Aetna Casualty and Surety Co. v. Sherwood Distilling Co.

• Citation: 271 F. Supp. 381
• Decision Date: 05 July 1967
• Docket Number: Civ. No. 11956.
• Parties: The AETNA CASUALTY AND SURETY COMPANY, a corporation, v. SHERWOOD DISTILLING COMPANY, Inc., a corporation, the United States of America, John L. Moore, Administrator of General Services, County Commissioners of Carroll County, a municipal corporation, the Mayor and Common Council of Westminster, a municipal corporation, Union Trust Company of Maryland, a corporation, Peoples First National Bank and Trust Company, a national banking corporation, William Hoffenberg, Louis Mann, Heat and Power Corporation, a corporation, Joseph E. Seagram & Sons, Inc.
• Court: United States District Courts. 4th Circuit. United States District Court (Maryland)

271 F. Supp. 381

The AETNA CASUALTY AND SURETY COMPANY, a corporation, v. SHERWOOD DISTILLING COMPANY, Inc., a corporation, the United States of America, John L. Moore, Administrator of General Services, County Commissioners of Carroll County, a municipal corporation, the Mayor and Common Council of Westminster, a municipal corporation, Union Trust Company of Maryland, a corporation, Peoples First National Bank and Trust Company, a national banking corporation, William Hoffenberg, Louis Mann, Heat and Power Corporation, a corporation, Joseph E. Seagram & Sons, Inc.

Civ. No. 11956.

United States District Court D. Maryland.

July 5, 1967.

COPYRIGHT MATERIAL OMITTED

William B. Kempton, Baltimore, Md., and Alexander M. Heron and John A. Whitney, Washington, D. C., for plaintiff.

Ward B. Coe, Jr., Charles B. Keenan, Jr., and Anderson, Coe & King, Baltimore, Md., for Sherwood Distilling Company, Inc., William Hoffenberg and Louis Mann.

Stephen H. Sachs, U. S. Atty., and Roger C. Duncan, Asst. U. S. Atty., Baltimore, Md., for United States and John L. Moore.

A. Earl Shipley, Westminster, Md., for County Commissioners of Carroll County.

D. Eugene Walsh, Robert J. Martineau and Walsh, Fisher & Martineau, Westminster, Md., for Mayor and Common Council of Westminster.

Morton H. Perry, Baltimore, Md., for Union Trust Company.

Richard F. Cleveland and Semmes, Bowen & Semmes, Baltimore, Md., for Pittsburgh National Bank (formerly Peoples First National Bank and Trust Co.)

Morris Rosenberg, Baltimore, Md., for Joseph E. Seagram & Sons, Inc.

THOMSEN, Chief Judge.

Plaintiff, Aetna Casualty and Surety Company (Aetna), upon equitable principles of subrogation, seeks to enforce the lien rights of the United States arising under section 2800(e) (1) of the Internal Revenue Code, 1939, quoted in the next paragraph of this opinion, against property belonging to the defendant Sherwood Distilling Company, Inc. (Sherwood), located in the City of Westminster, Carroll County, Maryland. Joined as parties defendant are all persons who have any lien or recorded claim against the property.¹ Jurisdiction is claimed and exists under 28 U.S.C. §§ 1331, 1332, 1340 and 2410. Aetna prays that its claimed lien be enforced and be declared superior to all other claims against the property, that the Court appoint receivers to sell the property and that the proceeds of sale be first used to satisfy its claim.²

Aetna was surety for Sherwood on certain bonds conditioned inter alia upon Sherwood's payment of the tax on distilled spirits manufactured and stored in the property in question, imposed by section 2800, I.R.C., 1939,³ which provided, in pertinent part:

"§ 2800. Tax

"(a) Rate

"(1) Distilled spirits generally. There shall be levied and collected on all distilled spirits in bond or produced in or imported into the United States an internal revenue tax at the rate of $10.50 on each proof gallon or wine gallon when below proof and a proportionate tax at a like rate on all fractional parts of such proof or wine gallon, to be paid by the distiller or importer when withdrawn from bond.

* * * * * *

"(C) Time of attachment. The tax shall attach to distilled spirits, spirits, alcohol or alcoholic spirit, within the meaning of subsection (b) of section 2809 as soon as this substance is in existence as such, whether it be subsequently separated as pure or impure spirit, or be immediately, or at any subsequent time, transferred into any other substance, either in the process of original production or by any subsequent process.

* * * * * *

"(e) Lien.

"(1) Property subject to. The tax shall be a first lien on the spirits distilled, the distillery used for distilling the same, the stills, vessels, fixtures, and tools therein, the lot or tract of land whereon the said distillery is situated, and on any building thereon from the time said spirits are in existence as such until (except as provided in paragraph (3)), the said tax is paid."

