Ferris v. Chic-Mint Gum Co.

• Decision Date: 23 May 1924
• Court: Court of Chancery of Delaware
• Parties: FRED H. FERRIS, v. CHIC-MINT GUM COMPANY, a corporation of the State of Delaware. In the Matter of the Petition of Wilmington Trust Company for order for payment by Receiver of principal and interest of bond and mortgage out of funds in his hands

124 A. 577

14 Del.Ch. 232

FRED H. FERRIS, v. CHIC-MINT GUM COMPANY, a corporation of the State of Delaware. In the Matter of the Petition of Wilmington Trust Company for order for payment by Receiver of principal and interest of bond and mortgage out of funds in his hands

Court of Chancery of Delaware, New Castle

May 23, 1924

PETITION FOR PAYMENT of principal and interest of bond and mortgage out of funds in hands of receiver. The petition is filed by Wilmington Trust Company. It represents that it is the holder of a mortgage given to it by the insolvent defendant to secure the payment of a bond for the real debt of twenty-three thousand dollars. The mortgage is dated and was recorded on September 12, 1922. Interest is due thereon at the rate of six per centum per annum from the date of its execution. The premises upon which the mortgage was a lien were sold by the receiver of the defendant corporation in accordance with the order of this court, free of the lien of the mortgage, the mortgagee consenting thereto and agreeing that its lien might be transferred to the proceeds of the sale. In due time the sale was held and the sum realized therefrom was in round numbers about twenty-eight thousand dollars. The petitioner prays that the principal and interest due on its mortgage may be ordered paid to it prior to all other claims except tax claims due the County of New Castle and the City of Wilmington and a claim held by said city as a sewer lien.

Upon the filing of the petition a rule was directed to be served on all parties disclosed by the claims filed in the cause to be adverse in interest to show cause why the prayer of the petition should not be granted.

A few days before the filing of this petition the receiver had filed a report in which he prayed for allowances and requested instructions concerning the order in which he should make distribution of the funds in his hands. These funds are made up not alone of the proceeds of the sale of the mortgaged premises but as well of moneys derived from other sources not necessary to describe.

In response to the rule, all parties in interest appeared and the argument was such as to raise the entire question of the relative rights of all claimants.

William S. Hilles, for the petitioner, Wilmington Trust Company.

James H. Hughes, Jr., U. S. District Attorney, for John W. Herring Collector of Internal Revenue.

Frank L. Speakman, for New Castle County.

Caleb S. Layton, City Solicitor, for City of Wilmington.

Franklin Brockson, for Wilmington Paper Box Company, a judgment creditor.

David J. Reinhardt, for the receiver.

OPINION

THE CHANCELLOR

Consideration of the rights of the mortgagee has drawn into the discussion the rights of other claimants, and all being before the court pressing their respective demands directions will be herein given defining the rights and priorities of each.

No attempt will be made to ascertain the precise sums to be paid to individual claimants. The principles by which distribution is to be made will be laid down. Thereafter an order applying those principles may be submitted for signature.

The following are the claimants:

(1) The receiver for expenses, allowances and costs of the cause.

(2) The Wilmington Trust Company for its mortgage dated September 12, 1922.

(3) The United States of America for sundry taxes aggregating $ 18,349.41.

(4) State, County, Wilmington City taxes and sewer lien aggregating $ 2,200.00.

(5) Two judgment creditors, as follows: One for $ 290.45 and the other for $ 211.62.

(6) General creditors.

The funds in hand are insufficient after paying preferred claims to supply anything to the general creditors. They may therefore be disregarded.

The main controversy concerns the right of the Federal government to be recognized as preferred over the mortgagee and the State, County and City governments.

