In re Fornabai, B-325-62.

• Decision Date: 28 February 1964
• Docket Number: No. B-325-62.,B-325-62.
• Citation: 227 F. Supp. 928
• Parties: In the Matter of Nicholas FORNABAI individually and trading as Fornaby Equipment Company, Bankrupt.
• Court: U.S. District Court — District of New Jersey

227 F. Supp. 928

In the Matter of Nicholas FORNABAI individually and trading as Fornaby Equipment Company, Bankrupt.

No. B-325-62.

United States District Court D. New Jersey.

February 28, 1964.

David M. