia Tractor and Equipment Company, $2,422.47; Collector of Internal Revenue of the United States the following sums, $903.39, $1,037.13, $548.92, $517.34, $182.06, $648.37, and $719.86, aggregating $4,557.07; all of said sums being for withholding taxes except the sum of $517.34, designated as Victory tax; West Virginia Department of Unemployment Compensation $1,589.16; State Tax Commissioner of West Virginia, $1,255.78; Sheriff of Preston County, 1944 and 1945 taxes, $101.56 and $74.57, aggregating $176.13; The Tildesley Coal Company $15,730.00, and $430.65; United States of America, employment taxes, $193.85; United States of America, employment taxes, $170.40; United States of America, capital stock taxes, $115.46; and then enters decrees in favor of other creditors, not necessary to detail.

Prior to this decree, the property involved in this suit had been sold, under an agreed order entered in the cause on July 11, 1945, and, after due notice, on the 25th day of July, 1945, at the price of $14,000.00, and purchased by the Coal Company, plaintiff herein. This sale was confirmed on August 30, 1945 , and the special commissioner who made the sale was directed to retain the fund derived therefrom until such time as the priority of the various liens had been determined, except that he was authorized to pay out of said fund the costs and expenses of sale, including his commissions. All of these proceedings with reference to said sale were by consent of the parties to this suit, and no question is raised as to the validity thereof, nor is there any dispute that the liens decreed as aforesaid are liens on the proceeds of said sale.

[The Issues]

From the decree aforesaid, we granted this appeal on December 16, 1946 . It will be apparent that the cause will have to be discussed and decided, first, with respect to the claim of West Virginia Tractor and Equipment Company, and, second, with respect to the priority for taxes contended for by the United States of America and the State of West Virginia, as against the claim of plaintiff under its conditional sales contract, dated February 15, 1944. The claim of the Tractor Company requires separate consideration and will be first determined.

[Opinion]

No question is raised as to the priority of the Tractor Company's lien, the only question being that advanced by plaintiff, the Coal Company, in an effort to reduce the amount of the Tractor Company's lien. The effort to reduce this claim is based upon the application by the Tractor Company, first, of the payment made on account of the return, prior to January 25, 1944, of the scraper mentioned above, and, second, the application of the $750.00 payment made on June 1, 1944.

There is some dispute as to the proper application of the sum of $4,309.20, the agreed price for the scraper returned. Evidence was taken on this point, and it was stated by the official who handled the transaction for the Tractor Company, that it was agreed between his company and the Fuel Corporation, as a condition of the return transaction, that the judgment of $1,835.00, with interest and costs, should be paid in full; and the balance of the agreed price for the scraper should be applied on the unpaid notes then due under the conditional sales contract of August 18, 1942. The president of the Fuel Corporation says that the Tractor Company was directed to apply the whole of this sum on the notes; but he does not furnish any written evidence of this direction. Immediately after the application was made, by letter dated January 25, 1944, directed to Ernest H. Gilbert, president of the Fuel Corporation, the Tractor Company notified the Fuel Corporation of the application of the $4,309.20, and in that letter the state of the account is set forth as follows: Notes, $5,075.00; interest to January 20, (1944) $345.94; judgment, $1,835.00; interest, $39.15; court costs, $6.10, making a total of $7,301.19, less credit memorandum of $4,309.20, leaving a balance due of $2,991.99, which is the sum the Tractor Company claims should have been decreed to it in this cause. There is no evidence that any exception was thereafter taken to this application, and the trial court held that the application so made by the Tractor Company was proper.

