Adco Service, Inc. v. Graphic Color Plate

• Decision Date: 24 October 1975
• Citation: 137 N.J.Super. 39,347 A.2d 549
• Parties: , 36 A.F.T.R.2d 75-6342, 76-1 USTC P 9106 ADCO SERVICE, INC., a corporation, Assignee of Robert J. Morrow, Plaintiff, v. GRAPHIC COLOR PLATE, a division of Cybermatics, Inc., a corporation, and Graphic Color Plate, Inc., a corporation, Defendants and Third-Party Plaintiffs, v. UNITED STATES of America, Third-Party Defendant.
• Court: New Jersey Superior Court

Page 39

137 N.J.Super. 39

347 A.2d 549, 36 A.F.T.R.2d 75-6342,

76-1 USTC P 9106

ADCO SERVICE, INC., a corporation, Assignee of Robert J.

Morrow, Plaintiff, v. GRAPHIC COLOR PLATE, a division of Cybermatics, Inc., a corporation, and Graphic Color Plate, Inc., a corporation, Defendants and Third-Party Plaintiffs, v. UNITED STATES of America, Third-Party Defendant.

Superior Court of New Jersey,

Law Division.

Oct. 24, 1975.

Rexford Lyon, Newark, for petitioner (Sobel & Lyon, Newark, attorneys).

Garland C. Tanks, Asst. U.S. Atty., for third-party defendant U.S. (Jonathan L. Goldstein, U.S. Atty., attorneys).

YANOFF, J.C.C., Temporarily Assigned.

This case is the second round of litigation resulting from an assignment of a contract by a person whose assets were subject to a lien for withholding taxes due the United States. For a complete understanding it is necessary to summarize the facts of that transaction.

Richard J. Morrow, as corporate officer, became indebted to the United States for withholding of FICA taxes. After he became so indebted he entered into a contract with defendant and third-party plaintiff Graphic Color Plate, Inc. (Graphic) to sell its products on a commission basis. A portion of the Government's claim was perfected into lien prior to the contract with Graphic, and another portion of it was perfected into lien after the contract with Graphic. All of the liens were perfected before Morrow became entitled to any commissions under his contract with Graphic. Effective April 19, 1971 Morrow entered into a contract with plaintiff, Adco Service, Inc. (Adco), under which he assigned to Adco all rights 'under such commissions arrangements and/or contracts.' All of the commissions in question were earned after April 19, 1971. In September 1973 Adco started suit against Graphic for the assigned commissions. Graphic joined the United States as third-party defendant. There was a dispute as to the amount due from Graphic under the commissions agreement. While that dispute was pending Graphic moved to interplead the sum it owed. The court deferred ruling on the motion for interpleader until the question of the amount due was determined. Thereafter, Adco and Graphic agreed upon $17,521.88 as the amount due and the court granted the interpleader. The tax lien is greater by far than this sum.

The contest then resolved itself into two issues: (1) whether Adco or the United States was entitled to the sum; (2) whether the interpleading party was entitled to counsel fees. These were resolved by an opinion dated February 25, 1974, which ruled that the United States was entitled to the money, and that no counsel fees would be allowed to the interpleading party. This ruling was affirmed by the Appellate Division under date of July 2, 1975.

Now the attorneys for Adco seek to enforce a lien upon the fund by virtue of a retainer agreement with Adco, dated September 21, 1973, for one-third of all sums collected, and a non-contingent fee of $750.

In brief, the attorneys' position is that they have a special or charging lien under N.J.S.A. 2A:13--5, which is prior to the lien of the United States for taxes, both because it is specifically given a super-priority under the Federal Tax Lien Act (26 U.S.C.A. § 6323) and upon equitable grounds because they created the fund to which the lien attached. Other grounds are urged which need not be considered, since I have concluded that the attorneys are entitled to priority over the lien of the United States.

The complexity of the problem of the order of priority between federal tax liens and liens created by state law is amply demonstrated by the opinions in Continental Fin. Inc. v. Cambridge Lee Metal, 100 N.J.Super. 327, 241 A.2d 853 (Law Div.1968), aff'd 105 N.J.Super. 406, 252 A.2d 417 (App.Div.1969), aff'd 56 N.J. 148, 265 A.2d 536 (1970), for reasons other than those set forth in the trial court. Legal writing on the subject has been profuse. See Plumb, 'Federal Liens and Priorities--Agenda for the Next Decade,' 77 Yale L.J. 228, 605, 1104 (1968); Coogan, 'Tax Liens and the U.C.C.' 81 Harv.L.Rev. 1369 (1968); Note, 86 Harv.L.Rev. 1570, and literature cited in 56 N.J. 148. Pertinent is the observation of Judge Goldberg in Texas Oil & Gas Corp. v. United States, 466 F.2d 1040, 1043 (5 Cir. 1972) ¹ 'We enter with some trepidation the tortured meanderings of federal tax lien law * * *'

