In re Baltimore Pearl Hominy Co.

• Decision Date: 14 April 1925
• Docket Number: No. 2207,2227.,2207
• Citation: 5 F.2d 553
• Parties: In re BALTIMORE PEARL HOMINY CO. GUARANTY TRUST CO. OF NEW YORK v. McKENRICK et al. (two cases).
• Court: U.S. Court of Appeals — Fourth Circuit

5 F.2d 553 (1925)

In re BALTIMORE PEARL HOMINY CO. GUARANTY TRUST CO. OF NEW YORK v. McKENRICK et al. (two cases).

Nos. 2207, 2227.

Circuit Court of Appeals. Fourth Circuit.

April 14, 1925.

George Weems Williams and James Morfit Mullen, both of Baltimore, Md., for petitioner and appellant.

Edgar Allan Poe, of Baltimore, Md. (Bartlett, Poe & Claggett and Morris A. Rome, all of Baltimore, Md., on the brief), for respondents and appellees.

Before WOODS and WADDILL, Circuit Judges, and McDOWELL, District Judge.

WOODS, Circuit Judge.

The Baltimore Pearl Hominy Company was notified on July 10, 1920, by the Commissioner of Internal Revenue of a claim for additional income and excess profits taxes for the years 1916, 1917, and 1918, amounting to $359,899.54. The letter of notification contained the following statement:

"This is not a notice of assessment, and no payment is required in connection herewith until you receive formal notice from the collector of internal revenue for your district."

Some time between the receipt of the notice and February, 1921, the Hominy Company employed the firm of Humphreys, Day & Co., income tax specialists, to attempt to secure a reduction in the assessment. After negotiations with the government by Humphreys, Day & Co., the claim was reduced to $72,192.34.

On February 11, 1921, five banks, including the appellant, unsecured creditors of the Hominy Company to the amount of $233,000, became concerned because of the inability of the company to meet its obligation to the government and offered to advance a sufficient sum to compromise the tax claim for $42,000 or less and to pay Humphreys, Day & Co., their charge of $20,000. Each bank agreed to contribute to the sum advanced in proportion to its unsecured claim. The letter written jointly by the banks and the Hominy Company to Humphreys, Day & Co., expressing the proposition outlined, contained the following:

"It is distinctly understood that in so far as the parties hereto are able to do so, the undersigned banks shall be entitled to be subrogated to all of the rights of the government, as to a prior lien for such amounts paid to the government for said taxes, and further that we shall receive notes of the Baltimore Hominy Company covering such advances as may be made under this agreement."

On its books the assets of the Hominy Company at this time were largely in excess of its liabilities. In fact, its liabilities were very largely in excess of its assets.

A settlement with the government was arranged by Humphreys, Day & Co. for $35,000. The Union Trust Company, one of the five banks mentioned, collected from each of the banks its proportionate share of the sum advanced to cover the amount of the compromise and the counsel fee of $20,000, each bank taking the note of the Hominy Company for the amount it contributed. On February 23, 1921, the Union Trust Company drew its check for $35,000 in favor of the Hominy Company, and that company indorsed it to the order of the Commissioner of Internal Revenue. The government's representatives refused to accept this check and returned it. On March 17, 1921, the collector of internal revenue at Baltimore received an assessment list from the Commissioner of Revenue at Washington, upon which list appeared an assessment against the Hominy Company of $72,192.34. On the next day, March 18, 1921, a new check was made out by the Union Trust Company for the amount agreed upon to the order of Joshua W. Miles, collector, dated as of February 23, 1921. This check was accepted, being acknowledged as final settlement in a letter from a deputy commissioner under date of March 22, 1921.

On April 4, 1921, the circuit court of the city of Baltimore appointed receivers for the Hominy Company, and on May 6, 1921, it was adjudicated a bankrupt. The unsecured debts of the corporation amounted to $591,000, and its principal assets were sold for $178,000. The referee allowed the tax payment as a preference in favor of the banks who had made it. Upon the hearing of petition of one of the trustees of the bankrupt estate, the District Judge made an order disallowing the preference and directing the respective claims of the banks for the amounts advanced to be allowed only as unsecured claims. This, as we understand, is a test case to determine the rights of the banks claiming preference by way of subrogation to the government's alleged prior lien, brought to this court on petition to superintend and revise and on appeal from the decree of the District Court.

We think the government had a lien for the tax on March 18, 1921, at the time of payment. The applicable statutory provision is:

"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. Compiled Statutes, § 5908.

The tax fixed by the government at $72,192.34 was on the assessment list received by the collector of internal revenue on March 17, 1921. No payment had then been made, for the collector had refused the check tendered. It is true no demand in formal terms was made of the Hominy Company because of the voluntary agreement of the taxpayer to pay $35,000 which the government had agreed to accept. The statute prescribes no form and no kind of demand. The whole course of dealing shows that the government had reduced its original tentative claim of $359,899.54 to a formal assessment of $72,192.34, that it was expecting and requiring payment of $35,000 in settlement of...