The ruling of the trial court on this point should be affirmed. It cannot be questioned that the general rule as to application of payments to existing indebtedness is correctly stated as follows: A debtor is entitled to direct the application of any payment made by him to any part of his indebtedness; where there is no direction as to application by the debtor, the creditor is entitled to make the application on any indebtedness in his favor; and where there has been no direction by the debtor, and no application by the creditor, a court will apply the payment to the indebtedness least secured. Here, of course, the Fuel Corporation had the right to direct the application of the credit agreed upon for the return of the scraper, and it claims to have done so. On the other hand, the Tractor Company claims that its application of this fund was proper not only because of its right to apply the credit where there had been no direction by the debtor therefor, but, also, on the theory that there was an agreement that it was to be so applied, first to the payment of its judgment, and the balance on the conditional sales contract notes. The letter written by the Tractor Company to the Fuel Corporation, immediately following this transaction, clearly outlined the manner in which the application had been made, and there being no subsequent objection to that application, leads us to believe that the proper application of this credit was made.

As to the credit of $750.00 made on June 1, 1944 , it will be remembered that, at that time, the Tractor Company was the owner of a current account against the Fuel Corporation, amounting to $373.00. It is not questioned that the Fuel Corporation directed that the application of this payment be made to note No. 6, executed under the conditional sales contract between the parties, and that at that date note No. 6 had been paid. We think, however, the direction made clearly indicated the intent of the debtor to have this payment applied to the indebtedness under the conditional sales contract, represented by notes. The error in directing its application to a note which had been theretofore paid, is not, in our opinion, of any consequence. The trial court held that the full amount of the $750.00 payment should be applied on the conditional sales contract notes, and we think this ruling should be affirmed. On these two rulings, the court determined that the Tractor Company was entitled to recover the sum of $2,422.47, with interest from March 1, 1946 , and decreed that said sum had first priority as against the proceeds of sale of the tractor. There is a stipulation in the case that, for the purpose of priorities, the value of the tractor is $8,000.00. We affirm the decree of the Circuit Court of Preston County as to that part which determines the amount of the lien in favor of West Virginia Tractor and Equipment Company, and fixes its priority.

[Priority of Tax Liens]

Next in order, is to determine the priority of the liens for taxes proved in the cause. There seems to be no dispute in the cause as against the amount of the decree in favor of plaintiff for $15,730.00. Plaintiff does not dispute the priority of the personal property taxes decreed to the Sheriff of Preston County, amounting in the aggregate to $176.13. It does dispute the priority of the liens for taxes decreed to the Collector of Internal Revenue of the United States , the Department of Unemployment Compensation of West Virginia, and the State Tax Commissioner of West Virginia .

[Claim of Collector]

We will first consider the claim in favor of the United States of America , on the several sums decreed to the Collector of Internal Revenue. The assertion of priority on the part of the United States of America is based, first on Sections 3670, 3671, and 3672, of the Internal Revenue Code. Section 3670 provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." Section 3671 provides: "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time". But this lien, and the date it arises, are somewhat restricted by Section 3672, which under the heading "Validity against mortgagees, purchasers, and judgment creditors", provides: "(a) Such lien shall not be valid as against any mortgagee, pledgees, purchaser, or judgment creditor until notice thereof has been filed by the collector (1) in the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory; or (2) in the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State or Territory has not by law authorized the filing of such notice in an office within the State or Territory; or (3) in the office of the clerk of the District Court of the United States for the District of Columbia, if the property subject to the lien is situated in the District of Columbia."

By Section 1, Article 10, Chapter 38 of the Code of West Virginia, provision is made for the recordation of Federal tax liens, in the office of the clerk of the county court of each county in the State, so that the State of West Virginia has made provision for the filing of such notice, and the provisions of subsection (1) in the quotation above becomes applicable to the situation presented in this case. We do not understand counsel for the Government to contest this statement. They do insist, however, that tax liens in favor of the Federal Government become fixed at the time the statement of the assessment was received by the Collector of Internal Revenue, in the district where taxpayer's business was being carried on; and in this contention we think they are correct. There receiving of the assessment list by the collector makes the lien effective, and serves, of course, to protect the lien so long as the rights of mortgagees, pledgees, purchasers or judgment creditors do not arise.

