[90-1 USTC ¶50,331] Metropolitan National Bank, James M. Oberlies and
[Code Secs. 6323 and 7425 ]
Federal tax liens: Deed of trust: State law.--Tax liens filed by the government against three parcels of land owned by the taxpayer were not subordinate to the bank's interest. The district court erroneously ruled that the government's lien was not entitled to priority over the bank's interest because under state (
Woodrow W. Pringle III,
Before POLITZ, GARWOOD, and JOLLY, Circuit Judges.
JOLLY, Circuit Judge:
The United States appeals from the district court's judgment holding that the United States' perfected tax lien, filed against three parcels of real property owned by the taxpayer, Weaver & Sons, Inc., was not entitled to priority over the interests claimed in the property by the appellees, Metropolitan National Bank (the "Bank"), James M. Oberlies, and
The facts were stipulated by the parties. On February 23, 1978, Weaver & Sons, Inc. (the "taxpayer"), by its president, S. Albert Weaver, executed a deed of trust in favor of First State Bank and Trust, the predecessor of appellee Metropolitan National Bank. The deed of trust recited that the taxpayer was indebted to the Bank in the amount of $400,000, and listed certain real property owned by the taxpayer located in
On February 23, March 2, March 9, March 16, and
The taxpayer defaulted in payment of its obligation to the Bank, and subsequently filed a Chapter 7 bankruptcy petition. Although none of the papers relating to the taxpayer's bankruptcy are contained in the record before us, the appellees' brief states that the taxpayer's bankruptcy petition was filed on
The bankruptcy court lifted the automatic stay, authorizing the Bank to repossess and foreclose upon the subject property. Notices of foreclosure were posted in the county courthouse, published in the local newspaper, and sent to the IRS by certified mail. A nonjudicial foreclosure sale was held on
The appellees brought this action against the
Under 26 U.S.C. §6321 , the amount of a delinquent taxpayer's liability constitutes a lien in favor of the United States upon all of the taxpayer's property and rights to property, whether real or personal. The lien imposed by §6321 is effective from the date of assessment of the tax, and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 . The question whether and to what extent a taxpayer has "property" or "rights to property" to which the tax lien attaches is determined under the applicable state law. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677,683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983). It is undisputed in this case that the taxpayer owned, or had rights to, the subject property to which the federal tax liens attached.
Once it has been determined under state law that the taxpayer owns property or rights to property, federal law controls for the purpose of determining whether an attached tax lien has priority over competing liens asserted against the taxpayer's property. Rodgers, 461 U.S. at 683, 103 S.Ct. at 2137 "When a third party also claims a lien interest in the taxpayer's property, the basic priority rule of 'first in time, first in right' controls, unless Congress has created a different priority rule to govern the particular situation." Texas Commerce Bank-Fort Worth, N.A. v. United States [90-1 USTC ¶50,155 ], 896 F.2d 152 (5th Cir. 1990). Section 6323 of the Internal Revenue Code, as amended by the Federal Tax Lien Act of 1966, governs the validity and priority of federal tax liens imposed by §6321 against "certain persons." The appellees rely on the special priority rules of subsection (a) of §6323 , which provides, in pertinent part, that a federal tax lien shall not be valid against any "holder of a security interest" until notice of the tax lien has been filed. Thus, the respective priorities with respect to federal tax liens and competing claims that are protected under §6323(a) are dependent upon which claim is perfected "first in time." Both parties agree that, if the Bank was a "holder of a security interest" at the time the
The definition of "security interest" is found in 26 U.S.C. §6323(h)(1) :
The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability.
A security interest exists only when the lienholder satisfies two requirements:
(A) if, at such time the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.
Because the subject property is in existence and the Bank parted with money in return for the deed of trust, the Bank's interest in the subject property by virtue of the original deed of trust is entitled to priority over the subsequently filed federal tax lien under §6323(a) if, as a result of filing the original deed of trust, the Bank is "protected under local law against a subsequent judgment lien arising out of an unsecured obligation." 26 U.S.C. §6323(h)(1) . The United States argues that the district court erred in holding that the Bank is a "holder of a security interest" within the meaning of §6323(a) because the Bank's interest was not protected under Mississippi law against a subsequent judgment lien arising out of an unsecured obligation, and thus, there was no security interest in existence, within the meaning of §6323(h)(1) ,at the time of the filing of the federal tax liens.
Because the corrected deed of trust was not filed until after the federal tax liens were filed, the issue before us is whether the Bank held an interest under the original deed of trust that was protected under
Under §6323(h)(1) , a security interest exists only if "the interest is protected under local law against a subsequent judgment lien arising out of an unsecured obligation." The House Committee Report states with reference to §6323(h)(1) that:
[A] security interest becomes protected against a subsequent judgment lien on the date on which all actions required under local law to establish the priority of the security interest against such a judgment lien have been taken, or, if later, the date on which all such actions are deemed effective, under local law, to establish such priority.
H.R. Rep. No. 1884, 89th Cong., 2d Sess. 49 (1966).