The principal issues to be determined at this time are: (1) when the lien created by section 2800(e) (1), supra, attached; and (2) whether Aetna, by paying the taxes, interest and penalties, became subrogated to that lien. Other issues include: (3) the extent of the area to which the lien attached; (4) the rights of the Administrator of GSA as successor to RFC; and (5) questions of priority among the several defendants.⁴

Most of the essential facts have been stipulated. The others are necessary or reasonable inferences from the stipulated facts and exhibits.

Facts

Since sometime before 1945 Sherwood owned about 2.82 acres of land in Westminster, Carroll County, Maryland.⁵ The land is improved by a distillery and warehouse, which Sherwood operated as Registered Distillery No. 12—Maryland and Internal Revenue Bonded Warehouse No. 12—Maryland, from 1945 or earlier until 1952. The entire 2.82 acres was not included in the area described in the distiller's notice, Form 27-A, required by Title 26, Chapter I, of the 1940 Regulations.⁶ Part of the property not included was improved by an office building and other construction; part was unimproved. The Director, Alcohol and Tobacco Tax Division of the Internal Revenue Service, has stated: "We would not consider the lien under section 2800 (e) as attaching to land or buildings other than as described in Form 27-A".

In the operation of the distillery and warehouse Sherwood gave bonds to the United States as required by law. By bond dated April 18, 1941, designated a Transportation and Warehousing Bond, Sherwood, with Aetna as its surety, bound itself to the United States in the penal sum of $200,000. The condition of the bond was that Sherwood should pay or cause to be paid the tax imposed by law then or thereafter in force together with interest and penalties on all distilled spirits then or thereafter deposited in the warehouse, before the withdrawal therefrom and within eight years from the date of the first entry thereof, as well as on distilled spirits then or thereafter in transit thereto from any other Internal Revenue Bonded Warehouse, and further that it should comply with all other requirements of law and regulations respecting such distilled spirits and the warehouse in which they were deposited.

By Consent of Surety dated March 27, 1945, Sherwood and Aetna consented that the Transportation and Warehousing Bond of April 18, 1941, be changed "to support Distiller's Bond, Form 30, executed March 27, 1945, effective May 1, 1945, in the penal sum of $100,000 and written without surety to cover the operation of Registered Distillery No. 12." The effective date of the Consent was May 1, 1945. The obligors agreed to remain bound by the terms of the bond as changed to all intents and purposes as if a new bond with such terms were currently executed. By the Distiller's Bond, Form 30, Sherwood bound itself (and by its Consent, Aetna became bound) to the United States in the penal sum of $100,000 for the faithful compliance of all provisions of law and regulations relating to the duties and business of distillers and the payment of all penalties or fines imposed upon it in that connection and the payment of all taxes imposed then or thereafter by law together with penalties and interest on distilled spirits produced by it.⁷

On March 30, 1946, Sherwood executed a similar Distiller's Bond in favor of the United States covering the period beginning May 1, 1946, and on the same day Sherwood as principal and Aetna as surety executed another and similar Consent of Surety to support the new Distiller's Bond. Aetna was therefore bound as surety on the two Distiller's Bonds, each in the amount of $100,000, covering the respective periods May 1, 1945, to April 30, 1946, and May 1, 1946, to April 30, 1947. During each of those two fiscal years Sherwood distilled certain spirits; as a result thereof, the tax referred to in section 2800, Internal Revenue Code, 1939, not only attached to those spirits, but also became a first lien on the distillery, etc., as soon as those spirits came into existence as such. The spirits were duly placed in the bonded warehouse.

In accordance with the applicable statutory provisions,⁸ assessments were made by the Collector of Internal Revenue at the expiration of eight years from the date of distillation upon spirits distilled during each of those periods.

On April 5, 1954, the United States filed notice of tax lien on account of the unpaid taxes on those distilled spirits in the amount of $199,188.10. Thereafter similar notices of lien were filed on April 30, 1955, for $58,144.80; on April 30, 1955, for $33,736.50 and on November 10, 1955, for $54,516.00. All of these notices were filed in the office of the Clerk of the Circuit Court for Carroll County and still remain on record.

On July 25, 1957, the United States, Sherwood, Aetna, Union Trust and Peoples First National Bank and Trust Company of Pittsburgh (now Pittsburgh National Bank) entered into an agreement reciting the tax liability of Sherwood on account of whiskey then in its warehouse in the total amount of $263,896.50. The agreement identified the assessment lists and lots of whiskey by number, their original entry date, the quantity of spirits and the amount of the assessment in each instance. The agreement recited the desire of all the parties to sell the whiskey so that the proceeds of the sale might be applied in payment and reduction of the taxes. It was agreed that Sherwood and the banks, which made claim to the whiskey by reason of ownership of certain warehouse receipts, should sell or cause to be sold the lots of whiskey at the best terms possible and turn over the total proceeds of those sales for application to the taxes, interest and penalties owing in connection therewith. It was further agreed that if the total receipts from the sale of each lot were not sufficient to pay the total tax, interest and penalty, Aetna would pay an amount equal to the deficit resulting from...