Farmers & Merchants Nat. Bank of Hagerstown v. Schlossberg
| Decision Date | 01 September 1985 |
| Docket Number | No. 64,64 |
| Parties | , 1 UCC Rep.Serv.2d 928 FARMERS & MERCHANTS NATIONAL BANK OF HAGERSTOWN v. Roger SCHLOSSBERG, Assignee et al. , |
| Court | Maryland Court of Appeals |
Omer T. Kaylor, Jr. (Kaylor & Wantz, on brief), Hagerstown, for appellant.
Deborah B. Bacharach, Asst. Atty. Gen. (Stephen H. Sachs, Atty. Gen., and Linda Koerber Boyd, Asst. Atty. Gen., on brief) Baltimore, for appellees.
Argued Before MURPHY, C.J., and SMITH, ELDRIDGE, COLE, RODOWSKY, COUCH and McAULIFFE, JJ.
The issue presented in this appeal is the relative priority, in proceedings for distribution of an estate assigned by a debtor for the benefit of its creditors, of a claim of the State for unpaid sales and use taxes, and a security interest perfected before the assignment and before the State's filing of its lien for the unpaid taxes.
On December 28, 1982, Paramount Interiors, Inc., a Maryland corporation, executed an assignment for the benefit of its creditors by which it transferred all of its assets to Roger Schlossberg as assignee. At the time of the assignment, the Farmers & Merchants National Bank of Hagerstown held a security interest in Paramount's inventory, equipment, and accounts receivable, including after-acquired property and proceeds, securing a loan of which $240,687.09 in principal and interest remained outstanding and upon which interest continued to accrue at the rate of 12 1/2% per year. The security interest had been duly perfected on July 19, 1979.
Paramount was also indebted to the State of Maryland for unpaid sales and use taxes at the time of the assignment. A lien for these unpaid taxes, plus interest and penalties, in the amount of $3,331.63 was filed against Paramount on December 10, 1982, by the Comptroller of the Treasury, Retail Sales Division. On April 15, 1983, the State filed a Prior Preferred Tax Claim against Paramount's estate in which it increased its allegation of Paramount's sales and use tax liability, including interest and penalties, to $5,816.37, and further alleged that interest would continue to accrue at the statutory rate of 0.75% per month until the taxes were paid.
Schlossberg, as assignee, filed a Petition for Assumption of Jurisdiction in the Circuit Court for Washington County on December 29, 1982, seeking that court's assumption of jurisdiction over the distribution of Paramount's estate; the bank subsequently filed a Consent to Assumption of Jurisdiction. The circuit court (Corderman, J.) granted Schlossberg's petition and entered an order assuming jurisdiction over the estate.
On May 31, 1983, the bank, with the consent of the assignee, petitioned the circuit court to approve a partial distribution to be made to the bank as a secured creditor. The petition recited that the inventory, fixtures, and equipment subject to the bank's security interest had been sold by the assignee who held net proceeds of $76,630. The bank sought payment to it of these net proceeds from its security, less $5,000 to be held as a reserve by the assignee to cover certain expenses of administration and the claim of the State of Maryland, if allowed. The circuit court so ordered.
On July 25, 1984, the bank filed a petition in the circuit court for an order directing Schlossberg to distribute the $5,000 reserve to the bank. The State filed an answer in which it asserted the priority of its claim to this reserve on the basis of Maryland Code (1957, 1980 Repl.Vol.), Article 81, §§ 202(b), 343, and 394. On December 4, 1984, the circuit court entered an order according the State's claim priority over that of the bank. The bank filed a timely appeal to the Court of Special Appeals, and we issued a writ of certiorari on our own motion before the intermediate appellate court's consideration of the case.
The bank maintains that its perfected security interest is entitled to priority over the State's claim for unpaid taxes by operation of §§ 9-201 and 15-102(b) of the Commercial Law Article. 1 Section 9-201 states that "[e]xcept as otherwise provided by Titles 1 through 10 of this article a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors." Section 1-201(12) defines "creditor" broadly to include "a general creditor, a secured creditor, a lien creditor and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity and an executor or administrator of an insolvent debtor's or assignor's estate."
The security agreement between the bank and Paramount provides that, upon default by Paramount, the bank may exercise all of its rights and remedies under Title 9, including taking possession of the collateral and selling it in a commercially reasonable manner. An assignment for the benefit of creditors by Paramount is expressly stated to be an event of default. The security agreement further provides that the proceeds from the sale of the collateral must be applied to satisfy the indebtedness underlying the bank's security interest, subject only to the prior payment of certain expenses incident to the disposition of the collateral. Nothing in Titles 1 through 10 of the Commercial Law Article provides that such a security agreement is ineffective against the State. Thus, § 9-201 purports to afford the bank's antecedent perfected security interest priority over the claim of the State, as a creditor of Paramount.
The bank also cites § 15-102(b) of the Commercial Law Article, which, it argues, conflicts with and supersedes the tax statutes relied upon by the State. Section 15-102(b) establishes certain priorities in the distribution of property following an assignment for the benefit of creditors:
"The property of an insolvent who makes an assignment for the benefit of creditors or who has his property taken by a receiver under a decree of a court in an insolvency proceeding shall be applied to the following, in the order stated:
(1) Costs and expenses of the administration of the trust or insolvency proceeding which the court approves;
(2) Wages of an employee and health, welfare, and pension contributions contracted for in place of wages, earned not more than three months before the assignment or institution of the insolvency proceeding;
(3) Lien claims of the State, a county, municipal corporation, or other political subdivision of the State perfected or recorded before the assignment or institution of the insolvency proceeding, and claims of persons having judicial liens on property of the insolvent recorded more than four months before the assignment or institution of the insolvency proceeding;
(4) Unsecured claims of individuals, to the extent of $900 for each individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of the individuals, that were not delivered or provided;
(5) Rent for any interest in real property in the State due not more than three months before the execution of the assignment or institution of the insolvency proceeding;
(6) Charges in connection with the transportation of goods advanced by one common carrier to another on behalf of a consignor or consignee not more than three months before the assignment or institution of the insolvency proceeding;
(7) Taxes not included in paragraph (3) of this subsection; and
(8) Claims of unsecured creditors." (Emphasis added.)
The bank maintains that, although § 15-102(b) is silent as to the relative priority of a perfected security interest, such an interest has priority, implicitly, over all the claims listed in this section. Since paragraphs 3 and 7 of § 15-102(b) purport to provide for the priority of all state tax claims, the bank concludes that its security interest must have priority over the State's claim in this case.
Sections 343 and 394 apply, respectively, to claims for state sales and use taxes, and contain the following identical language:
None of these three sections of Article 81 creates a lien for unpaid taxes, and each purports to afford tax claims priority whether or not the claims have been reduced to...
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