As we explain below, our examination of the relevant Mississippi cases and statutes convinces us that the Bank's interest under the original deed of trust would not have been entitled to protection against a subsequent judgment lien arising out of an unsecured obligation unless such a judgment lien creditor had actual notice or knowledge of the defectively acknowledged deed of trust. 1
Under Mississippi law, all deeds of trust are "void as to all creditors and subsequent purchasers for a valuable consideration without notice, unless they be acknowledged or proved and lodged with the clerk of the chancery court of the proper county, to be recorded . . . ." Miss.Code Ann. §89 -5-3 (1972). "But as between the parties and their heirs, and as to all subsequent purchasers with notice or without valuable consideration, said instruments shall nevertheless be valid and binding."
A deed of trust is not eligible for recordation unless it is properly acknowledged, and an instrument that does not contain a proper acknowledgment does not impart constructive notice to creditors or bona fide purchasers, pursuant to Miss. Code Ann. §89 -3-1 (1972):
[A] written instrument of or concerning the sale of lands . . . shall not be admitted to record in the clerk's office unless the execution thereof be first acknowledged or proved, and the acknowledgment or proof duly certified by an officer competent to take the same in the manner directed by this chapter; and any such instrument which is admitted to record without such acknowledgment or proof shall not be notice to creditors or subsequent purchasers for valuable consideration.
It is undisputed, and the district court correctly held, that the original deed of trust dated
It would be against public policy to permit a grantee, mortgagee, or trustee, or other person beneficially interested in the transaction to take an acknowledgment to an instrument in which he is named as a party or has a beneficial interest. The object of the law is to prevent the perpetration of fraud, and the policy of the law seems to be that the officer taking the acknowledgment must not be in such relationship to the grantee that there shall exist any temptation for the officer to do aught but his duty impartially.
Mills v. Damson Oil Corp., 686 F.2d 1096, 1102-03 (5th Cir.1982) (quoting 1 Delvin on Real Estate and Deeds, §477d (3d Ed. 1911)). The acknowledgment taken by the trustee in this case was thus void. 2 Jones v. Porter, 59 Miss. 628 (1882) (where the acknowledgment of a grantor was taken by the husband of the grantee, who was the procuring cause of the conveyance, the acknowledgment was void). Because the acknowledgment was void, the deed of trust was not eligible for recordation and, even though the deed was recorded, it nevertheless did not impart constructive notice to creditors under Miss.Code Ann. §89 -3-1. See also Holden v. Brimage, 72
In Mills v. Damson Oil Corp., this court stated that "[i]t is well settled in Mississippi that constructive notice is not imparted to bona fide purchasers by recording a defectively acknowledged deed." 686 F.2d at 1103-04 (citing Ligon v. Barton, 88
Whether a defectively acknowledged and recorded deed imparts constructive notice if the defect in the acknowledgment is entirely latent?
Mills, 686 F.2d at 1114. The Mississippi Supreme Court answered "yes." Mills v. Damson Oil Corp., 437 So.2d 1005, 1006 (
Nothing in the Mississippi Supreme Court's answer to the certified question in Mills casts any doubt on the cases involving defectively acknowledged deeds in which the defects are patent. Those cases hold that the recording of such defectively acknowledged deeds does not impart constructive notice to bona fide purchasers. See Mills, 686 F.2d at 1103-04 and cases cited therein; see also Cotton v. McConnell, 435 So.2d 683 (Miss. 1983) (a deed with a defective acknowledgment is not eligible for recordation, and is not effective as to third parties, under §89 -3-1, but it is wholly effective between the parties to it). The original deed of trust in this case names
The district court held that, although the recordation of the defective deed did not impart constructive notice, it could impart actual notice "to anyone who cared to review the records of the Chancery Clerk." The district court then held that the
The appellees contend, and the district court held, that the
The appellees contend, however, that the
In support of their position that the United States had a duty to inquire, the appellees argue, without any citation of authority, that the fact that the taxpayer had not paid its taxes should have provided notice to the United States that the title to any property owned by the taxpayer would be subject to other liens or problems. We disagree. The fact that the taxpayer was delinquent in its federal tax obligations created no inferences concerning the taxpayer's title to any particular property and falls short of the type of information necessary to place the
We conclude that the record does not support the district court's holding that the
The district court further held that the defectively acknowledged deed of trust gave the Bank "equitable title" sufficient to defeat the claims of "a subsequent purchaser or party coming after the document in question, who has notice of the questionable document." Even if we assume that the defectively acknowledged deed of trust gave the Bank "equitable title," the
We reject the appellees' argument that, when the defectively acknowledged deed was recorded, the
The district court's holding that the federal tax lien was extinguished in the foreclosure sale of the property under the provisions of 26 U.S.C. §7425(b) is based on its erroneous conclusion that the tax liens were junior to the Bank's lien. As we have already held, the Bank's lien did not prime the federal tax liens. Section 7425(b) provides that, even if the government's lien is inferior under state law, it will not be discharged by the foreclosure sale unless the proper type of notice is given to the
For the foregoing reasons, the judgment of the district court is REVERSED, and the case is REMANDED to the district court for further proceedings.
REVERSED AND REMANDED.
