Carter v. Carter, Civ. A. No. 87-1021-A.

CourtUnited States District Courts. 4th Circuit. United States District Court (Eastern District of Virginia)
Citation681 F. Supp. 323
Docket NumberCiv. A. No. 87-1021-A.
PartiesCarole Vandergrift CARTER, Plaintiff, v. William Douglas CARTER and T-Cas of America, Inc., Defendants, v. UNITED STATES of America, Intervenor.
Decision Date08 March 1988

John F. McGinley, Alexandria, Va., for plaintiff.

Jeffrey B. Rice, Fairfax, Va., for defendant Carter.

John E. Harrison, McLean, Va., for defendant T-Cas America.

Nash Schott, Asst. U.S. Atty., Alexandria, Va., for intervenor.


ELLIS, District Judge.


In this case, a federal tax claim and a prior judgment lien compete for the same assets. The case has an involved history; it grows out of an apparently hotly contested divorce action. The government's claim is based on federal income tax deficiencies assessed initially against the husband and wife, defendant William D. Carter and complainant Carole V. Carter. Defendant T-CAS America, Inc. (T-Cas) has a judgment lien on the same assets based on the husband's unpaid debts to T-Cas. The assets involved are the proceeds from the sale of the marital home.

The central question presented is whether the federal tax claim is entitled to priority over T-Cas's earlier judgment lien. Resolution of this issue requires the Court to determine whether the case is governed by the Federal Tax Lien Act of 1966 (FTLA), 26 U.S.C. §§ 6321-6323,1 or the much older federal Insolvency Statute, 31 U.S.C. § 3713.2 The FTLA, if applicable, would confer priority on the T-Cas lien whereas the Insolvency Statute, if applicable and under certain circumstances, makes the government tax claim the winner.

Determining which statute governs is the central and threshold, though not the sole, issue presented. As this matter is before the Court on summary judgment, the Court, after determining which statute controls, must then consider whether any material facts remain genuinely in dispute.


Complainant Carole Carter and defendant William Carter are Virginia citizens and residents of Loudoun County. Defendant T-Cas, a Virginia corporation, has one class of stock, half of which is owned by William Carter.3 The genesis of this case is the Carters' divorce, which was filed in Loudoun County's circuit court in March, 1986.4 Prior to the commencement of the divorce, William Carter borrowed a substantial sum of money from T-Cas. From May, 1980 to February, 1986, William Carter executed thirty-one demand promissory notes representing a total indebtedness to T-Cas of $1,117,000. The notes were never paid. A substantial portion of the funds borrowed from T-Cas were apparently invested in Greenwood Farm, the marital home located in Loudoun County. On September 15, 1987, at the direction of the Loudoun County Circuit Court, Greenwood Farm was sold and the proceeds, now totaling over $1,427,000, were placed in escrow with that court's General Receiver. It is Mr. Carter's one-half share of the proceeds from the sale of Greenwood Farm that is the object of the competition between the federal tax claim and the T-Cas judgment lien.

The following paragraphs briefly describe the genesis of (1) the T-Cas judgment lien, (2) the federal tax claim and (3) Mrs. Carter's lien, which she no longer asserts, but which is nonetheless helpful to an understanding of the genesis of this action.

1. The T-Cas Lien. In April, 1987, events commenced that led ultimately to the T-Cas judgment lien. In light of the unpaid promissory notes, the T-Cas Board met and passed a resolution to take action to collect the notes. William Carter, who served as a Board member, attended this meeting, but did not vote. Pursuant to this resolution, counsel for T-Cas filed suit in the Circuit Court for Fairfax County.5 William Carter chose not to respond. T-Cas obtained a default judgment for $1,193,851.32, the full amount of the principal and interest due on the notes.6 This default judgment was docketed on August 4, 1987.7 Thereafter, on September 23, 1987, one week after the sale of the farm, the Loudoun County Circuit Court ordered the T-Cas judgment lien transferred to the proceeds of the sale. It is this lien which T-Cas asserts is superior to the government's tax claim.

2. The Federal Tax Claim. On or about January 30, 1987, Mr. Carter filed an amended return for the 1982 tax year, showing federal income taxes due and owing for 1982 in the amount of $993,855.65. Mrs. Carter did not sign the return. Thereafter, on September 18, 1987, the Internal Revenue Service issued an assessment against Mr. and Mrs. Carter for the full amount of taxes and interest owing to the United States. Then, on September 22, the United States filed a notice of levy in the land records of Loudoun County.