The federal 'Choateness' doctrine was well summarized in Continental Finance, Inc., supra:

Under that doctrine, a recorded federal lien, though subordinate to an earlier 'specific and perfected' state lien, takes priority over any so-called inchoate lien which is not specific and perfected. The state lien is said to be specific and perfected (or choate) when 'there is nothing more to be done--when then the identity of the lienor, the property subject to the lien, and the amount of the lien are established.' (56 N.J. at 151, 265 A.2d at 537)

To the same effect, see United States v. Fidelity Philadelphia Trust Co., 459 A.2d 771, 773 (3 Cir. 1972); Plumb, Supra at 230.

In 1966 Congress amended the Federal Tax Lien Act by enacting, Inter alia, 26 U.S.C.A. § 6323 which reads in pertinent part:

(a) Purchases, holders of security interests, mechanic's lienors, and judgment lien creditors.--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 which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

(b) Protection for certain interests even though notice filed.--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid.

(8) Attorneys' liens.--With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States. (26 U.S.C.A. § 6323, at 61 and 63)

Whether the taxpayer has any property to which the federal lien can attach is determined by state law, Acquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960), but the order of priority of liens is determined by federal law. United States v. Acri, 348 U.S. 211, 75 S.Ct. 239, 99 L.Ed. 264 (1954); see Continental Finance, Inc., supra, 100 N.J.Super. 335, 241 A.2d 853. In the first phase of this litigation it was determined that the federal lien attached prior to the effective transfer of any rights to plaintiff primarily under the authority of Glass City Bank v. United States, 326 U.S. 265, 66 S.Ct. 108, 90 L.Ed. 56 (1945); Stokley Bros. & Co. Inc. v. Conklin, 131 N.J.Eq. 552, 26 A.2d 147 (Ch.1942); Kahn v. Rockhill, 132 N.J.Eq. 188, 28 A.2d 34 (Ch.1942), aff'd 133 N.J.Eq. 300, 31 A.2d 819 (E. &A.1943) . The question is whether despite that ruling the attorneys are entitled to what they claim is a 'superlien.' The attorneys take the position that as to them the 1966 amendments have ended the choateness test; the United States urges that this is true, if at all, only where the attorney represents the taxpayer.

Before the 1966 amendments to the Federal Tax Lien Act, there were cases which struck down an attorney's lien arising from contract for lack of choateness. United States v. Pioneer, 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963); United States v. Pay O Matic, 162 F.Supp. 154 (S.D.N.Y.1958); 'Federal Tax Lien--Competing Liens,' 94 A.L.R.2d 748, 782; Plumb, Supra at 682, n. 457.

The courts in our State had occasion to pass on aspects of the problem before 1966 in Equitable Life Assur. Society & Bagin, 45 N.J. 206, 212 A.2d 25 (1965), and Textile Products v. Feldan, 54 N.J.Super. 291, 148 A.2d 741 (Ch.Div.1959). In Textile Products the attorneys for a defendant who in effect interpleaded the fund was held not entitled to counsel fees as against a federal tax lien. In Equitable Life Assur. Society the competing claims were those of the attorney for a foreclosing mortgagee and a federal tax lien. The attorney claimed attorney's fees as part of taxed costs pursuant to New Jersey court rules. The trial judge held that the federal lien came first, and was reversed by the Supreme Court which distinguished Pioneer, supra, on the ground that the fees were part of taxed costs. However, the Supreme Court was in turn reversed by the United States Supreme Court (384 U.S. 323, 332, 86 S.Ct. 1561, 1566, 16 L.Ed.2d 593 (1966)), which said that

'We hold that the federal tax lien is entitled to priority over the claim for the attorney's fee under Rule 4:55--7(c).'

Thus, this is the first occasion a New Jersey court has had to pass upon a lien which arises as the result of contract after the enactment of the 1966 amendments.

Prior to these amendments there were cases which upheld an attorney's lien against a prior tax lien, despite lack of choateness, on equitable grounds. In United States v. Hubbell, 323 F.2d 197 (5 Cir.1963), a painting contractor whose assets were subject to a federal tax lien had a claim for extra work which he assigned to his general contractor. The general contractor successfully litigated the claim and obtained judgment. The court held that the contractor and its attorney were equitably entitled to a lien prior to the tax lien, because they created a fund for the benefit of the United States. The court said:

In order to insure that the efforts and expenses of appellees and their attorneys will be 'taken care of,' we remand this case to the trial court for a determination of the amount of reimbursement...