In re Caswell Const. Co.

• Citation: 13 F.2d 667
• Parties: In re CASWELL CONST. CO., Inc.
• Decision Date: 12 July 1926
• Court: U.S. District Court — Northern District of New York

13 F.2d 667 (1926)

In re CASWELL CONST. CO., Inc.

District Court, N. D. New York.

July 12, 1926.

Oliver D. Burden, U. S. Atty., and H. V. S. Groesbeck and B. Fitch Tompkins, Asst. U. S. Attys., all of Syracuse, N. Y., for the United States.

William F. Canough and Irving J. Higbee, both of Syracuse, N. Y., for lienors.

COOPER, District Judge.

This is a petition by mechanics' lienors for an order directing the trustee in bankruptcy to pay their liens before paying the claim of the United States for income taxes. No question is raised of the right to have the referee in bankruptcy first pass on this question.

On November 22, 1920, an involuntary petition in bankruptcy was filed against the Caswell Construction Company, and the company was adjudicated a bankrupt on January 17, 1921. When the petition was filed the bankrupt was engaged in performing certain construction work for the city of Syracuse, and there was due to the bankrupt for work performed the sum of $17,727.27. On December 17, 1920, James K. Bryant was appointed receiver of the bankrupt estate, and a trustee was elected February 2, 1921. Prior and subsequent to the filing of the petition in bankruptcy and within the four months permitted by the Lien Law of New York state (Consol. Laws, c. 33), from the furnishing of the last item of labor or material several mechanics' liens were duly filed against the fund in the possession of the city of Syracuse.

An action to foreclose these liens was instituted in the Supreme Court of New York State on February 3, 1921. On application to this court an order was made allowing the trustee to be made a party to the action in the state court. During the pendency of this action in the state court a stipulation was entered into by the lienors and the trustee, upon which an order of this court was made directing the city of Syracuse to transfer to the trustee the money due the bankrupt pending the final determination of the action.

On February 2, 1923, a judgment of the state Supreme Court was entered declaring the liens valid in the sum of $24,609.30 and ordering the payment thereof in order of priority. The trustee appealed from this judgment to the Appellate Division of the Supreme Court. The appeal was later dismissed.

On March 28, 1924, or April 28, 1924, a notice of assessment of additional income taxes for the year 1920 against the Caswell Construction Company, amounting to about $19,000, was filed with the Collector of Internal Revenue of the proper district. It is this additional income tax which the lienors claim is subordinate to their liens.

The government opposes the petition of the lienors and insists that the income tax in question must be paid before the mechanics' liens. If so paid, there will be nothing for the lienors.

The question of priority under the Bankruptcy Act as between the government's claim of additional income taxes later assessed and mechanics' liens earlier filed seems not to have been decided by any court. At least, no case deciding this question is given in the relatively hasty brief of the attorneys for the mechanics' lienors nor in the more voluminous brief of the government counsel, and none has been found by the industry of the court.

The sections of the Bankruptcy Act involved are 64a and 67d, being Comp. St. §§ 9648, 9651.

Section 64a reads as follows: "Debts which have priority: (a) The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, state, county, district, or municipality in advance of the payment of dividends to creditors, and upon filing the receipts of the proper public officers for such payment he shall be credited with the amount thereof, and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court."

Section 67d reads thus: "Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall, to the extent of such present consideration only, not be affected by this act."

There is no provision of the Bankruptcy Law expressly giving government taxes priority of payment over liens. The government contends that section 64a controls and requires that the federal taxes be first paid. The lienors contend that their liens are protected by section 67d and are not affected by section 64a.

