Commercial Credit Corporation v. Schwartz, Civ. A. No. LR-2784.

• Decision Date: 24 March 1955
• Docket Number: Civ. A. No. LR-2784.
• Citation: 130 F. Supp. 524
• Parties: COMMERCIAL CREDIT CORPORATION, Plaintiff, v. Phil SCHWARTZ et al., Defendants.
• Court: U.S. District Court — Eastern District of Arkansas

130 F. Supp. 524

COMMERCIAL CREDIT CORPORATION, Plaintiff, v. Phil SCHWARTZ et al., Defendants.

Civ. A. No. LR-2784.

United States District Court, E. D. Arkansas, W. D.

March 24, 1955.

Barber, Henry & Thurman, Ralph M. Sloan, Little Rock, Ark., for plaintiff.

Talley & Owen, William L. Blair, Little Rock, Ark., for defendant Schwartz.

Townsend & Townsend, Little Rock, Ark., for defendant Commercial Nat. Bank.

Julius C. Acchione, Asst. U. S. Atty., Little Rock, Ark., for the United States.

Roger L. Murrell, Little Rock, Ark., for defendant Kelly Motors, Inc.

Josh McHughes, Little Rock, Ark., for defendant Arkansas Democrat Co.

Luke Arnett, Little Rock, Ark., for Commissioner of Labor of State of Arkansas.

LEMLEY, District Judge.

This cause comes on for hearing upon the motion for summary judgment filed herein by the United States, which was made a party defendant under the provisions of 28 U.S.C.A. § 2410, the responses to said motions filed by the plaintiff, Commercial Credit Corporation, and Kelly Motors, Inc. and the Commissioner of Labor of the State of Arkansas, defendants herein, together with the cross motions for summary judgment filed by the plaintiff and by Kelly Motors, which motions have been submitted upon written briefs.¹ From our consideration of the record we are satisfied that there are no genuine issues as to any material facts, and that the case can be disposed of upon the pending motions.

The plaintiff commenced this action in the Chancery Court of Pulaski County, Arkansas (Little Rock) for the purpose of foreclosing a chattel mortgage and a real estate mortgage covering, respectively, certain personal property and certain realty of the defendant, Phil Schwartz; since the United States held tax liens covering both the real and personal property of Schwartz, it was made a party defendant; the Commercial National Bank of Little Rock, which held a first mortgage on the real estate of Schwartz, and the State, which claimed a lien on all of his property by virtue of certain unpaid unemployment compensation taxes, were likewise made parties, together with other lienors, and Kelly Motors, which had purchased certain of the personal property of Schwartz at a distraint sale conducted by the Government, was also named as a defendant. The Government removed the case here, as provided by 28 U.S.C.A. § 1444.

This litigation involves the conflicting claims of the plaintiff, the Government, and the State to a fund now on deposit in the registry of this court, representing the balance of the proceeds of the foreclosure sale of Schwartz' real estate remaining after satisfaction of the Bank's first mortgage and the payment of the costs of said sale. We are also called upon to determine the title which Kelly Motors obtained to the property which it purchased at the distraint sale which has been mentioned; and there is also involved a counterclaim for malicious prosecution which Kelly Motors has filed against the plaintiff. The facts in the case, insofar as here pertinent, are substantially as follows:

For some years prior to the filing of this suit the defendant, Schwartz, was engaged in the automobile business in Little Rock. In March of 1951 he and his wife executed and delivered to the Bank a first mortgage on the real estate here involved, which mortgage secured a debt of $8,000; said mortgage was properly recorded and is conceded to have been a first lien on said real estate.

In December of 1951 Schwartz owed the State $1,257.50, representing unpaid unemployment compensation taxes; on December 28, 1951 the Commissioner of Labor filed with the Circuit Clerk of Pulaski County, Arkansas, a certificate of assessment covering said indebtedness. Under the provisions of the pertinent Arkansas statutes, Ark.Stats.1947, §§ 81-1117(e), 26-1121, 26-1123, and 29-130, said certificate upon its filing acquired the status of a judgment of the Circuit Court of said County and was from the time of filing a lien on all of the real estate in Pulaski County belonging to Schwartz; since the State never sued out any execution, however, it never acquired a lien on Schwartz' personal property.

On March 27, 1953 the Government, acting under the authority of 26 U.S.C. A. §§ 3670-3672, filed with the Circuit Clerk a notice of lien for unpaid income taxes alleged to be due from Schwartz with respect to income received in 1948, the amount being $10,486.71; for convenience this lien will be referred to as "Government's Lien No. 1." On June 26, 1953 Schwartz executed a chattel mortgage in favor of the plaintiff covering certain personal property and securing a debt of $6,000, which mortgage was duly filed in the Circuit Clerk's office. On July 10, 1953 the Government filed two additional notices of lien, based upon assessments for certain unpaid withholding taxes aggregating $3,936.18; while two separate notices were filed, the parties have treated them as a unit, and we shall do likewise and shall refer to the two liens collectively as "Government's Lien No. 2". On the same day that Government's Lien No. 2 was filed Schwartz and his wife executed a second mortgage on his real estate to the plaintiff securing a debt of $4,000, but this mortgage was not filed for record until the next day. On September 21, 1953 the Government filed still another notice of lien based upon another assessment for unpaid withholding taxes amounting to $1,530.54, which lien we shall call "Government's Lien No. 3". Although certain other liens and claims thereafter came into existence, they obviously stand too low in the order of priority to ever participate in the fund now in court, and we do not stop to enumerate them.

From the foregoing it will be seen that as of September 21, 1953 the property of Schwartz was subject to the following liens in order of time: First, the Bank's first mortgage lien on Schwartz' real estate. Second, the State's lien for unpaid unemployment compensation taxes, which was a judgment lien on his real estate. Third, the Government's Lien No. 1, which was a statutory lien on all of Schwartz' property, both real and personal. Fourth, the plaintiff's chattel mortgage lien on the personal property covered thereby. Fifth, the Government's Lien No. 2, which was a statutory lien on all of Schwartz' property. Sixth, the plaintiff's second mortgage on the real estate. And, seventh, the Government's Lien No. 3 covering all of Schwartz' property. The situation just outlined can probably be more readily comprehended by reference to the following tabulation:

Liens On Schwartz' Property In Order Of Time

A. Real Estate

1. The Bank's first mortgage.

2. The State's tax lien.

3. The Government's Lien No. 1.

4. The Government's Lien No. 2.

5. The plaintiff's second mortgage.

6. The Government's Lien No. 3.

B. Personal Property

1. The Government's Lien No. 1.

2. The plaintiff's chattel mortgage.

3. The Government's Lien No. 2.

4. The Government's Lien No. 3.

Prior to September 16, 1953 the Government issued four warrants of distraint, based respectively on the tax liabilities secured by its Liens No. 1, No. 2, and No. 3;² and on the date just mentioned officials of the Government, acting under said warrants, seized the personal property of Schwartz located at his place of business in Little Rock and covered by the plaintiff's chattel mortgage. Two days later Schwartz was notified that this property would be sold at auction, as provided by 26 U.S.C.A. § 3690; this notice referred to all four of the distraint warrants which have been mentioned. The gross amount of Schwartz' tax liability was $15,944.30, including penalty, lien fees, advertising costs, and interest computed up to September 29, 1953.

On October 5, 1953 the distraint sale was held, and Kelly Motors purchased the personal property for $7,400, which it duly paid. Prior to the sale bidders were advised of the conditions thereof including the proviso that the Government was selling "only the right, title, and interest of the taxpayer in the property offered for sale", and that it would not warrant or defend the title thereto.

When the Government received the purchase price of the personal property, it made an allocation thereof, the legality of which is sharply challenged here both by the plaintiff and by Kelly Motors. Instead of applying all of the proceeds to the tax liability secured by its Lien No. 1, senior tax lien, the Government applied said proceeds so as to extinguish completely its Lien No. 2 and Lien No. 3; the surplus still remaining was then applied so as to reduce Lien No. 1 by $2,349.77, leaving a balance of $8,136.94 still unpaid.³ Thereafter the plaintiff commenced this action.

Shortly after the case was removed to this Court, the real estate was sold by agreement, and the Bank's first lien was discharged in full. The balance remaining after discharging the Bank's claim and paying the expenses of the sale, which balance amounts to $7,758.87, is now being held in the registry of this Court pending final determination of the relative priorities of the respective claims. Since the money now on hand represents proceeds of the sale of real estate, it stands in the place of the land and will be treated as such; hence it is subject to the plaintiff's second real estate mortgage, but is not subject to the chattel mortgage.

The first controversy which we shall take up is that between the State and the Government. While the latter does not deny that the State's lien is superior in point of time to its tax liens, it contends nonetheless that it is entitled to priority; we cannot agree. Neither the State nor the Government ever undertook to seize the Schwartz real estate or subject it to sale; hence, at the commencement of this action both of said lienors held general statutory liens on the land, which liens have now attached to the moneys on deposit in the registry. Since 26 U. S.C.A. § 3670, upon which the Government's liens are based, gives no...