Avco Delta Corporation Canada Ltd. v. United States

• Decision Date: 18 April 1972
• Docket Number: No. 71-1321.,71-1321.
• Citation: 459 F.2d 436
• Parties: AVCO DELTA CORPORATION CANADA LIMITED, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant, and Canadian Parkhill Pipe Stringing, Inc., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

459 F.2d 436 (1972)

AVCO DELTA CORPORATION CANADA LIMITED, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant, and Canadian Parkhill Pipe Stringing, Inc., et al., Defendants-Appellees.

No. 71-1321.

United States Court of Appeals, Seventh Circuit.

Argued February 17, 1972.

Decided April 18, 1972.

COPYRIGHT MATERIAL OMITTED

Scott P. Crampton, Asst. Atty. Gen., Tax Div., Meyer Rothwacks, Chief, Appellate Section, U. S. Dept. of Justice, Washington, D. C., Donald B. Mackay, U. S. Atty., Springfield, Ill., Johnnie M. Walters, Asst. Atty. Gen., Crombie J. D. Garrett, Stephen Schwarz, Attys., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant.

Frank O. Wetmore, II, Edward J. Wendrow, George L. Saunders, Jr., Mark E. MacDonald, Theodore M. Miller, Chicago, Ill., Eugene L. White, Peoria, Ill., for plaintiffs-appellees; Winston, Strawn, Smith & Patterson, Sidley & Austin, Chicago, Ill., Kavanagh, Scully, Sudow, White & Frederick, Peoria, Ill., of counsel.

Before DUFFY, Senior Circuit Judge, SPRECHER, Circuit Judge, and ESCHBACH, District Judge.^*

SPRECHER, Circuit Judge.

What is the priority between a perfected tax lien and an earlier perfected chattel mortgage lien upon property not owned by the chattel mortgage debtor but owned by the taxpayer who had represented to the creditor that the debtor owned the property?

Three affiliated Parkhill corporations are involved: The parent corporation is Canadian Parkhill Pipe Stringing Ltd. ("Ltd."), which is the sole shareholder of the taxpayer, Canadian Parkhill Pipe Stringing, Inc., d/b/a Parkhill Pipeline, Inc. ("taxpayer"), and of the chattel mortgage debtor, Canadian Parkhill Construction Equipment, Ltd. ("Construction").

Avco Delta Corporation Canada Limited ("Avco"), which was in the business of financing the purchase and rental of construction equipment, loaned $600,000 in cash to Construction on November 13, 1969. Avco took a note for $674,301.32 and a chattel mortgage on 29 pieces of heavy construction equipment. In the chattel mortgage executed by Construction, the mortgagor expressly covenanted that it owned the mortgaged equipment. The equipment was allegedly leased by Construction to taxpayer for use on a pipe laying job in Bureau County, Illinois. Avco filed a financing statement, listing the 29 pieces of equipment, with the recorder of Bureau County, Illinois, where the equipment was located, on November 25, 1969, and with the Secretary of State of Illinois, on December 5, 1969. The financing statement listed Construction as debtor.

As part of the consideration for making the $600,000 loan to Construction, Avco received a "Guarantee and Indemnity" executed on October 23, 1969, by Ltd. and taxpayer, wherein they agreed to guarantee payment as principal debtors of debts and liabilities of Construction to Avco and to indemnify and save Avco harmless from all liabilities and claims arising as a consequence of Avco's dealing with Construction.

Avco received from Construction the first two installments on the loan on December 1 and 17, 1969, but on December 30, 1969, Construction communicated to Avco its inability to make further payments.

The government's tax claim is based upon withholding and F.I.C.A. taxes assessed against taxpayer for the third and fourth quarters of 1969 in the amount of $792,125.06. The assessment was made on February 6, 1970, and notices of liens were filed on February 9, 1970, with the Secretary of State of New York, where taxpayer was incorporated, and on February 16, 1970, with the recorder of Bureau County, Illinois.

On February 16, 1970, pursuant to a notice of seizure issued on that date, the Internal Revenue Service seized property located at Princeton, Bureau County, Illinois, including the 29 pieces of equipment listed in the Avco chattel mortgage and financing statement.

On April 20, 1970, Avco served Construction with formal demand for payment of the loan.