The first consideration then is whether or not mechanics' liens as created by the laws of the state of New York are included within the term "liens" in section 67d. The words "liens given or accepted in good faith" would seem to exclude statutory liens or any liens other than voluntary liens, such as mortgages and the like. Statutory liens and common-law liens, like those of lodging house keepers, are neither "given" nor "accepted" in good faith or otherwise. The only liens that can be given or accepted in good faith would seem to be voluntary liens. Statutory and common-law liens are not voluntary liens, but are exactly the opposite, namely, involuntary liens. They arise by operation of law, with or without some affirmative action on the part of the lienors, and without any participation on the part of the owner of the property. They are not given voluntarily, but they are imposed involuntarily upon the property of the owner, who may be called a lienee. There is authority for holding that statutory liens do not come under and are not included within the provisions of section 67d. In re Cramond (D. C.) 145 F. 966-976.

The weight of authority, however, is that liens both voluntary and statutory do come within the provisions of section 67d. In re Yoke Vitrified Brick Co. (D. C.) 180 F. 235, 238; Norris v. Trenholm, 209 F. 827, 126 C. C. A. 551; Re Purvis (D. C.) 293 F. 102, 106, 108; City of Richmond v. Bird, 249 U. S. 174, 39 S. Ct. 186, 63 L. Ed. 543; In re San Joaquin Packing Co. (C. C. A.) 295 F. 311.

The lien in the City of Richmond Case, supra, arose under a Virginia statute giving a landlord a lien on the goods and chattels of his tenant for rent due. Under that statute the lien attaches upon a levy on the goods and chattels of the tenant under a distress warrant. The landlord's lien under this law of Virginia is a lien of the same kind and nature as the mechanic's lien under the Lien Law of the state of New York. The Supreme Court held that such lien was preserved by section 67d of the Bankruptcy Law, and was superior to the lien of taxes due to the city of Richmond.

In Re San Joaquin Packing Co. (C. C. A.) 295 F. 311, the court in the Ninth circuit said: "The respondent's (mechanic's) lien on the building was not affected by the bankruptcy. Section 67d."

This court, therefore, feels itself bound by the decision of the highest court, to hold that mechanics' liens under the Lien Law of the state of New York come within the protection of section 67d of the Bankruptcy Act.

The City of Richmond Case, supra, was decided upon the language of 67d as it was prior to the amendment of 1910. The section was amended in that year and the words inserted "to the extent of such present consideration only." The amendment of 1910 can have no bearing on statutory liens. It was the evident purpose of the amendment to limit the protection of section 67d so far as voluntary liens, such as installment mortgages, buildings loan mortgages, and the like, are concerned, to the amount advanced thereon.

Even if the amendment applies to statutory liens, it may be presumed that the state court found the liens in the case at bar valid only for the amount of labor and material furnished up to the time of filing the liens.

With this preliminary question disposed of, we return to the main question as to whether mechanics' liens are to be preserved and remain unaffected under section 67d of the Bankruptcy Act or federal income taxes are to have priority under section 64a.

As was said in the City of Richmond Case, supra: "Section 64a directs that taxes be paid in advance of dividends to creditors; and `dividend' as commonly used throughout the act means partial payment to general creditors. In section 65b for example, the word occurs in contrast to payment of debts which have priority. And as the local laws gave no superior right to the city's unsecured claim for taxes we are unable to conclude that Congress intended by section 64a to place it ahead of valid lien holders."

As has been previously stated, there is no provision of the Bankruptcy Act other than section 64a which is claimed to give taxes any priority of payment over liens protected by 67d. Section 67d says that the liens included therein are not affected by any provisions of the Bankruptcy Act, hence it follows that the liens coming within section 67d are not subordinated to the prior payments of taxes under section 64a merely because such taxes are taxes.

Only in case such taxes are themselves liens having priority in time over mechanics' liens can taxes be given priority and paid before the payment of liens which come under section 67d. Of course, no provision of the law of the state of New York gives any lien to federal taxes. That would not be a subject for state legislation. No provision of federal statute was cited by the counsel on either side, giving income taxes the character of a lien, and none can be found by the court other than section 3186 of the Revised Statutes (Comp. St. § 5908), which reads: "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 from the time when the assessment list was received by the collector, except when otherwise provided, until paid, with the interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to such persons: Provided, however, that such lien shall not...