1 Other courts have taken two different approaches in determining the kind of protection Congress contemplated that a security interest must have in order to be "protected under local law against a subsequent judgment lien." One line of cases applies the "subjective knowledge lien creditor test," and places the
2 Although the acknowledgment was void, it does not follow that the deed itself was void. Pursuant to Miss.Code Ann. §89 -5-3, a deed that is neither acknowledged nor recorded is "nevertheless valid and binding" as between the parties and their heirs, and as to all subsequent purchasers (and creditors) with notice or without valuable consideration.
3 In Aetna Ins. Co. v. Texas Thermal Industries, Inc. [79-1 USTC ¶9287 ], 591 F.2d 1035, 1038 (5th Cir. 1979), this court held that the Federal Tax Lien Act of 1966 was intended to supplant the federal common law with respect to "tax lien priority questions as to which that statute provides an unambiguous federal answer." In Texas Commerce Bank-Fort Worth, N.A. v. United States [90-1 USTC ¶50,155 ], 896 F.2d 152, 161 n. 8 (5th Cir. 1990), however, another panel of this court has recently noted that there is an apparent conflict between Aetna and two earlier decisions of this court, Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565, 572 (5th Cir. 1980) and Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040, 1053 (5th Cir. 1972), cert. denied sub nom., Pecos County State Bank v. United States, 410 U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973). In Rice and
In the case before us, the statute provides a nonambiguous federal answer to the priority. It is unnecessary for us to resolve any conflict between
Although the deed of trust identifies the lienor and describes the property subject to the lien, the amount of the lien was not established "beyond all possibility of change or dispute" at the time the notices of tax liens were filed. The deed of trust secured not only the $400,000 loan, but also "such future and additional advances as may be made to the grantor," as well as "all debts, obligations, or liabilities, direct or contingent, of the grantor . . . to the beneficiary, whether now existing or hereafter arising at any time before actual cancellation of this instrument on the public records of mortgages and deeds of trust, whether the same be evidenced by note, open account, over-draft, endorsement, guaranty or otherwise." Because the deed of trust had not been cancelled at the time the IRS filed the notices of tax liens, the amount of the Bank's lien, under the express terms of the deed of trust, was subject to a "possibility of change or dispute" and thus was not perfected, or "choate," under pre-1966 federal common law.
[57-2 USTC ¶9801]
(CA-5), U. S. Court of Appeals, 5th Circuit, No. 16474, 247 F2d 285, 6/29/57, Reversing in part and remanding unreported District Court decision
[1954 Code Sec. 6323--similar to 1939 Code Sec. 3672(a)]
Tax lien: Priority over equitable vendor's lien.--The government's lien for unpaid taxes had priority over an equitable vendor's lien under Texas law for the unpaid purchase price of real estate. The equitable vendor's lien was not sufficiently specific and perfected to warrant priority over the government's tax lien.
[1939 Code Sec. 3678--same as 1954 Code Sec. 7403; Section 2410 of the Judicial Code]
Action to quiet title from Federal tax lien: Foreclosure as jurisdictional prerequisite.--It is not a jurisdictional prerequisite in a suit, under section 2410 of the Judicial Code, to quiet title to real estate from a Federal tax lien that the District Court order a foreclosure. Under section 2410 of the Judicial Code, the court may take whatever action is necessary to assure that the Government's lien is fully and effectually respected in accordance with its established rank. This might take the form of the judicial ascertainment of values to determine whether there was any real equity over and above the prior lien, whether Government or private. If it is established to a judicial certainty that nothing would be gained by a judicial sale, nothing would be lost by declining to compel a needless, unproductive act.
One dissent in part.
Before HUTCHESON, Chief Judge, and JONES and BROWN, Circuit Judges.
BROWN, Circuit Judge:
Out of strikingly simple facts two questions emerge: First, whether the equitable vendor's lien for the unpaid purchase price of
Morrison, the Vendor,
In the meantime, Federal taxes due by Taxpayer were, on various dates, 1 assessed for a total of $7,912.76 and Notice of Tax Lien filed in the Dallas County Clerk's office. Unaware of this activity, the Vendor on
March 12, 1956, Vendor under 28 USCA 2410 (note 5, infra) brought suit in the State Court to quiet title and remove the cloud of the Federal tax liens asserted in respect of the Purchaser (Taxpayer). After removal of the Government's petition, 28 USCA 1444, the Trial Court without a jury held that the
Since the Vendor, asserting here his equitable vendor's lien, has neither the status of a "mortgagee, pledgee, purchaser, or judgment creditor," the right of the Government to the tax lien 2 under Section 6321 is not affected by the race between the Notice of Tax Lien (note 1, supra) and the Vendor's lis pendens for recordation 3 under Section 6323, and the question of priority must be determined by other considerations, United States v. Albert Holman Lumber Co., 5 Cir., 206 Fed. (2d) 685 [53-2 USTC ¶9545], modified on rehearing, 208 Fed. (2d) 113 [53-2 USTC ¶9609]; Macatee v. United States, 5 Cir., 214 Fed. (2d) 717 [54-2 USTC ¶9550], the principal factor being that the lien which is first in time is first in right, United States v. Atlantic Municipal Corporation, 5 Cir., 212 Fed. (2d) 709 [54-1 USTC ¶9392], if, but only if, the one first in time is specific and perfected in the Federal sense.
[Standing of Equitable Vendor's Lien in
The initial inquiry whether it is a lien and its date of rank for the limited purposes of this case may be quickly disposed of. As to the latter, coming into being at the time of the conveyance
But its standing in
We need not elaborate on the Federal infirmities of this state lien. It is sufficient to point out that insofar as it bears on the competition for tax priorities, the lien, equitable in nature, arises only because equity in good conscience requires it to accomplish right and justice. Whether it exists depends on the equities which, in turn, depend upon facts including the intention of the vendor either to, or not to, waive it. As a secret lien it is, or may be, outranked by many liens of innocent purchasers or others. And, to enforce it, the only remedy available is an equitable action for foreclosure in which the debt and the lien must be established.
[Federal Tax Lien Had Priority]
Of course, in this contest the Vendor's rights are not greater after the property was reconveyed (December 20, 1955) to him, 43A Tex. Jur., supra, §§ 368, 369, than they were when he held only an equitable vendor's lien for approximately $2,600. The result is that the District Court's finding and conclusion was erroneous as a matter of law since Taxpayer at the critical date, under the Federal view, was subject only to the claim of an equitable lien junior in rank to the Government's lien (note 1, supra).
Under the District Court's decision, the second question arose because even though the Vendor's lien for $2,600 was determined to be superior, this would not be grounds for holding that the Government did not have a lien for $7,912.76. Priority is not equated with invalidity.
Consequently, the Government, on this appeal insisted that when a person claiming an interest in property files a Section 2410 bill quia timet, and it is determined that both a Federal tax and private lien exist, but that the private lien is superior, the only relief which the court can grant is to foreclose the property under a literal application of a part of the statute. 5 From this it then urged that since the Vendor did not pray specifically for foreclosure, the District Court lacked jurisdiction. Receding tactically, the Government claims alternatively that as a minimum the court cannot remove the cloud of the inferior tax lien by decree unless, on sufficient evidence, the Chancellor finds that the property does not have sufficient value to discharge the prior, superior liens.
The question appears more remote now in view of our holding on the rank of liens, but since we have as little evidence as did the District Judge on which to ascertain values, it remains in the case and is proper for decision.
On it, we are of the clear view that it would be out of keeping with the nature of an equitable proceeding of quia timet and the flexibility necessarily reposed in the office of the Chancellor to assume that Congress meant either to redesign the procedure or hamstring the judge.
Unlike some courts who appear to have disclaimed jurisdiction, Borough of Kenilworth v. Corwine, D. C. N. J., 96 Fed. Supp. 68 [52-1 USTC ¶9176]; Integrity Trust Co. v. United States, D. C. N. J., 3 Fed. Supp. 577 [1933 CCH ¶9469]; cf. Sherwood v. United States, D. C. N. Y., 5 Fed. (2d) 991 [1925 CCH ¶7088], to entertain the suit, either direct or after removal from the state court, we think that Section 2410, an integral part of the Judicial Code rather than an
Congress recognized that such controversies could and would arise. With swift and ofttimes harsh
In other instances, the private party claiming an interest or lien might recognize that the Government's lien is equal to or superior to his. In such case, a controversy does not exist in the sense of a dispute, but one does exist in the traditional sense that judicial relief is required to effectually assert the interest. For that controversy a determination of what is actually undisputed is unavailing, and what the party needs, and what Congress meant to afford, was a means by which the lien could be aforeclosed. Elaborate machinery is specified in subparagraph c of Section 2410, note 5, supra, for just such action for liens inferior or superior to that of the Government. And this gives purpose to the 1942 Amendment, note 5, supra, which expressly expanded the scope of relief to include a request "to quiet title to" property.
This conclusion accords with that reached by several district courts, Trust Company of Texas v. United States, D. C. Tex., 3 Fed. Supp. 683 [1933 CCH ¶9486]; Oden v. United States,
[Foreclosure Not Mandatory]
There is no hazard to the revenues in the course which we approve. If the Court on sufficient evidence under controlling legal principles concludes that the Government has no lien, a foreclosure is unnecessary to remove the cloud of the asserted lien from the title, and the Government, in fact, has lost nothing. It will not be different if, on the other hand, the Court were to find that the Government lien does exist and has not been, by valid action prior to the Section 2410 suit, extinguished by a valid foreclosure. As to such lien, whether superior, equal to, or inferior to the competing lien, the Court, if the posture of the controversy is such that the legal determination of the priorities itself is not a full solution, can, under its traditional flexibility as well as that specified in paragraph (c), Section 2410, note 5, supra, take whatever action is necessary to assure that the Government's lien is fully and effectually respected in accordance with its established rank. This might take the form of the judicial ascertainment of values to determine whether there was any real equity over and above the prior lien, whether Government or private. For if it is established to a judicial certainty that nought would be gained by a judicial sale, nought would be lost by declining to compel a needless unproductive act.
Since we reach the conclusion that the Vendor's lien was inferior, the judgment of the District Court is reversed and here rendered to hold that the Government's tax lien for $7,912.76 is superior. On remand the Court, to the extent that any of these other questions remain in the case, shall, as a court of equity, take such further and not inconsistent action as may be necessary.
Reversed and rendered in part and remanded.
Date of Notice Filed Amount
Tax Period & Kind Assessment Clerk's Office Outstanding
1954 WT & FICA .........
Aug. 23, 1955
Oct. 4, 1955
1Q 55 WT & FICA ........