When, at any time, rights in favor of a mortgagee, pledgee, purchaser, or judgment creditor do arise, the mere receiving of the assessment list, in the office of the Collector of Internal Revenue, does not protect the lien, as against those persons, under the plain provisions of Section 3672 quoted above. It is entirely clear, that while some of these tax assessments were received in the collector's office, prior to the date of the bill of sale executed by the Fuel Corporation to plaintiff, none of them was filed in the office of the Clerk of the County Court of Preston County prior to the 15th day of April, 1944, more than a month after the filing of the conditional sales contract made by plaintiff Coal Company with the Fuel Corporation, and more than six weeks following the sale of the tractor involved herein by the Fuel Corporation to plaintiff, the Coal Company.

All this seems to be conceded, but counsel for the Government say that the plaintiff, the Coal Company, does not, under its mortgage, or under its bill of sale, or under its status as the seller in the conditional sales contract made by it to the Fuel Corporation, occupy the position of a mortgagee, pledgee, purchaser or judgment creditor. The argument for this proposition is: First, that the deed of trust dated September 1, 1943, was invalid, and did not create a lien against the tractor conveyed thereby, (1) because no trustee was named therein, and (2) because it was not properly acknowledged, in that the notary public did not certify the date of the expiration of her commission as such. We do not think either of these propositions can be sustained. It is fundamental law that equity will not permit a trust to fail for the want of a trustee. The writing herein considered is called a deed of trust, but is, in fact, a mortgage. Equity considers the substance and not the form, and certainly the paper creates a lien on the property conveyed therein. The mere fact that it might be necessary to invoke the aid of a court of equity, to enforce the lien, does not detract from its force or effect. Quite frequently, trustees appointed in a trust deed die or become incapacitated, or, for other reasons, refuse to execute a trust. We have made provision under our statute for the appointment of a new trustee to enforce a deed of trust, by application to the circuit court of the county in which the property covered by the deed of trust is located. See Machir v. Schon, 14 W. Va. 777; New York Life Ins. Co. v. Kennedy, ( Va. ) 135 S. E. 882.

On the point of the supposed invalid acknowledgment, the position of the Government that under Code, 29-4-8, the requirement that a notary shall state the date of the expiration of his commission is mandatory, and the failure to do so makes the acknowledgment invalid, cannot be sustained by reason or authority. It is quite evident that the purpose of the Legislature, in requiring a statement of the expiration date of the notary's commission was to make certain that, at the date of the acknowledgment, he was, in fact, a notary public. It specifically provides that a misstatement of such date shall not invalidate any official act of such notary, if his commission be, at the time thereof, in full force. We need not decide the question whether, in the absence of such statement of the expiration of the commission, and a showing that she was not at that time a notary public, would make the acknowledgment invalid. However, there is no showing here that the notary who certified the acknowledgment to the deed of trust, was not, in fact, a notary public with full power to act. We think, therefore, that the deed of trust or mortgage of September 1, 1943 , was a valid instrument and created a lien on the property conveyed thereby. Whether such deed of trust, if the same had been attacked as a preference or as fradulent, could have been sustained, is a question not now before us.

But the deed of trust, and the execution thereof, are not, in our opinion, of any particular importance in this case. Even if the so-called trust deed had not been executed, the Fuel Corporation had the right to sell its interest in the property described therein, and it did so on February 15, 1944 , when it executed to the Coal Company a bill of sale therefor. The fact that the deed of trust was in existence at that time, is not important. The plaintiff and the Fuel Corporation had a right to adjust their affairs to their satisfaction, so long as there was nothing fraudulent in the transaction, or any preference of creditors, and neither has been established in this case. No doubt the transaction of February 15, 1944, was intended to place plaintiff in what it thought was a more secure position, and the execution of the bill of sale to plaintiff, and the immediate resale of the tractor and other property to the Fuel Corporation, under a conditional sales contract, was intended to effect that purpose. Under ordinary circumstances, no exception could be taken by any person to such procedure.