First. Is the Federal government to be paid ahead of the mortgagee? This question, of course, has reference only to that portion of the funds in hand which were derived from a sale of the mortgaged premises. The taxes claimed by the Federal government are said to constitute a lien prior to the mortgage by virtue of the following provision found in the Revised Statutes of the United States:

"Section 3186. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise provided, until paid, with the interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to such person; provided, however, that such lien shall not be valid as against any mortgagee, purchaser or judgment creditor until notice of such lien shall be filed by the collector in the office of the clerk of the District Court of the district within which the property subject to such lien is situated." U.S. Comp. St. § 5908.

Prior to the Act of March 4, 1913 (Chapter 166, 37 U.S. Stat. L. 1016), the foregoing section did not contain the language beginning with the words "provided, however." That act added this language. Whether its enactment grew out of the decision made by Judge Rose in United States v. Curry, (D. C.) 201 F. 371, I do not know. Probably it did. At all events the provision now appears in the Federal Statutes and is applicable to the instant situation. The lien provided for by Section 3186 dates from the time "when the assessment list is received by the collector." By "Exhibit 1" filed in the cause by consent of the parties, it appears that of the total amount of Federal taxes here claimed, $ 3,587.27 thereof appeared on the assessment lists which were received by the collector prior to September 12, 1922, the date of the recordation of the mortgage, and the balance thereof, viz., $ 14,762.14, was certified and received by the collector subsequent to said date. There was a demand for payment of all the Federal taxes and a neglect or refusal to pay. Therefore the taxes acquired the effect of liens insofar as Section 3186 could confer on them that quality.

In arriving at a conclusion with respect to these taxes, as to whether they are preferred over the mortgage, they will be broken into two classes, viz., those assessed and certified to the collector prior to the date of the mortgage and those assessed and certified subsequently thereto. The amount falling in each class has before been stated.

What is the status of those assessed and certified subsequent to the date of the mortgage? It is to be observed that both the lien of the mortgage and the lien for the taxes are legal liens. As between legal liens the general rule universally applied is that the first in time is first in right. The solicitor for the United States endeavors to circumvent this rule by the suggestion that the mortgage in this case was given to secure an antecedent debt and this being so the mortgagee is not in the position of a bona fide purchaser for value. Wherefore, he concludes that the taxes assessed and certified subsequently to the mortgage are not to be disturbed in their lien by the mortgage notwithstanding its earlier date. This is a non sequitur. It is so for two and possibly three reasons. (a) It is founded on the erroneous conception that the equitable doctrine of bona fide purchaser for value without notice is applicable to such a situation as this. The case does not call for an amplified discussion of the nature and kind of controversies to which equity applies this favored doctrine. It is sufficient to point out the negative fact that in questions affecting the priority of purely legal estates and demands equity leaves them where they are, undisturbed by those equitable considerations which give to the situation of a purchaser for value without notice a favored position. 2 Pomeroy's Equity Jurisprudence, (4th Ed.) §§ 675, 735. See, also, Story's Equity Jurisprudence, (14th Ed.) § 850, where it is indicated that barring the exceptional case of dower the plea of a purchaser for a valuable consideration has been supposed to apply only to equitable claims. In the instant case, there is no appearance of anything like an equitable claim. The rights and claims are purely legal. I am unable, therefore, to see how there is any occasion to invoke the doctrine to which the solicitor for the United States appeals. (b) The statute under which the United States claims its lien expressly declares that the same "shall not be valid as against any mortgagee * * * until notice of such lien shall be filed by the collector in the office of the clerk of the District Court," etc. Notice of these liens was never filed in the office of the clerk of the District Court. Therefore they are not liens as against the mortgagee unless the statute is to be so interpreted as to read into it a qualification confining the term "mortgagee" to that class whose mortgages were obtained to secure a contemporaneous debt, and excluding from its scope that class of whom this mortgagee is one, whose mortgages were obtained to secure an antecedent indebtedness. It is admitted that the term "mortgagee" is broad enough in its literal meaning to embrace the petitioner in this case. Nothing has been adduced here which would justify the court in going over into the field of unrelated equitable ...