Cavalier Service Corp. v. Wise

• Decision Date: 02 July 1986
• Docket Number: Civ. A. No. 86-194-N.
• Parties: CAVALIER SERVICE CORPORATION, a Successor Trustee, Plaintiff, v. Michael T. WISE, United States of America, Patsy J. Frango, Rosa Leigh Frango, Defendants.
• Court: U.S. District Court — Eastern District of Virginia

645 F. Supp. 31

CAVALIER SERVICE CORPORATION, a Successor Trustee, Plaintiff, v. Michael T. WISE, United States of America, Patsy J. Frango, Rosa Leigh Frango, Defendants.

Civ. A. No. 86-194-N.

United States District Court, E.D. Virginia, Norfolk Division.

July 2, 1986.

Peter G. Zemanian, Willcox & Savage, Norfolk, Va., for plaintiff.

Joel P. Crowe, Babb, Oast, Hook & Crowe, Mall, Portsmouth, Va., for Wise.

Larry W. Shelton, Asst. U.S. Atty., Norfolk, Va., Tryna A. Kwasny, U.S. Dept. Justice, Washington, D.C., for U.S.

Robert H. Romm, Reed, Beaman & Romm, Norfolk, Va., for Frango.

MEMORANDUM OPINION

KELLAM, Senior District Judge.

This action was originally brought in the Circuit Court for the City of Norfolk, but since the plaintiff sought an interpleader action against the United States, the defendants removed the action to the federal court pursuant to 28 U.S.C. § 1444. Defendants Frango also filed a cross-claim against defendant Wise for any interest and penalties incurred by the Frangos for the delay in transferring the proceeds from the Trustee's sale to the United States; for recovery of their attorney's fees in this action; and for attorney's fees for the plaintiff Cavalier Service Corporation.

I.

Plaintiff, Cavalier Service Corporation, was appointed Successor Trustee under a Deed of Trust assumed by defendants P.J. and Rosa Leigh Frango dated June 12, 1975. The deed of trust secured the payment of a promissory note by Clifford T. Lenz and wife, and assumed by the Frangos. Upon default in the payment of the promissory note, a trustee sale was conducted and the proceeds of the sale, after satisfaction of the promissory note, were held by the Trustee and subsequently interpleaded in this action. At the time of the sale, the property was subject to two liens—one a lis pendens in favor of defendant Michael T. Wise, docketed February 5, 1985 for $50,000 and subsequently reduced to judgment on September 18, 1985. The other lien was a federal tax lien docketed March 11, 1985 in favor of the Internal Revenue Service against the Frangos for $46,739.75, plus interest. The tax lien arose when the Secretary of the Treasury made two assessments against the Frangos for unpaid federal taxes for the years 1978 and 1979. The Frangos refused to pay the delinquent taxes and pursuant to 26 U.S.C. § 6321, a federal tax lien arose against all property and rights to property belonging to the Frangos. According to 26 U.S.C. § 6322 the lien arose at the time of assessment, December 3, 1984, and later notice of the federal tax lien was filed with the Clerk of the Circuit Court of Norfolk on March 11, 1985.

After the Trustee's sale, the plaintiff paid the holder of the above-mentioned promissory note the balance due; paid itself $1,000 for Trustee's commission; paid $1,250.00 to Willcox and Savage for legal fees, and paid the costs of sale. Afterwards, the plaintiff was in possession of a $19,182.27 surplus from the Trustee's sale. As a result, a dispute arose between defendants Wise and the United States as to who was entitled to the surplus funds. In other words, whose lien, the lis pendens or the federal tax lien, had priority and was entitled to receive the surplus proceeds from the Trustee. Plaintiff instituted this interpleader action to have the Court determine the priorities of the adverse claimants. In addition, plaintiff seeks to receive an additional $1,000 in Trustee's commission; and to recover additional attorney's fees amounting to $3,190.84 for instituting the interpleader action. Wise and the United States have each filed motions for summary judgment based on the pleadings.

II.

A federal tax lien is a creature of federal law and is a "formidable arsenal of collection tools" necessary "to ensure the prompt and certain enforcement of the tax laws in a system relying primarily on self-reporting." United States v. Rodgers, 461 U.S. 677, 683, 103 S.Ct. 2132, 2137, 76 L.Ed.2d 236 (1983). The importance of obtaining revenues to satisfy the nation's obligations justifies the "extraordinary priority accorded federal tax liens." United States v. Kimbell Food, Inc., 440 U.S. 715, 734, 99 S.Ct. 1448, 1462, 59 L.Ed.2d 711 (1979). To collect delinquent taxes owed to the government, Congress enacted the Federal Tax Lien Act of 1966. 26 U.S.C. § 6321, et. seq. If any person refuses to pay a tax once it has been assessed, then the government possesses a lien "upon all property and rights to property, whether real or personal" belonging to the delinquent taxpayer. 26 U.S.C. § 6321. Air Power, Inc. v. United States, 741 F.2d 53, 54 (4th Cir.1984). In order to ensure the superiority of these federal tax liens over other liens the code provides that

the lien imposed by section 6321 shall rise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

26 U.S.C. § 6322 (emphasis added). A federal tax lien generally arises or attaches at the time the tax assessment is made and thus a federal tax lien takes priority over all other liens arising subsequent to the assessment of the delinquent tax. United States v. Pioneer American Insurance Co., 374 U.S. 84, 88, 83 S.Ct. 1651, 1654-55, 10 L.Ed.2d 770 (1963).