[Purchaser]

But it is contended by the Government that none of these transactions constituted plaintiff, the Coal Company, a mortgagee, pledgee, purchaser or judgment creditor. Of course, it was neither a mortgagee nor a judgment creditor, and we do not think it was a pledgee; but, clearly, in our opinion, it was a purchaser, both under the deed of trust of September 1, 1943, and under the bill of sale dated February 15 [sic], 1944. Under the deed of trust, the tractor was conveyed to it and that constituted it a purchaser; and under the bill of sale it certainly became a purchaser of the property described therein. The fact that the bill of sale was not recorded is of no consequence. There may have been existing tax liens; but, if so, they had not been filed in Preston County when plaintiff acquired the interest of the Fuel Corporation in this property. It, therefore, took it free of any liens that might have then been in existence but not filed in said county, and it still holds an equitable interest in said property under its conditional sales contract with the Fuel Corporation.

Of course, at the date of these transactions, the legal title to the tractor involved in this cause was in the Tractor Company, under the conditional sales contract of August 18, 1942; but it must be borne in mind that, at that time, the indebtedness binding this tractor had been reduced to what we now hold was less than three thousand dollars. According to the letter of the Tractor-Company to the Fuel Corporation dated January 25, 1944 , it had been reduced to $2,991.99. Certainly, the Fuel Corporation was, at the date of its bill of sale to plaintiff, the beneficial owner of the tractor, subject only to the lien for the balance of the purchase money then due. The bill of sale, in our opinion, passed the beneficial ownership of the tractor to plaintiff, subject only to the Tractor Company's lien; and, in turn, when plaintiff by the conditional sales contract delivered possession of the tractor to the Fuel Corporation, it transferred all its rights therein, subject only to the right to repossess the property in case of failure to pay the agreed purchase price therefor, and the superior lien of the Tractor Company. As stated above, equity considers the substance and not the form of a transaction. Unquestionably, by paying more than three-fourths of the purchase price of the property sold by the Tractor Company to the Fuel Corporation, in August, 1942, the latter acquired an equitable interest in the property, covered in the sales contract, which is transferable, and the transfer of which a court of equity will recognize.

But the Government contends further that under Section 3466 of the Revised Statutes of the United States , it is entitled to priority over all other indebtedness. This section reads:

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

This statute is very old. It rests on an act of March 3, 1797 , and an act dated March 2, 1799 . It seems to have been enacted because there is no common law of the United States , and the priority given by common law to debts due a sovereign state could not be claimed by the United States , but must depend for their priority on the statute. This was held in Trust Co. v. Connecticut Brass & Mfg. Corp., 290 F. 712. The priority claimed must, therefore, rest entirely upon the terms of this statute, and by its terms it applies in case of insolvency, or whenever the estate of a deceased debtor is in the hands of an executor or admin istrator, and is insufficient to pay all the debts due from deceased. As to the case here presented, it could only be applied, in any event, where the insolvency of the debtor, in this case the Fuel Corporation, had been judicially established. There are indications in the record before us that the Fuel Corporation may be insolvent; but there is no proof of such insolvency, and it must be borne in mind that the bill in this case does not attempt to bring before the court all of the property of the Fuel Corporation, but it only brings into court, and asks for a determination of the liens, as to the property sold to the Fuel Corporation under the conditional sales contract of February 15, 1944. The amount of the Tractor Company's claim being in dispute, and the validity of the tax liens asserted by the Federal Government and the State of West Virginia, being in dispute, plaintiff sought to determine where it stood with respect to its indebtedness under its conditional sales contract with the Fuel Corporation. That is the extent of the property involved in this litigation. Whether the Fuel Corporation owns other property, out of which its indebtedness may be liquidated, is not clearly shown by this record. We are of opinion, therefore, that even if Section 3466 should be construed as securing priority in cases of insolvency, the section cannot be applied in this case.

But another question arises as to the applicability of Section 3466 to this case. There is respectable authority for the proposition that the requirement of Section 3672 of the Internal Revenue Code, relating to the filing of tax liens should be applied to Section 3466 of the Revised Statutes. We have seen that the United States cannot, under its sovereign power, claim priority for unpaid taxes, over other liens against a taxpayer; but can only claim such priority under an Act of Congress; and the contention is that this being true, and Section 3672 having provided that such liens may not be enforced against mortgagees, pledgees, purchasers or judgment creditors, until notice thereof has been filed by the collector in the office of the state or territory in which any property affected by the lien is located, as therein provided, the same rule should apply to priority established by Section 3466 aforesaid. This theory is upheld in the case of In re Meyer's Estate ( Pa. ), 48 A. 2d 210 [46-2 USTC 9332]. In that case the question is discussed at some length, and, were it necessary to do so, we would be inclined to give serious consideration to this aspect of the case. We do not do so, however, because we are of the opinion that the Federal Government has not brought itself within the provisions of Section 3466, in that it has not shown either insolvency, or the commission of an act of bankruptcy, on the part of the Fuel Corporation. Of course, there is here no question of an absconding, concealed, or absent debtor.

[Conclusion]

We are of the opinion, therefore, that the trial court erred in according priority to the Government of the United States , through its Collector of Internal Revenue, as against the claim of plaintiff. We do not think the Government protected its liens, by filing them in the office of the Clerk of the County Court of Preston County , at a date prior to that on which plaintiff became the purchaser of the property involved herein.

Nor do we think the State of West Virginia , through its Department of Unemployment Compensation, and its State Tax Commissioner, is entitled to the priority accorded them in the circuit court's decree. The lien of the decree to the State Tax Commissioner for the sum of $1,225.78 is based upon Code, 11-13-12 , which provides that:

"A tax due and unpaid under this article shall be a debt due the state. It shall be a personal obligation of the taxpayer and shall be a lien upon the property used in the business or occupation upon which such tax is imposed provided no such tax lien shall be enforceable against a purchaser (including lien creditor) for valuable consideration without notice, unless docketed in the office of the county court of the county wherein such property is located before deed therefor to such purchaser is delivered for record to the clerk of the county court of such county."

The word "deed" should be construed to include a deed of trust, and we think a bill of sale of personalty. The assessment of taxes in this case was not at any time docketed in Preston County , as the statute requires, and this, we think, precludes the State from asserting its lien to the prejudice of the plaintiff, who is the purchaser of the property against which the lien is asserted. The deed of trust of September 1, 1943 , was recorded in Preston County , and, as to the state taxes, certainly established plaintiff as the purchaser of the property conveyed thereby, which includes the property against which the State's tax lien is now asserted.

The situation with respect to the decree of $1,589.16 to the Department of Unemployment Compensation is somewhat different. Its claim is based on a priority provided for in the Unemployment Compensation Act, Section 18, Article 5, Chapter 1, Acts of the Legislature, Second Extraordinary Session, 1936, which provides:

"In the event of any distribution of an employer's assets pursuant to an order of the court under a law of this State, payments then or thereafter due shall be paid in full prior to all other claims, except taxes and claims for wages * * *,"

thus creating a priority rather than, in direct terms, creating a lien. There is, so far as we know, no provision for filing an assessment for unemployment compensation in the office of the clerk of the county court, and therefore we do not need to consider that point in determining the priority of this particular claim. We do not think it can be asserted to the prejudice of the plaintiff, whose claim is based upon a conditional sales contract, as to the property covered thereby, and the conditional sales contract of February 15, 1944 , from the Coal Company to the Fuel Corporation covers all the property involved in this suit. In Moran v. Leccony Smokeless Coal. Co., 122 W. Va. 405, 10 S. E. 2d 578, we held:

"The vendor in a conditional sales contract, duly filed, wherein title to the property sold is retained by him until the full payment of the purchase price therefor, is entitled to have paid any balance due him thereon before the payment of any lien which may attach thereto, except the lien of a levy for a property tax."

In that case the State of West Virginia was claiming priority for a decree in its favor for gross sales tax and consumers' sales tax, but we think the principle announced must necessarily apply to a tax in favor of the Department of Unemployment Compensation. This theory is, as announced in the Moran case, that under a conditional sales contract the legislative intent was to tax only the property of the taxpayer, and that the section then under consideration should be interpreted to mean that the property upon which the lien was laid must be the property of the taxpayer, and that taxes could be imposed only upon the interest of a purchaser in a conditional sales contract, after the lien of the purchase money due the seller has been completely liquidated. Of course, applying that rule to this case, there must be full liquidation of the purchase money due before the priority of West Virginia can attach.

We therefore reverse the decree of the Circuit Court of Preston County, in so far as it grants priority to the claims of the Collector of Internal Revenue of the United States, the Department of Unemployment Compensation of West Virginia, and the State Tax Commissioner of West Virginia, over the claim of plaintiff, The Tildesley Coal Company, a corporation, and remand the case to said court, with directions to distribute the money in the hands of its special commissioner, applicable to the claims presented here as follows: First, the sum of $2,422.47 decreed to West Virginia Tractor and Equipment Company; second, $176.13 decreed to the Sheriff of Preston County for taxes for the years 1944 and 1945; and, third, to the decree of $15,730.00 in favor of the plaintiff herein. If is should develop, at any time hereafter, that any funds remain, after the payment of said sums, such remaining sum shall be first applied to the payment of the amount due to the Collector of Internal Revenue; and next to the decrees in favor of the Department of Unemployment Compensation and the State Tax Commissioner of West Virginia, in the order named.

Affirmed in part; reversed in part; remanded with directions.

Judge Kenna concurs in result and reserves right to file a concurring opinion.

 

 

[50-2 USTC 9455] Rob erts and McInnis v. Emery's Motor Coach Lines, Inc.

In the West Virginia Circuit Court. Berkeley County, September 16, 1950

Tax liens: Priority of federal tax liens over subsequent execution creditor: Recordation requirements: Property subject.--The assessment lists were received by the Collector and demands made upon the tax delinquent prior to the time execution and garnishee summons were issued. This had the effect of perfecting the lien and, as against an execution creditor, the federal tax lien had priority since such a creditor is not in the class of a mortgagee, pledgee, purchaser, or judgment creditor against whom such liens are not valid unless there has been compliance with recordation requirements. Moreover, the lien in favor of the federal government is a continuing one upon all property, including bank deposits.

Martin & Seibert, Martinsburg, West Virginia, for Rob erts et al. Howard Caplan, Assistant United States Attorney, Clarksburg, West Virginia, for the government.

RODGERS, District Judge:

The plaintiffs obtained a judgment in this court on May 19, 1949 against the defendant. Execution and garnishee summons were issued thereon on October 22, 1949 . The garnishee summonses were promptly served on the Old National Bank and The Peoples Trust Company. At the February Term, 1950 of this court, the two banks answered that the defendant had on deposit on the dates of service of garnishee summons, the sums of $924.80 and $215.67, in said banks respectively.

The United States of America filed its petition herein on February 27, 1950 and its amended petition on April 29, 1950 claiming a lien, having priority over that of the plaintiffs. The petition alleges that the defendant, on or prior to October 22, 1949, was indebted and still is indebted to petitioner in the sum of $9,989.86 for unpaid Internal Revenue taxes; and alleges, in detail, the dates when the nine various amounts constituting the total, accrued; when the assessment list applicable to each of the nine items of tax was received by the collector; and when the several demands upon each were made by the collector upon the defendant, all of which dates were prior to the issuance of the execution and garnishee summonses by the plaintiffs herein. The petition alleges the dates when notice of the several tax liens were recorded in the office of the Clerk of the County Court of this County, it is alleged that of said total tax, the liens for $8034.34 were recorded before October 22, 1947, and the balance since said latter date. The petition alleges a levy for said taxes by the Collector upon both banks and actual notice to them on or about February 6, 1950 .

To this petition as amended, the plaintiffs demur. It is contended: (1) that the Federal lien for internal revenue taxes is an inchoate lien until levy and seizure of the property of the taxpayer and that other liens attaching to the property before that time have priority over the Federal lien; (2) that a bank deposit is a debt and not subject to the Federal lien, because a bank deposit is not "property" or a "right of property" under the law of West Virginia; and (3) that the tax lien attaches only to property of the tax debtor in existence when the Federal tax lien attaches. It is assumed that the money to the credit of the defendant on the date of service of the garnishee summonses was not the debt due the depositor on the date the federal tax lien arose.

