Equitable Life Assurance Society of US v. United States, 6143.

• Decision Date: 27 April 1964
• Docket Number: No. 6143.,6143.
• Citation: 331 F.2d 29
• Parties: The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Defendant, Appellant, v. UNITED STATES of America, Plaintiff, Appellee.
• Court: U.S. Court of Appeals — First Circuit

331 F.2d 29 (1964)

The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Defendant, Appellant, v. UNITED STATES of America, Plaintiff, Appellee.

No. 6143.

United States Court of Appeals First Circuit.

April 27, 1964.

Stuart A. McCarthy, New York City, with whom James P. Lynch, Jr., Boston, Mass., Thomas J. Craig, Jr., Charles W. Muller, New York City, and Nutter, McClennen & Fish, Boston, Mass., were on brief, for appellant.

Stanton H. Zarrow, Attorney, Department of Justice, with whom John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson and Joseph Kovner, Attorneys, Department of Justice, W. Arthur Garrity, Jr., U. S. Atty., and Murray H. Falk, Asst. U. S. Atty., were on brief, for appellee.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

ALDRICH, Circuit Judge.

One Brody, a former resident of Massachusetts, having survived various personal difficulties with the government due to nonpayment of his income tax, cf. Brody v. United States, 1 Cir., 1957, 243 F.2d 378, cert. den. 354 U.S. 923, 77 S.Ct. 1384, 1 L.Ed.2d 1438, disappeared, possibly to Switzerland. He is presumably still alive. He left behind, in addition to this outstanding obligation, two policies of life insurance on his life issued by appellant Equitable Life Assurance Society, the proceeds or value of which the government now seeks to reach, asserting a tax lien thereon under section 6321 of the Internal Revenue Code of 1954.¹ The policies, so far as appears, are in the hands of Brody's attorney in Florida who, not having Brody's permission, has declined to give them up. Equitable received the statutory notice of the tax lien in January 1959 and due demand for surrender of all "monies and property" subject thereto in May 1960, but refused any payment, including the accumulated dividends, no separate point of which is made on this appeal, because the policies had not been physically surrendered. This action to obtain payment under 26 U.S.C. § 7403,² was instituted in October 1961 against Equitable and Brody in the district court for the district of Massachusetts. Equitable, a New York corporation with its home office in New York, is doing business in Massachusetts. It is not claimed that Brody was domiciled in that state, but his returns had been filed there, which may have suggested this selection. See 28 U.S.C. § 1396. Jurisdiction rests on 28 U.S.C. § 1340. Brody not being found within the state, and his address being unknown, service was made by publication in compliance with the terms of 28 U.S.C. § 1655, infra. No other person was named as a party, or, on the record, could have any interest in the policies.³

Policy No. 11,653,183 (hereinafter the '183 policy) was issued to Brody in April 1943 in the face amount of $30,000 on the 15-year endowment plan. This meant that the policy totally "matured," viz., became payable to the endowment beneficiary, in April 1958. It would also have become payable on the insured's death had that occurred prior to the endowment maturity. The amount payable in either instance was the face amount, plus any accumulated dividends, less any outstanding indebtedness and interest thereon. If the policy matured as an endowment the payee was the insured, whereas in case of death it was a named beneficiary. The right to change the beneficiary was reserved, and in 1957 Brody designated the Internal Revenue Service as the (revocable) beneficiary. Prior to maturity the insured could, from among other policy rights, elect to surrender the policy, or to borrow against it up to the current "Loan and Surrender Value" pursuant to a table contained in the policy. This table recited the dollar amount of the cash surrender value for each policy year, and stated that the loan value was the same amount minus a prepaid interest deduction computed to the next anniversary date. The reason for the difference is that a loan leaves the policy in force, where as surrendering it terminates the insurance. While the policy did not expressly say so, it has been held that surrendering the policy for its surrender value implies a physical delivery. Kothe v. Phoenix Mut. Life Ins. Co., 1929, 269 Mass. 148, 168 N.E. 737. In connection with paying the matured amount the policy expressly provided for its "surrender." The policy was written on a single premium basis, which premium was paid when the policy was issued.