On May 26, 1970, after Avco and the government were unable to agree on the ownership of the 29 pieces of equipment or on the priorities of their respective liens, the three Parkhill companies, Avco and the Internal Revenue Service executed an agreement whereby property, including the disputed 29 pieces, was sold at auction on July 16, 1970. The proceeds of the sale, including $603,744 allocable to the 29 items, were deposited in escrow pending the determination of the rights of Avco and the government.

This action was filed in the district court on July 16, 1970, by Avco against the three Parkhill companies and the United States. Avco asked that its lien be adjudged a first lien on proceeds allocable to the 29 items.

After answers were filed by all defendants, Avco moved for entry of judgment on the pleadings supported by the affidavits of Avco and Parkhill officers. The three Parkhill companies consented to and prayed for the entry of summary judgment in favor of Avco. The United States opposed the motions and filed the affidavits of two revenue agents, who raised questions as to whether Construction or taxpayer owned the 29 items covered by Avco's chattel mortgage.

The district court allowed Avco's motion for judgment on the pleadings, holding that Avco's "chattel mortgage is a prior and superior lien on the escrow fund to the lien of the Internal Revenue Service of the Treasury Department of the United States Government for taxes due from taxpayer." 321 F.Supp. 241, 245 (S.D.Ill.1971).

In the absence of any dispute regarding Construction's ownership of the 29 pieces of mortgaged equipment, Avco's lien would prevail over the government's tax lien. The lien created by 26 U.S.C. § 6321 is not valid as against the holder of a security interest until filed in the designated office in the state or county in which the property is located. 26 U.S.C. § 6323. The government filing in Bureau County, Illinois, occurred on February 16, 1970, whereas Avco had perfected its security interest under Illinois law by filing its financing statement in Bureau County on November 25, 1969. Ill.Rev.Stat. ch. 26, § 9-302 (1963). Under the codified common-law rule of "the first in time is the first in right," a choate state-created lien takes priority over later federal tax liens. United States v. Pioneer American Ins. Co., 374 U.S. 84, 87-88, 83 S.Ct. 1651, 1654, 10 L.Ed.2d 770 (1963). A state-created lien is choate "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. New Britain, 347 U.S. 81, 84, 74 S.Ct. 367, 369, 98 L.Ed. 520 (1954). The Avco financing statement showed Construction as the lienor, described the 29 items of equipment and established the amount secured.

However, the two affidavits filed on behalf of the government showed that taxpayer rather than Construction paid virtually the entire purchase price for the 29 items, that taxpayer received the bill of sale from the original seller for 12 of the items and that the items had been expensed on taxpayer's books and tax returns.

The affidavits filed on behalf of Avco showed that Avco had previously loaned money to the Parkhill companies on three occasions; each time the loans were prepaid before they matured prior to the $600,000 loan. Avco made its customary investigation of the financial standing of the three Parkhill companies, including an examination of the most recent interim accounts and consolidated financial statement prepared by certified accountants, supplemented by Dun & Bradstreet reports and inquiries at Construction's bank. Thereafter Construction furnished to Avco corporate resolutions authorizing the sale of the pieces of equipment from Ltd. to Construction and a copy of a bill of sale showing title to the equipment in Construction. The affidavits also stated that Avco received letters from the accounting firms of Buckley, McCarney, Swinarton & Company, stating that the equipment was included in the assets of Construction, and Touche Ross & Co., enclosing copies of invoices and bills of sale. Avco received the written guarantees of the loan from both taxpayer and Ltd. and certified copies of resolutions by the boards of directors of each company authorizing the guarantee. Prior to recording the notes and chattel mortgage in Toronto, Ontario, Canada, and the financing statement in Bureau County and with the Secretary of State of Illinois, a check was made of each of the respective recording offices which disclosed that there were no outstanding security interests in any of the pieces of equipment. The government affidavits did not contradict the facts set forth in Avco's affidavits outlining the steps which Avco took prior to consummating the loan.

The government contended that its affidavits introduced "factual uncertainty relating to the ownership of the construction equipment" sufficient to preclude the district court's summary disposition.

The district court, however, took the position that the disputed ownership was immaterial since Avco obtained its security interest in equipment which it "believed in good faith to be owned by the borrower." The court said, "Neither the so-called `real owner' nor his creditors in such a situation can be permitted to prevail over one who has...