The petitioner relies upon the provisions of Section 3670 and 3671 of Title 26 of the United States Code.

The sections of the United States Code insofar as pertinent to this inquiry, are:

Section 3670. "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."

Section 3671. "Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

Section 3672. "Such lien shall not be valid or against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed by the collector--in accordance with the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law provided for the filing of such notice," etc.

The statute then exempts from the lien certain securities, including money, mortgaged, pledged or purchased without actual notice or knowledge of the existence of such lien. It may be noted that the debts due by the banks to the taxpayer, in this case, had not been mortgaged, pledged.

Section 1, Article 10, Chapter 38 of the Code of West Virginia provides for the recordation of federal tax liens. This statute provides that no federal tax lien shall be a valid lien as against any mortgagee, purchaser or judgment creditor, until such notice shall be filed in the office of the clerk of the county court of the county or counties in which the property subject to such lien is situated.

The provisions of the federal statute relative to recording the federal tax lien were added to the statute by later amendments. Prior to these amendments, the federal tax lien was valid as against subsequent purchasers and encumbrances without notice. U. S. v. Curry, 201 Fed. 371. Re Dartmount Coal Co., 46 Fed. (2d) 455. U. S. v. Snyder, 149 W. S. 210, 37 L. ed. 705, 13 S. Ct. 846. Blacklock v. U. S. , 208 U. S. 75, 52 L. ed. 396, 28 S. Ct. 228.

These amendments as to recording of the lien now require the recording of the lien as to "any mortgagee, pledgee, purchaser, or judgment creditor". But the plaintiffs in this case, claiming a lien by execution and garnishee summons, falls in none of the excepted classes, named in either the federal or state statutes relative to recording of the lien. These recording statutes are of no benefit to the plaintiffs. The fact that lien creditors of the class to which the plaintiffs belong, are not included in the statutory provisions is strongly indicative of the validity of the government's contention thta the federal tax lien is a specific and perfected lien after assessment and demand, not an inchoate lien that must be perfected by further action by the government.

While recordation of the lien was not necessary as to lien creditors of the class to which plaintiffs belong, yet the government did record two of its tax liens in the total amount of $5261.66, prior to May 19, 1949 , the date of plaintiff's judgment.

The court concludes that the government's lien did not have to be recorded as to plaintiffs' lien; and that federal tax liens in excess of the money herein involved, were in fact recorded prior to the plaintiffs' judgment and garnishee proceedings.

The plaintiffs contend that even though the tax lien did not have to be recorded, yet that it was an inchoate lien until levy and seizure of the property of the taxpayer. The federal statute gives these and other remedies to the government for the collection of its taxes, but there is nothing in the statutes that make the exercise of these remedies or any of them prerequisites or conditions precedent to the perfecting of the government's lien. The very specific and unequivocal provisions of section 3671 settles this question, as it provides "the lien shall arise at the time the assessment list was received by the collector".

This question was before the U. S. Circuit Court for the Fourth Circuit in U. W. v. Greenville, 118 Fed. (2d) 963 [41-1 USTC 9381]. Holding that the federal tax lien was a specific and perfected lien and not an inchoate lien that must be perfected by levy or distraint, the court said:

"Such a lien is clearly not a mere inchoate lien, or right to lien, as held in Gerson et al. v. Shubert Theater Corp. D. C., 7 Fed. Supp. 399 [1934 CCH 9330]; for not only was it deemed necessary in the statute itself to provide that the lien should not be valid against any mortgagee, purchaser or judgment creditor until filing of notice, but provision also was made by the Act of June 29, 1939, 53 Stat. 882, 26 U. S. C. A. Int. Rev. Code S. 3672(b) that, notwithstanding the filing of such notice, such lien should not be a valid lien upon certain described securities as against mortgagees, pledgees or purchasers, if they were holders for an adequate and full consideration and 'without notice or knowledge of the existence of such lien'. No such provisions would be necessary if the lien were intended to be a mere inchoate right to a lien which would attach to specific property only after proceedings had been instituted for its enforcement."