Oct. 14, 1955
Dec. 15, 1955
2 & 3Q 55 WT & FICA ....
Nov. 30, 1955
Dec. 15, 1955
Total .................. $7,912.76
2 Internal Revenue Code of 1954 (26 USCA 6321):
"SEC. 6321. LIEN FOR TAXES.
"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, 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."
This is former Section 3670 of the 1939 Code (26 USCA 3670).
3 "SEC. 6323. (26
"(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--
"(1) Under state or territorial laws.--In the office designated 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 designated an office within the State or Territory for the filing of such notice; or
* * *
This is from former Section 3672 of the 1939 Code (26 USCA 3672).
4 See the Report of the Committee on Relative Priority of Government and Private Liens of the Real Property, Probate and Trust Laws Section of the American Bar Association which, with a full bibliography and annotation, collects and discusses the cases on this subject. It points out that in the past ten years the Government has succeeded in each of the twelve cases before the United States Supreme Court which, except as otherwise indicated, involve Section 3670: United States v. White Bear Brewing Co., 350 U. S. 1010, 100 L. Ed. 871 [56-1 USTC ¶9440]; United States v. Colotta, 350 U. S. 808, 100 L. Ed. 725; United States v. Acri, 348 U. S. 211, 99 L. Ed. 264 [55-1 USTC ¶9138]; United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215, 99 L. Ed. 268 [55-1 USTC ¶9136]; United States v. Scovil, 348 U. S. 218, 99 L. Ed. 271 [55-1 USTC ¶9137]; United States v. New Britain, 347 U. S. 81, 98 L. Ed. 520 [54-1 USTC ¶9191]; United States v. Gilbert Associates, 345 U. S. 361, 97 L. Ed. 1071 (§3466) [53-1 USTC ¶9291]; United States v. Security Trust and Savings Bank, 340 U. S. 47, 95 L. Ed. 53 [50-2 USTC ¶9492]; Goggin v. California Division of Labor Law Enforcement, 336 U. S. 118, 93 L. Ed. 543 (§64 and §67(c) of Bankruptcy Act); Massachusetts v. United States, 333 U. S. 611, 92 L. Ed. 968 (§3466); Illinois v. Campbell, 329 U. S. 362, 91 L. Ed. 348 (§3466); United States v. Waddill, Holland & Flinn, Inc., 323 U. S. 353, 89 L. Ed. 294 (§3466) [45-1 USTC ¶9126].
As we have pointed out and continue to follow, United States v. Atlantic Municipal Corp., 5 Cir., 212 Fed. (2d) 709 [54-1 USTC ¶9392], the principle of first in time first in right is clearly established by
5 "28 USCA 2410. Actions Affecting Property on which
"(a) Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, including the District Court for the Territory of Alaska, or in any State court having jurisdiction of the subject matter, to quiet title to or for the foreclosure of a mortgage or other lien upon real or personal property on which the United States has or claims a mortgage or other lien.
* * *
"(c) A judicial sale in such action or suit shall have the same effect respecting the discharge of the property from liens and encumbrances held by the
The italicized words in paragraph (a) were added by the 1942 Amendments to former 28 USCA 901 by Chapter 656, Section 1, 56 Stat. 1026.
6 The Congressional purpose to invest District Courts with the full flexibility of a Chancery Court is reflected by like language affording parallel, although more awkward, relief under 26 USCA 7424 (a substantial recodification of Section 3679, 26 USCA 3679(a)(c)(d) of the 1939 Code). This provides that if the Government, after six months request, declines to institute its own proceeding under Section 7403 (Section 3678 of the 1939 Code) a person claiming an interest may, with permission of the Court, after application and hearing, file a civil action "in which the United States and all persons having liens upon or claiming any interests in the property shall be made parties." In that proceeding, subparagraph (b) declares that "* * * the district court shall proceed to adjudicate the matters involved therein in the same manner as in the case of civil actions filed under Section 7403." Section 7403, 26 USCA 7403 (Section 3678 of the 1939 Code) complementary to 7424 provides for the filing of a civil action by the United States to enforce its liens naming all persons having liens or claiming interests as parties and which, under subparagraph (c), provides: "The court shall * * * proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States."
Italicized words in §7403 were substituted in former 26 USCA 1569 (of 1934), §1127(b) of the 1926 Internal Revenue Code by Amendment
See also note 8, United States v. Boyd, 5 Cir., -- Fed. (2d) -- [No. 16537] [57-2 USTC ¶9791], as to the inter-relation of these statutes.
7 The case has come in for considerable criticism, see Removal of Federal Income Tax Lien as Affected by Power of Sale in Mortgage, 49 Yale Law Journal 1106; also 53 Harvard Law Review 888; Clark, Federal Tax Liens and Their Enforcement, 33 Virginia Law Review 13, 32-38, and footnote 79.
