Bethlehem Steel Corporation v. Foley, 389

• Decision Date: 26 July 1968
• Docket Number: No. 389,Docket 32012.,389
• Citation: 399 F.2d 314
• Parties: BETHLEHEM STEEL CORPORATION, Appellant, v. John E. FOLEY, District Director of Internal Revenue, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

399 F.2d 314 (1968)

BETHLEHEM STEEL CORPORATION, Appellant, v. John E. FOLEY, District Director of Internal Revenue, Appellee.

No. 389, Docket 32012.

United States Court of Appeals Second Circuit.

Argued May 9, 1968.

Decided July 26, 1968.

Donald C. Lubick, Buffalo, N. Y. (Hodgson, Russ, Andrews, Woods & Goodyear, Buffalo, N. Y., on the brief), for appellant.

Robert J. Campbell, Dept. of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Dept. of Justice, Washington, D. C., Thomas A. Kennelly, Acting U. S. Atty., and C. Donald O'Connor, Asst. U. S. Atty., Western Dist. of New York, on the brief), for appellee.

Before LUMBARD, Chief Judge, and SMITH and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

In 1964, the State of New York contracted with Schwab Bros. Trucking, Inc. (the contractor) for the construction of two sections of arterial highway in Buffalo. The contractor in turn made an agreement with Bethlehem Steel Corporation (Bethlehem) for the purchase and delivery of heavy construction materials to be used on the highway project. The materials were shipped to the job site between the first of August and the end of November, 1964.

Between January 15 and February 16, 1965, the District Director of the Internal Revenue Service assessed allegedly delinquent taxes due from the contractor in the amount of $200,672.65; and on February 16, pursuant to §§ 6321-6323 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 6321-6323,¹ he filed with the Clerk of Erie County, New York, a notice of lien relating to these assessments.

The contractor experienced grave financial difficulties during early 1965 and at some point in late February or early March it was forced to abandon the construction project. On March 24, the State of New York terminated the contractor's authority to proceed under the contracts.

At the time the contractor ceased work on the project, some of the materials supplied by Bethlehem had neither been installed in the project nor paid for by the contractor and remained stored at the site. On March 5, the District Director, pursuant to the tax lien filed by the IRS on February 16, levied upon and seized numerous pieces of equipment and supplies, including the heavy building materials supplied by Bethlehem.

On June 4, Bethlehem notified the District Director of its claim under § 39-c of the New York Lien Law, McKinney's Consol.Laws, c. 33,² which permits a materialman to repossess and remove materials supplied by him but not paid for and which remain unused or uninstalled after the project has been completed or abandoned. Bethlehem also requested that the tax levy and seizure be withdrawn in its favor. The District Director refused the request and Bethlehem filed suit under 28 U.S. C. §§ 1340 and 2463 to recover possession of the seized materials.

Pursuant to a stipulation by the parties to the suit, the unused and uninstalled materials were sold and the proceeds were paid into the registry of the District Court, to be paid over as may be determined by the ultimate disposition of the issues in this case. The parties further stipulated that the tax lien filed by the IRS attached to the uninstalled materials in question, which, it was agreed, were lawfully levied and seized prior to Bethlehem's exercise of its right of repossession under § 39-c of the New York Lien Law, and that Bethlehem took all steps necessary to protect its rights, if any, under § 39-c. Indeed, the record before us reflects that the IRS tax lien was filed on February 16, three days before the earliest date on which the project could be considered abandoned and before Bethlehem's right of repossession and removal accrued.

Bethlehem moved for summary judgment on the ground that its right to repossess and remove under § 39-c is a property right in the uninstalled materials which upon exercise extinguished the IRS lien which attached only to the property or interest in the property which the contractor then had. The IRS cross-moved for summary judgment asserting the priority of its lien and from the order granting that cross-motion and entering judgment for the Government, Bethlehem now brings this appeal. We affirm.

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had `property' or `rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that `in the application of a federal revenue act, the state law determines the nature of the legal interest which the taxpayer had in the property * * *.' (footnote omitted) Morgan v. Commissioner of Internal Revenue, 309 U.S. 78, 82 60 S.Ct. 424, 426, 84 L.Ed. 585." Aquilino v. United States, 363 U.S. 509, 512-513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960).

Once the nature and extent of the contractor's property rights have been ascertained under state law, the questions of priority are then determined under federal law because § 6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law * * *." United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135 (1958). Since it is clear under the applicable portions of the New York Personal Property Law³ that "the property" in the uninstalled materials had passed to the contractor by the dates of the federal tax assessment and the levy and seizure, the issues are narrowed to determining what property or other interest the appellant may have had by virtue of § 39-c and whether that interest affects the contractor's property or rights to property in the uninstalled materials in a manner which defeats the IRS's perfected tax lien.

The language and meager legislative history of § 39-c indicate that the provision was designed to remedy a specific plight in which materialmen often found themselves. Charles Howard Levitt, counsel to the Lien Law Revision and Enforcement Association, in a letter⁴ urging the then Governor, Franklin D....