By statute,8 the issuance of the government's assessment created a lien in favor of the United States upon the property of Mr. and Mrs. Carter as of September 18. Subsequently, however, the government withdrew its assessment against Mrs. Carter based on her apparent refusal to sign the amended return. Thus the claim and statutory lien asserted here by the government attach only to Mr. Carter's share of the Greenwood Farm sale proceeds.

3. Mrs. Carter's Lien. In the course of the divorce proceeding, the state circuit court judge, in an apparent attempt to safeguard the marital assets, issued an order precluding Mr. Carter from selling, transferring or encumbering any marital assets, including Greenwood Farm and the T-Cas stockholdings. In the summer of 1986, Mr. Carter sought relief from this order. He asked the court to lift the ban on stock transfers in return for which he pledged his one-half share in Greenwood Farm as security for any equitable distribution of marital assets the Loudoun County court might ultimately order in the divorce suit. The court approved this arrangement by stipulation order dated September 8, 1986 with nunc pro tunc effect to June 2, 1986.9 On September 11, 1986, Mrs. Carter brought suit in Loudoun County against Mr. Carter and T-Cas to establish the priority of her putative lien.10 She claimed that Mr. Carter's pledge and the September 8 stipulation order created a lien on the property in her favor. It is this suit that is now before the bar of this Court. The United States successfully intervened in state court on October 2, 198711 and then removed to federal court on October 10, 1987, pursuant to 28 U.S.C. § 1444. Prior to removal, the state court entered a decree holding the T-Cas lien valid and prior to Mrs. Carter's lien arising from the stipulation order.12 That decree also gave the United States until 6:00 p.m. on that date to file its intervention papers and pleadings.

In summary, therefore, the cause before this Court pits the T-Cas judgment lien of August 4, 1987 in the approximate amount of $1,117,000 against the government's September 18, 1987 tax assessment in the approximate amount of $1,194,000. Both liens seek satisfaction from Mr. Carter's one-half share of the Greenwood Farm sale proceeds, approximately $713,500. T-Cas and the government agree that the T-Cas lien would be entitled to priority if the Insolvency Statute is inapplicable and the case is governed by Section 6323 of the FTLA. In this event, there would be no disputed material issues of fact and summary judgment for T-Cas would be appropriate. The government contends, however, that Section 3713 governs and therefore the federal tax claim deserves priority under this section because Mr. Carter is insolvent and has committed an "act of bankruptcy."

T-Cas disputes the government's position on two grounds. First, T-Cas argues that Section 3713 does not apply in the case of tax claims because the FTLA operates as an exception to the application of the more general Section 3713. Second, T-Cas disputes whether Mr. Carter in fact is insolvent and has committed any "act of bankruptcy."

For the reasons that follow, the Court rejects T-Cas's contention that Section 3713 does not apply to federal tax claims where, as here, there is a contention that the taxpayer is insolvent. Accordingly, T-Cas's summary judgment motion must be denied. Moreover, summary judgment for the government is also inappropriate given that there are disputed fact issues regarding whether Mr. Carter is insolvent and has committed any act of bankruptcy.


Because the central question is the applicability of two statutes, analysis appropriately begins with the statutory language. The Insolvency Statute is remarkably straightforward and free from significant ambiguity. It states:

(a)(1) A claim of the United States Government shall be paid first when —
(A) A person indebted to the Government is insolvent and—
(iii) an act of bankruptcy is committed.13

31 U.S.C. § 3713.

A sharp focus solely on the statutory language makes unmistakably clear that the section applies to the instant case. The tax assessment against Mr. Carter is plainly "a claim of the United States Government." See Price v. United States, 269 U.S. 492, 499, 46 S.Ct. 180, 181, 70 L.Ed. 373 (1926) (taxes due held to be debts under Section 3466, the predecessor of Section 3713); Illinois ex rel Gordon v. United States, 328 U.S. 8, 9, 66 S.Ct. 841, 842, 90 L.Ed. 1049 (1946) (same). This, coupled with the government's allegations of insolvency and acts of bankruptcy on the part of Mr. Carter, leave no doubt that Section 3713, by its terms, applies here. T-Cas argues, however, that the application of Section 6323 is equally clear. Moreover, T-Cas contends that since Section 6323 relates specifically to priority of federal tax liens vis a vis other types of liens, it is therefore an exception to the more general statute, Section 3713. Put another way, T-Cas argues that Section 3713 is a general application statute that does not apply in the tax context because Section 6323 is specific to that context.

This argument is ultimately unpersuasive. In the first place, there is nothing in the text or legislative...

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