[Concurring and Dissenting Opinion]
JONES, Circuit Judge, Concurring in Part and Dissenting in Part:
As is said by the majority, the facts are "strikingly simple." Plaintiffs asserted ownership of property in
In the majority opinion there is much discussion of lien priorities, foreclosures and other matters which seem to me to have passed out of the case. The plaintiffs assert no present lien. They claim title. No reason appears that would prevent the operation of the rule that when a lienholder acquires title the lien is merged with the title and is extinguished. 43 A
[55-2 USTC ¶9658]Bank of America National Trust and Savings Association, Etc., Plaintiff v. Jack D. Green, et al., Defendants Floyd B. Marshall, et ux., Defendants and Cross-Complainants v. Jack D. Green, United States, et al., Cross-Defendants United States of America, Defendant by Cross-Complaint and Cross-Complainant v. Jack D. Green, et al., Cross-Defendants
In the Superior Court of the State of California, in and for the County of Madera, No. 9513, June 13, 1955
[1939 Code Sec. 3672--substantially unchanged in 1954 Code Sec. 6323]
Priority of liens: Equitable proration.--Because of the apparent legal impasse reached in determining the priority of judgment creditors' liens and the government's income tax liens, the court applied the maxim "Equality is equity" and ordered the fund in question distributed ratably among the various judgment creditors and the United States. An exception to this was one income tax lien as to the priority of which there was no question. This lien was paid first.
Laughlin E. Waters, United States Attorney, Los Angeles, California; Crossland & Crossland & Richardson; Docker & Docker; and Ralph
Memorandum of Opinion
As to the
While it is true that in the instant case we are dealing with liens that have various priorities, one against the other, yet, as we have seen, it is impossible to resolve these priorities. The maxim above quoted therefore appears to furnish the only solution to the dilemma.
A few words on the
After payment to the
Plaintiff will prepare findings and decree in accordance herewith.
[54-1 USTC ¶9292]Dale Walter Smith and Johanna Smith, Plaintiffs v. Melvin Hamilton, Eva H. Hamilton, United States of America, a body politic, John Doe, Jane Doe, and John Doe Company, a corporation, Defendants, by original summons, and between the said United States of America Cross-Claimant v. Dale Walter Smith, Johanna Smith, Melvin Hamilton, Eva H. Hamilton, John Doe, Jane Doe, and John Doe Company, a corporation, Cross-Defendants by Cross-Claim
In the District Court of the United States, Southern District of California, Central Division, No. 15768-BH, March 31, 1954
Priority of liens: Equitable or secret lien.--The recorded tax lien of the United States was superior to an unpaid vendor's lien where the latter was purely equitable in nature. Equitable liens because of their secret nature will not be enforced against creditors without notice, either actual or constructive.
Property subject to lien: Community property.--Property in question was community property notwithstanding that the form of deed granting it was one of joint tenancy. The spouses considered it as community property and, consequently, the entire real property was subject to the government's claim based on a tax lien.
The unpaid vendor's lien upon which the plaintiff bases his claim for a priority over the recorded tax lien of the
It is my view that the entire real property in question is subject to the government's claim. It is well settled in
I assume that the parties will agree on a form of decree of foreclosure, wherein the plaintiff shall receive any surplus after the government's lien is satisfied.
Findings and decree to be filed within ten days from date hereof.
Findings of Fact and Conclusions of Law (March 31, 1954)
This cause came on regularly for trial on the 1st day of March, 1954, and was continued to March 5, 1954, for further proceedings, before the Court without a jury, Oregon Smith appearing as attorney for the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith; Laughlin E. Waters, United States Attorney for the Southern District of California and Edward R. McHale, Assistant U. S. Attorney for said District, Chief, Tax Division, appearing for the defendant and cross-claimant, United States of America; the defendants and cross-defendants, Melvin Hamilton and Eva Hamilton, having been served with both the Complaint and Cross-claim and not having appeared, and their defaults having been entered; and the defendants and cross-defendants, Jane Doe and John Doe Company, a corporation, having been dismissed as such, and evidence both oral and documentary having been introduced and the cause having been submitted to the Court, and the Court being fully advised in the premises, finds the facts as follows:
Findings of Fact
I. The defendant and cross-claimant, United States of America, is a corporation sovereign and body-politic, and by statute (Title 28, U. S. C. §2410) consented to be sued in the Superior Court of the State of California, in and for the County of San Bernardino, in an action to foreclose a lien against real property, and thereafter removed the matter to this Court pursuant to Title 28, U. S. C. §1444, and is entitled to the affirmative relief of foreclosure of its liens pursuant to Title 28, U. S. C. §2410(c).
II. This Court has no jurisdiction over the defendant
III. Prior to August 26, 1952, the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, were the owners of record of that certain real property located in the City of Ontario, County of San Bernardino, State of California, particularly described as follows, to-wit:
"The East 1/2 of
SAVING AND EXCEPTING an undivided 1/2 interest in the West Four Feet of the said East half of Lot 25; TOGETHER with an undivided 1/2 interest in the East Four Feet of the West half of said
subject to a trust-deed securing a note in the principal balance remaining unpaid at that date of $5,476.40 executed by Dale Walter Smith, Trustor, to Pioneer Title Insurance and Trust Company, a California corporation, Trustee, to secure an original indebtedness of $7,000 in favor of the First National Bank of Ontario, a national banking association.
