Hinkley & Donovan v. Paine

Decision Date14 January 1977
Docket NumberCiv. A. No. 76-19,76-201.,76-104
Citation424 F. Supp. 1013
CourtU.S. District Court — District of New Hampshire
PartiesHINKLEY & DONOVAN v. William D. PAINE, III, et al. The EXETER BANKING COMPANY v. EXETER DEPOT, INC., et al. INDIAN HEAD NATIONAL BANK OF PORTSMOUTH v. UNITED STATES of America and State of New Hampshire.

Gerald C. Miller, Trial Atty., Tax Div., Dept. of Justice, Washington, D. C., for the U. S.

James C. Sargent, Jr., Asst. Atty. Gen., Concord, N. H., for State of N. H.

John M. Winiarski, Shaines, Madrigan & McEachern, Portsmouth, N. H., for Indian Head Nat. Bank of Portsmouth.

PARTIAL SUMMARY JUDGMENT

BOWNES, District Judge.

These three interpleader actions were initially commenced in the State Court and removed here by the United States. The facts have been stipulated in each case, and they have been consolidated because the primary parties and the issues of law are the same in each.

The basic issue is whether the United States or the State of New Hampshire has a priority interest in collecting their respective claims for unpaid taxes. A secondary issue is whether attorneys' fees and costs should be paid to the plaintiffs before satisfying the claims of the other parties. The statutes involved are 26 U.S.C. §§ 6321-6323 and 6331, and NH RSA 78-A:7, 20 and 21.

The Federal Courts are faced with the recurring problem of whether a lien created by a state statute takes priority over a federal tax lien. United States v. Equitable Life Assurance Society, 384 U.S. 323, 86 S.Ct. 1561, 16 L.Ed.2d 593 (1966); cf. United States v. Town of Marlborough, 305 F.Supp. 718 (D.N.H.1969); United States v. Town of Pittsfield, 302 F.Supp. 316 (D.Me. 1969). This is because federal law, not state law, determines the priority between a federal tax lien and competing liens. Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Acri, 348 U.S. 211, 75 S.Ct. 239, 99 L.Ed. 264 (1955); United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53 (1950); Town of Marlborough, supra, 305 F.Supp. at 720. The reason for applying federal law is the desirability of a uniform application of federal tax laws. United States v. Gilbert Associates, Inc., 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953).

The provision of the Internal Revenue Code creating the federal tax liens involved in these cases does not expressly confer upon them priority over competing liens. 26 U.S.C. § 6321. Instead, the common law principle that "the first in time is the first in right" is applied, and the priority of liens depends on the time competing liens attach and become choate. Equitable Life, supra, 384 U.S. at 328, 86 S.Ct. at 1564; United States v. Pioneer American Insurance Company, 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963); United States v. New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). There are certain classes of secured creditors and other parties with an interest in the property to which a federal lien has attached who are protected or given priority by the Internal Revenue Code. 26 U.S.C. § 6323. This will be treated separately, infra.

One other consideration is whether or not any of the debtors are insolvent. "Whenever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied. . . ." 31 U.S.C. § 191. The facts with regard to this issue have not been stipulated, and the issue has been expressly reserved.

The state liens in these cases can only prevail over the federal tax liens if they are choate and attached before the federal liens. United States v. Vermont, 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964); New Britain, supra, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520.

A lien is choate "when 1 the identity of the lienor, 2 the property subject to the lien, and 3 the amount of the lien are established." New Britain, id. at 84, 74 S.Ct. at 369.

IMPLIED LIEN

The State contends that an implied lien is established under NH RSA 78-A:7. Part II of that statute provides:

Each operator shall keep books and records in a form acceptable to the department showing the amount of all taxes collected. The operator shall pay the taxes over to the state as provided in this section. If the department believes that special action is necessary because payment of taxes collected may be in jeopardy, it may direct an operator to keep all taxes collected separate from any other funds. The department may require that the taxes be periodically deposited in a bank designated by the department, in an account in the name of the commission. The department may withdraw these tax collections from the bank account and apply them to the payment of the taxes due from the operator. When an operator commingles tax money with money belonging to him, the claim of the state for the tax is traceable, is enforceable against all other claims and takes precedence over all other claims against the commingled funds. No taxes collected by an operator under this chapter may be sent outside the state without the written consent of the department.