The Internal Revenue Code's basic scheme is to provide priority for federal tax liens over competing interests; however, there are certain classes of creditors—mortagees, pledgees, purchasers and judgment creditors—who must have actual notice of the tax lien before the tax lien has priority. Pioneer, supra 83 S.Ct. at 1655. 26 U.S.C. § 6323(a). First National Bank of Norfolk v. Norfolk & Western Railway Co., 327 F.Supp. 196 (D.C.Va.1871).

Federal law governs the priority of a tax lien against all other claims to the property. United States v. Security Trust & Savings Bank, 340 U.S. 47, 49-50, 71 S.Ct. 111, 112-13, 95 L.Ed. 53 (1950). The priority of the federal tax lien over other lawful debts is generally governed by the rule "the first in time is the first in right." Pioneer, supra 83 S.Ct. at 1654; Air Power, Inc., supra at 54. The United States Supreme Court in Security Trust, supra 71 S.Ct. at 114, held that a federal tax lien is prior to an inchoate attachment lien that has not ripened into a judgment at the time the federal tax lien attached. Thus, federal tax liens are superior to inchoate attachment liens. See also United States v. City of New Britain, 347 U.S. 81, 86, 74 S.Ct. 367, 370-71, 98 L.Ed. 520 (1954). In Security Trust, supra, the Court concluded that federal tax liens were superior to an attachment lien when notice of the federal tax lien was recorded subsequent to the date of the attachment but prior to the date that the attachment was reduced to judgment.

The Court held that

The attachment lien gives the attachment creditor no right to proceed against the property unless he gets a judgment within three years or within such extension as the statute provides. Numerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded. Thus the attachment line is contingent or inchoate—merely a lis pendens notice that a right to perfect a lien exists.

Security Trust & Savings Bank, supra 340 U.S. at 50, 71 S.Ct. at 113. (emphasis added).

In Security Trust, supra, the Supreme Court referred to the attachment lien as an "inchoate" lien. An inchoate lien is a lien which may become certain as to amount, identity of lienor, or property involved at some time subsequent to the notice of the federal tax lien. New Britain, supra 74 S.Ct. at 371.

These inchoate liens cannot displace federal liens. New Britain, supra at 371. If these inchoate liens were allowed to have priority over tax liens

a state could affect the standing of federal liens, contrary to the established doctrine, simply be causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment, etc., is determined.

New Britain, supra at 86, 74 S.Ct. at 370-71. An interest is choate when "there is nothing more to be done to have a choate lien—when the identity of the lienor, the property subject to the lien, and the amount of the lien is established." Pioneer, supra 83 S.Ct. at 1655; New Britain, supra 74 S.Ct. at 369. It is a matter of federal law whether a competing state lien is sufficiently choate to defeat a later arising federal tax lien. Pioneer, supra 83 S.Ct. at 1655; Air Power, Inc., supra at 55 n. 2. The Fourth Circuit has also acknowledged that there are certain federal threshold requirements of choateness that must be satisfied before a state lien can qualify for priority over a federal tax lien. Air Power, Inc., supra at 55. For instance, the Supreme Court held that where a garnisher had already attached proceeds but where a federal tax lien was filed with notice before the garnisher's claim was reduced to judgment, the federal tax lien was superior both to garnisher's lien and to the court's allowance to garnishee for attorney's fees. United States v. Liverpool & London & Globe Insurance Company, 348 U.S. 215, 217, 75 S.Ct. 247, 248, 99 L.Ed. 268 (1955). The Fourth Circuit citing Liverpool, supra held that where the United States had already served notice of the federal lien on taxpayer's debtor before the taxpayer's bankruptcy, then the United States' interest was superior. United States v. Eiland, 223 F.2d 118, 123 (4th Cir.1955).

III.

The Court finds that the Supreme Court decision in Security Trust, supra, is controlling in this case. Here, the government assessed a delinquent tax against the Frangos on December 3, 1984. At that time a lien in favor of the United States for the $46,739.75 worth of delinquent taxes arose. 26 U.S.C. § 6322. Then on February 5, 1985, defendant Wise docketed his lis pendens for $50,000. Notice of the federal tax lien...