IV. On or about August 26, 1952, the Smiths entered into an escrow with the defendants and cross-defendants Hamilton, for the sale of the aforementioned real property to the Hamiltons for the total consideration of $8,500, $1,000 to be paid in cash through the escrow, $5,476.40 by assumption of the trust deed in favor of the First National Bank of Ontario, and $1,723.60 by two promissory notes executed by the Hamiltons, one in the sum of $500 and the other in the sum of $1,523.60, both of which were unsecured. The escrow agent was the First National Bank of
V. Melvin Hamilton and Eva H. Hamilton raised the $1,000 in cash required to be paid into escrow by borrowing money from a finance company on a note secured by a chattel mortgage on their household furnishings which was their community property. From the time of the completion of the escrow, in November 1952, until the commencement of this action in July 1953, the
VI. On or about August 26, 1952, the Hamiltons made, executed and delivered to the escrow agent their promissory note in writing, in the principal sum of $500, dated said date, and payable to the order of the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith on or before September 29, 1952, with interest at the rate of 6% per annum from the date thereof until paid, payable at maturity; at all times herein mentioned, the Smiths have been and still are the owners and holders of said note; no part of the principal of said note or any of the interest thereon has been paid, although the Smiths have demanded payment of the same from the said Hamiltons; the Hamiltons have neglected, failed and refused, and still neglect, fail and refuse, to pay said sum of $500, or any part thereof, or any of the interest on said note, and the sum of $500, together with interest thereon at the rate of 6% per annum from August 26, 1952, which is now wholly due, owing and unpaid from Melvin Hamilton and Eva H. Hamilton, and each of them, to the Smiths.
VII. On or about August 26, 1952, Melvin Hamilton and Eva H. Hamilton made, executed and delivered to the Smiths their promissory note in the principal sum of $1,523.60, payable to the order of the Smiths in installments, including interest on the unpaid balance of said principal at the rate of 6% per annum from the date of said note until paid, of $40.00 per month, or more, on the 14th day of each month, commencing on October 14, 1952, and continuing until said principal and interest should be paid; at all times herein mentioned the Smiths have been and still are the owners and holders of said note, said note by its terms provided that if default should be made in the payment of any such installment, then the whole of said principal sum and the interest thereon should become immediately due at the option of the holders thereof. No part of the principal of said promissory note, or any of the interest thereon, has been paid. The Hamiltons made default in the payment of the installment of $40.00 due on October 14, 1952, and of the installment of $40.00 due on November 14, 1952; no part of said installments, or either of them, has been paid by the Hamiltons, or either of them to the Smiths, although the Smiths have many times demanded payment of the same. On or about November 25, 1952, the Smiths notifed the Hamiltons in writing of the non-payment of said installments and demanded payment of same, and notified them that should they fail to pay the same on or before November 29, 1952, plaintiffs would elect to declare the whole sum of principal and interest due and to become due under said promissory note immediately due and payable; that thereafter and on or about December 2, 1952, the Smiths notified the Hamiltons in writing that the Smiths elected to declare, and thereby declared the entire balance of principal and interest due, and to become due, under said promissory note immediately due and payable and demanded payment of said sum of $1,523.60, with interest thereon at the rate of 6% per annum from August 26, 1952, and the plaintiffs do hereby so elect. The Hamilton's have neglected, failed and refused, and still neglect, fail and refuse to pay said sum of $1,523.60, or any part thereof, or any of the interest thereon, to the Smiths, and that said sum of $1,523.60, together with interest thereon at the rate of 6% per annum from August 26, 1952, until paid is now wholly due, owing and unpaid from the Hamiltons, and each of them to the Smiths.
VIII. The said notes set out in paragraphs VI and VII above, by their terms each provided that if action should be instituted in any Court to enforce payment of the same, then the
IX. The United States of America filed with the
X. On December 30, 1952, the Commissioner of Internal Revenue assessed against the defendant Melvin Hamilton doing business as Melvin Hamilton Electric, withholding and employment taxes for the third quarter of 1952 in the sum of $1,504.73 taxes and $15.05 interest, for a total assessment of $1,519.78; the assessment list showing the assessment of the aforesaid taxes and interest was received in the office of the Director of Internal Revenue at Los Angeles, California, on January 5, 1953; notice and demand for the payment of the taxes and interest so assessed was made upon the taxpayer shortly thereafter, but no payment was made and no part thereof was paid on March 4, 1953, as alleged in the complaint, a notice of tax lien was filed in the office of the County Recorder of San Bernardino County, California, as Nos. 4986 and 263; remaining due, owing and unpaid is the sum of $1,654.95, representing the aforesaid assessment together with penalties and interest computed to August 31, 1953; further interest continues to accrue on the aforesaid assessment at the statutory rate of six per centum per annum from September 1, 1953, until paid; lien filing fees of $1.00 have been incurred.
XI. On March 6, 1953, the Commissioner of Internal Revenue assessed against Melvin Hamilton, doing business as Melvin Hamilton Electric, withholding and employment taxes for the 4th quarter 1952 in the sum of $658.16; the assessment list showing the assessment of the aforesaid tax was received in the office of the Director of Internal Revenue at Los Angeles, California, on March 9, 1953; notice and demand for the payment of the tax so assessed was made on the taxpayer shortly thereafter, but no payment was made and no part thereof was paid; on April 17, 1953, as alleged in the complaint, a notice of tax lien was filed in the office of the County Recorder of San Bernardino County, California, as No. 5044; remaining due, owing and unpaid is the sum of $709.25, representing the aforesaid assessment together with penalties and interest computed to August 31, 1953; further interest continues to accrue on the aforesaid assessment at the statutory rate of six per centum per annum from September 1, 1953, until paid; lien recording fees of $1.00 have been incurred.