None of the three elements of a choate lien are met by this "implied lien" at the time of collection by the operator. The State is not aware of the transaction, so the identity of the lienor is not known; the property subject to the lien has not been identified and segregated; nor is the amount of the lien known or established. Had the State exercised its statutory authority to "require that the taxes be periodically deposited in a bank designated by the department, in an account in the name of the commission," the segregated funds, their amount, and the identity of the lienor would be clearly established, and the lien would be choate. As the United States notes in its memorandum at page 7, "The deposited taxes would no longer belong to the taxpayer-operator, but would belong to the State . . .."

The State's contention that an implied lien is created at all is of dubious merit, Flack v. Agency, 96 N.H. 335, 76 A.2d 788 (1950); cf. Allen v. Bemis, 99 N.H. 247, 108 A.2d 549 (1954); but:

There is no dispute that the State of New Hampshire has, by statute, acquired liens upon ". . . all property and rights to property . . ." of each taxpayer-operator for unpaid meals and rooms taxes, plus statutory additions, and that the lien arose at the time demands for payment of the taxes were made. RSA 78-A:21. U. S. Memorandum, p. 5.
STATUTORY LIEN

The next question is whether the statutory lien was choate at the time demands for payment were made by the State or at some other time before assessment was made by the United States.

In applying the three-part New Britain test to determine the choateness of the State's lien, I note the similarity in the phraseology and structure of the state and federal statutes which create and enforce the liens.1 See United States v. Vermont, 377 U.S. at 351, 352, 354, 84 S.Ct. 1267. A comparison of the two statutes reveals the following:

1. Identity of Lienor
New Hampshire is identified as the lienor when:
any operator required to collect and transmit a tax under this chapter neglects or refuses to pay the tax after demand. . . . NH RSA 78-A:21.
The United States is identified as the lienor when:
any person liable to pay any tax neglects or refuses to pay the same after demand. . . . 26 U.S.C. § 6321.
2. Property Subject to the Lien
The New Hampshire language is:
upon all property and rights to property whether real or personal, belonging to the operator. NH RSA 78-A:21.
The Federal language is:
upon all property and rights to property, whether real or personal, belonging to such person. 26 U.S.C. § 6321.
3. Amount of the Lien
The State statute sets the lien as:
the amount of the tax, together with all penalties and interest provided for in this chapter and together with any costs that may accrue in addition to the tax . . .. NH RSA 78-A:21.
The Federal language is:
the amount of the tax (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) . . .. 26 U.S.C. § 6321.

There is no substantive difference between the requirements for choateness of the state and federal statutes.

Vermont, supra, is the closest case on point that I have found. In that case, the State of Vermont assessed a solvent tax-payer for past due state taxes pursuant to statutory language virtually the same as that of New Hampshire in this case. The United States assessment followed shortly. The State sued and obtained a judgment in State Court. Then the United States sued in Federal Court to uphold its lien. The District Court held that the State lien had priority and was upheld by the United States Supreme Court.

The United States seeks to distinguish that case because "the statutory scheme in each of those cases Vermont and New Britain provided for distraint or levy without intervening judicial proceedings." Memorandum, p. 6. The Court in Vermont, supra, 377 U.S. at 359, 84 S.Ct. 1267, did note that the statutes involved in Vermont and New Britain were "summarily enforcible," but this was not basic to its discussion. Id. at n.12. The record in New Britain does not disclose whether New Britain, Connecticut, foreclosed on its lien by administrative process, but in Vermont the State did not foreclose by administrative process even though it had that statutory right.

THE FILING ISSUE

The next issue is whether New Hampshire is a "judgment lien creditor" or a "holder of a security interest" within the meaning of 26 U.S.C. § 6323(a) which provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed by the Secretary or his delegate.

In Gilbert Associates, supra, 345 U.S. at 363-364, 73 S.Ct. 701, 703, the Supreme Court held that a New Hampshire town was...

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