City of Sherman v. United States

• Decision Date: 26 August 1968
• Docket Number: No. 24675.,24675.
• Citation: 400 F.2d 373
• Parties: The CITY OF SHERMAN and Sherman Independent School District, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

400 F.2d 373 (1968)

The CITY OF SHERMAN and Sherman Independent School District, Appellants, v. UNITED STATES of America, Appellee.

No. 24675.

United States Court of Appeals Fifth Circuit.

August 26, 1968.

COPYRIGHT MATERIAL OMITTED

Joe P. Cox, Jr., Sherman, Tex., for appellants.

Richard B. Hardee, First Asst. U. S. Atty., Wm. Wayne Justice, U. S. Atty., Tyler, Tex., for appellee.

Before JOHN R. BROWN, Chief Judge, and BELL and THORNBERRY, Circuit Judges.

THORNBERRY, Circuit Judge:

This appeal presents the question of lien priority between delinquent ad valorem taxes on personal property assessed by a city and school district and a chattel mortgage on the same personalty assigned to the Small Business Administration. Robert E. Brown, d/b/a Bob Brown Drive-In Supply, failed to pay ad valorem taxes validly assessed by the City of Sherman, Texas and the Sherman Independent School District on his personal property for the years 1957-63. The sum delinquent, with penalties and interest, is $2,309.74.

On April 12, 1961, Brown executed a chattel mortgage in favor of the Grayson County State Bank and this mortgage was filed on April 19, 1961. On May 4, 1961, a supplemental mortgage was executed and filed in favor of the Grayson County State Bank, and on May 11, 1961, a correction chattel mortgage was issued and filed. These mortgages were executed to secure a loan of $16,000 and covered the rental inventory of Bob Brown Drive-In Supply. In December, 1964, the bank assigned the note and the chattel mortgages to the Small Business Administration.

On October 5, 1961, Brown purchased additional rental inventory from United Rent-Alls, Inc. under a conditional sales contract. This conditional sales contract was assigned to the Texoma National Bank on July 22, 1964. Brown subsequently got into serious financial difficulties and assigned his accounts receivable to Jack Kennedy on September 19, 1963, for collection for the benefit of creditors. Also on September 19, 1963, the Tax Assessor for the City of Sherman "levied" on all of the personal property of Bob Brown Drive-In Supply by telling Brown that his property was being "levied" on.

On September 24, 1962, Clifford Bachman purchased the Bob Brown Drive-In Supply, and to secure monies advanced to him by the Texoma National Bank for use in purchasing the business, Bachman executed a chattel mortgage in favor of the Texoma National Bank covering all personal property added to his rental inventory after September 24, 1963. The total amount of the indebtedness of the Texoma National Bank which was secured by the conditional sales contract to which Bachman was a party, and the chattel mortgage executed by Bachman was $970.

On April 21, 1965, the City of Sherman in its own behalf and in behalf of the Sherman Independent School District instituted an action in the district court of Grayson County, Texas to recover its delinquent ad valorem taxes and to foreclose tax liens on the personal property of Bob Brown Drive-In Supply. By agreement of all parties on May 27, 1965, the personal property of Bob Brown Drive-In Supply, including that covered by the SBA's chattel mortgages, was sold by an auctioneer and the proceeds in the amount of $3,170.06 were deposited in the registry of the court.

In April, 1966 the United States intervened as a defendant in order to establish the priority of the SBA's lien on the rental inventory and removed the case to federal court. A default judgment was taken against Clifford Bachman. Since some of the personal property of Bob Brown Drive-In Supply was property upon which the Texoma National Bank had a lien and on which the United States did not have a lien, the parties settled as to this property in favor of the Texoma National Bank for $600 and in favor of the Sherman Independent School District for $90.26. The court, sitting without a jury, found as to the remainder of the sum that the United States was entitled to priority over the delinquent ad valorem taxes of the City of Sherman and the Sherman Independent School District on the basis of 31 U.S.C. § 191.¹ We vacate and remand.

The purpose of the general federal priority statute, 31 U.S.C. § 191, is to protect the public interest in collecting revenue owing to it by an insolvent person. Small Business Administration v. McClellan, 1960, 364 U.S. 446, 81 S.Ct. 191, 5 L.Ed.2d 200. In order for this priority statute to apply, the debtor must be insolvent by one of the acts specified in the statute: an act of bankruptcy, a voluntary assignment of the debtor's property, or an attachment of the property of an absconding, concealed, or absent debtor. See W. T. Jones & Co. v. Foodco Realty, Inc., 4th Cir. 1963, 318 F.2d 881.

In Bramwell v. United States Fidelity & Guaranty Co., 1926, 269 U.S. 483, 46 S.Ct. 176, 70 L.Ed. 368, the Supreme Court held that a bank whose assets were less than its liabilities made a "voluntary assignment" within 31 U.S.C. § 191 when it surrendered its assets to the state superintendent of banks for liquidation pursuant to a resolution by the bank's board of directors. Bramwell also held that 31 U.S.C. § 191 should be liberally construed since it was enacted for the public good. In the instant case Brown voluntarily assigned his accounts receivable for the benefit of his creditors, and in this assignment declared himself to be insolvent. Moreover, the consent to sale of the assets of Bob Brown Drive-In Supply should come within a liberal construction of a "voluntary assignment" for the payment of debts. See Bliss v. United States, 8th Cir. 1930, 44 F.2d 909.

Furthermore, the tax liens asserted by the City of Sherman and the Sherman Independent School District are general liens and not the specific liens which might supersede the priority statute. State tax liens, even though specific and perfected under state law, cannot be specific and perfected under federal law so as to take precedence over the federal government's statutory priority where the state has neither taken title to the debtor's property nor reduced it to possession. United States v. Waddill, Holland & Flinn, Inc., 1945, 323 U.S. 353, 65 S.Ct. 304, 89 L.Ed. 294; United States v. Haddix & Sons, E.D. Mich.1966, 252 F.Supp. 634. Therefore, we find that 31 U.S.C. § 191 gives the United States a priority unless this statute has been superseded by 15 U.S.C. § 646.²

Section 646 of the Small Business Administration Act provides that any interest held by the SBA in property as security for a loan is subordinate to any lien on that property for state or local taxes if the tax lien is superior by applicable state law. The purpose of Congress in enacting this section was to place the SBA's security claims against property in the several states upon the same level as those held by private parties in these states. See S. Rep. No. 1714, 85th Cong., 2d Sess. (1958).

Section 646 clearly applies to the instant case. The SBA holds a...