XII. Internal Revenue tax liens in favor of the cross-claimant, United States of America, arose upon all the property and rights to property which then belonged or thereafter came into the possession of the cross-defendant Melvin Hamilton, or the cross-defendant Eva H. Hamilton, on the dates indicated herein that the Director of Internal Revenue received the assessment lists carrying the assessments of Federal Internal Revenue taxes against Melvin Hamilton, and said liens became valid as to all the world upon filing notice thereof in the office of the County Recorder of San Bernardino County, California.
XIII. The Hamiltons purchased the real property with community funds during the time their marital community was indebted to the cross-claimant, the
XIV. The aforesaid real property purchased by the
XV. All the community property of Melvin Hamilton and Eva H. Hamilton is liable for the debts incurred by Melvin Hamilton in his community business venture of his electric contracting business, including his liability to the
Conclusions of Law
From the foregoing facts, the Court concludes as follows:
I. The Court has jurisdiction of this action, and of the
II. Internal Revenue tax liens in favor of the cross-claimant, United States of America, arose upon all of the property and rights to property which then belonged or which thereafter came into the possession of the defendants and cross-defendants, Melvin Hamilton and Eva H. Hamilton, on the dates indicated in the findings that the Collector of Internal Revenue received the assessment lists carrying the assessments of Federal internal revenue taxes against said defendant and cross-defendant Melvin Hamilton, and said liens became valid as to all the world, including all the cross-defendants herein upon filing of notice thereof in the office of the County Recorder of San Bernardino County, California.
III. The United States of America has a lien against the property and rights to property of Melin Hamilton by reason of Internal Revenue taxes for the third quarter of 1952 in the sum of $1,654.95, together with interest at the rate of 6 per centum per annum on the sum of $1,519.78 from September 1, 1953, until paid, and lien filing fees of $1.00, which sums are a lien upon the hereinafter described real property, prior and superior to the rights of all cross-defendants herein.
IV. The United States of America has a lien for Internal Revenue taxes against Melvin Hamilton, doing business as Melvin Hamilton Electric for Internal Revenue taxes for the fourth quarter 1952 in the sum of $709.25 together with interest on the sum of $658.16 at the statutory rate of 6 per centum per annum from September 1, 1953, until paid, and lien filing fees of $1.00, which sums are a lien upon the hereinafter described real property, prior and paramount to the interest of all cross-defendants herein.
V. The cross-claimant the
"The East 1/2 of
SAVING AND EXCEPTING an undivided 1/2 interest in the West Four Feet of the said East half of Lot 25; TOGETHER with an undivided 1/2 interest in the East Four Feet of the West half of said
which liens are prior and paramount to liens of all other parties herein and cross-claimant is entitled to a judgment foreclosing its tax liens against the herein described real property and ordering the sale of the property by the Marshal of this Court, proceeds thereof to be applied as set forth in Paragraph VII hereinafter.
VI. The plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, have a vendors' lien upon the real property, which is a secret lien, subsequent and subordinate to the aforementioned liens of the
VII. The defendant and cross-claimant,
FIRST: To the payment of Marshal's fees, disbursements, and expenses of sale;
SECOND: To the costs incurred in this action and by the defendant and cross-claimant, United States of
THIRD: To the United States of America the sum of $2,364.20, as of August 31, 1953, plus interest at the rate of six per centum per annum on the sum of $2,177.94 from said day to date of payment, and the further sum of $2.00 for its lien filing fees;
FOURTH: To the costs incurred in this action by the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith;
FIFTH: To plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith the sum of $2,023.60 with interest thereon at the rate of six per centum per annum from August 26, 1952, together with the sum of $500.00 as an attorney's fee for plaintiffs' attorney for the prosecution of the within action;
and that all of said sums be declared to be a lien upon said premises hereinafter described.
VIII. The real property shall be sold according to law by the United States Marshal for this District and the proceeds be applied to the payments of amounts as set forth in Paragraph VII hereinabove. If the proceeds of said sale be insufficient to pay amounts as aforesaid, and it shall so appear from the Marshal's return, a further hearing shall be had for the purpose of establishing the amount of the deficiency judgment or judgments, if any, to be entered for the cross-claimant against the cross-defendant Melvin Hamilton and for the plaintiffs Walter Smith and Johanna Smith, against the defendants Melvin Hamilton and Eva H. Hamilton.
IX. The liens of the defendant and cross-claimant, United States of America, the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, are valid and subsisting liens upon the lands and premises; and the United States of America and Dale Walter Smith and Johanna Smith are entitled to judgment and decree of this Court foreclosing said liens and to carry out the foregoing and also providing that any party of this action may become a purchaser at the sale of said property, said purchaser, or purchasers to be let into possession of said premises so sold after the expiration of the redemption period and that a writ of assistance issue therefor, if necessary, without notice. The defendant and cross-claimant,