The demurrants contend that a bank deposit is not property or a right to property under the law of West Virginia and rely upon Metropolitan etc. v. U. S., 107 Fed. (2d) 311 [39-2 USTC 9771] and Poe v. Seaborn, 282 U. S. 101, 75 L. Ed. 239 [2 USTC 611], for the proposition that, since section 3670 of the Federal Code does not define "property", the law of this state must be looked to for the meaning of the word.

However, under Section 10, Article 2, Chapter 2 of the Code of West Virginia "the word 'property' or 'estate' embraces both real and personal estate" and "the words 'personal estate' or 'personal property' includes goods, chattels, real and personal, money, credits, investments, and the evidences thereof."

The federal statute could hardly have used more inclusive terms than "all property and rights to property, whether real or personal". Some doubt might have been removed by saying "either tangible or intangible", but nothing would have been added to the meaning of the words used. The overwhelming weight of authority sustains the proposition that bank deposits, claims for work labor and services, and all other debts and intangible property, are subject to the federal tax liens. McKenzie v. U. S. , 109 Fed. (2d) 540. Miller v. Bank, 166 Fed. (2d) 415 [48-1 USTC 9185]. Citizens etc. v. Vidal, 114 Fed. (2d) 380 [40-2 USTC 9603]. Philipowicz v. Rothensies, 31 Fed. Supp. 719. U. S. v. Bank, 30 Fed. Supp. 113. U. S. v. Aetna , etc., 46 Fed. Supp. 30 [42-1 USTC 9266]. U. S. v. Canfield, 29 Fed. Supp. 734 [39-2 USTC 9641]. Dallas , etc. v. U. S. , 167 Fed. (2d) 468 [48-1 USTC 9242]. Goldenberg v. Westover, 150 Fed. (2d) 388 [45-2 USTC 9362]. U. S. v. Taft, 44 Fed. Supp. 544. Bank v. U. S. , 73 Fed. Supp. 303 [47-1 USTC 9296]. U. S. v. Caldwell , 74 Fed. Supp. 114 [47-2 USTC 9363.]

A closely related question is raised by the third ground of demurrer and that is whether the lien of the government for taxes attaches only to the money of the taxpayer on deposit on the day the lien is acquired, or does it also attach to money subsequently deposited. Congress thought it did, for the Congress amended section 3672 by exempting from the lien, even when recorded, certain securities, including money, mortgaged, pledged or purchased for value and without actual notice or knowledge of the existence of such a lien.

Some of the federal courts have held that the later deposits were not subject to the lien. U. S. v. Long Island , etc., 115 Fed. (2d) 983 [41-1 USTC 9140].

This case and others were expressly disapproved by the Supreme Court of the United States in Glass City Bank v. U. S., 66 S. Ct. 108, 326 U. S. 265, 90 L. ed. 56 [45-2 USTC 9449]. A syllabus of the latter case states:

"Section 3670 of the Internal Revenue Code, which provides that the amount of taxes owed the United States government by a taxpayer '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' and section 3671, create a continuing tax lien covering all property or rights to property owned by a tax delinquent at any time during the life of the lien, including property acquired after the lien arose."

For additional authorities bearing upon the questions discussed in this opinion, see annotations in 105 A. L. R. 1245 and 172 A. L. R. 1366.

The federal lien for taxes arises when the assessment list is received by the collector; demand upon the taxpayer is a condition precedent to its enforcement, but the lien is a specific and perfected lien without levy or distraint and requires no notice to subsequent execution creditors; the lien attaches to all the property of the taxpayer, both tangible and intangible, then in existence and after acquired; bank deposits, neither withdrawn from the bank, mortgaged or pledged, are subject to the lien; and said tax lien has priority over subsequent liens by garnishee process.

The demurrer to the government petition as amended is overruled.

 

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