Policy No. 10,777,528 (hereinafter the '528 policy) in the face amount of $1,000, was originally written in a different form, but in 1956 Brody converted it to an endowment policy maturing January 21, 1962, prepaying all premiums.⁴ The general policy provisions and circumstances, including the naming of the government as beneficiary, were otherwise similar to the '183 policy.⁵

The foregoing facts appearing, the government moved for summary judgment. Equitable resisted on the ground that Brody was an indispensable party, ineffectively served by publication, and that in his absence it was not liable on the policies unless they were physically surrendered, from which it would follow that if it paid now it could be obligated to pay a second time. The court granted the government's motion and decreed that the liens were foreclosed. It ordered Equitable to pay the government the "cash value and proceeds * * * computed as of the day of payment," which, while perhaps not precise, served to designate amounts which the company admits it would have owed had Brody then surrendered the policies and demanded payment. It further decreed that upon such payment every obligation of Equitable with respect to the policies would be discharged as to all persons. In its accompanying opinion the court stated that Equitable's cases of United States v. Massachusetts Mut. Life Ins. Co., 1 Cir., 1942, 127 F.2d 880, hereinafter referred to simply as Mass. Mutual, and United States v. Penn. Mut. Life Ins. Co., 3 Cir., 1942, 130 F.2d 495, had been "discredited" by United States v. Bess, 1958, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed. 2d 1135. Equitable appeals.

Equitable's first contention is that under Mass. Mutual the surrender of the policies was an absolute requirement, or condition precedent, to any liability. Mass. Mutual involved an unmatured policy, and we will defer discussing it until later.⁶ The '183 policy had matured even before the government filed notice of lien, and was absolutely owing except for whatever effect was due the surrender requirement. Under these circumstances the special considerations which moved us in Mass. Mutual do not apply. The provisions for physical surrender of the policy in connection with obtaining the matured value is a mere housekeeping matter to permit the company to tidy up its affairs. As the district court pointed out, an insurance policy is not a negotiable instrument or specialty embodying the obligation. Cf. Rosenthal v. Maletz, 1948, 322 Mass. 586, 593, 78 N.E.2d 652, 1 A.L.R.2d 1022. If the government was otherwise entitled to reach the obligation in this action the company could no more avoid this result by providing for the physical turning over of the policy than could a savings bank by a rule requiring delivery of the bank book. United States v. Manufacturers Trust Co., 2 Cir., 1952, 198 F.2d 366; United States v. Bowery Sav. Bank, 2 Cir., 1961, 297 F.2d 380. This is not to voice disagreement with the principle that in matters of substance the government's lien cannot rise above the rights of the taxpayer. United States v. Winnett, 9 Cir., 1947, 165 F.2d 149.

Considering, accordingly, the matured obligation represented by the '183 policy as absolutely owing to the insured, the question is whether it can be reached in this proceeding. The government says there is no problem. It concedes that the basic statute, section 7403, supra, fn. 2, made Brody an indispensable party, Macatee, Inc. v. United States, 5 Cir., 1954, 214 F.2d 717; cf. Shields v. Barrow, 1854, 17 How. 130, 139, 15 L.Ed. 158; State of Washington v. United States, 9 Cir., 1936, 87 F.2d 421, 427-28; F.R.Civ.P. 19, but asserts that he was adequately brought in for the purposes of quasi in rem jurisdiction by substituted service complying with the terms of 28 U.S.C. § 1655. The presently pertinent portions of this statute are the following:

"In an action in a district court to enforce any lien upon or claim to, or to remove any incumbrance or lien or cloud upon the title to, real or personal property within the district, where any defendant cannot be served within the State, or does not voluntarily appear, the court may order the absent defendant to appear or plead by a day certain.

* * * * *

"If an absent defendant does not appear or plead within the time allowed, the court may proceed as if the absent defendant had been served with process within the State, but any adjudication shall, as regards the absent defendant without appearance, affect only the property which is the subject of the action. * * *"

* * * * * *

The omitted portions are material in connection with the '528 policy, and will appear infra. The function of this statute, insofar as here relevant, is to give absent nonresident parties claiming an interest in property over which the court seeks to exercise jurisdiction due notice and opportunity to be heard, a fundamental condition not to jurisdiction, but to its assertion. Cooper v. Reynolds, 1870, 10 Wall. 308, 19 L.Ed. 931; Grannis v. Ordean, 1914, 234 U.S. 385, 34 S.Ct. 779, 58 L.Ed. 1363; Pennington v. Fourth National Bank, supra, 243 U.S. at 272, 37 S.Ct. 282, 61 L.Ed. 713. Unless the statute is to be read as wholly inapplicable to liens upon intangibles its use here seems peculiarly appropriate. Such liens are clearly given by section 6321 of the 1954 Code, supra, and are enforceable under 26 U.S.C. § 7403, supra, and there is no other statute which could be invoked where the defendant is outside the jurisdiction.

In the absence of any applicable constitutional limitations,⁷ we must...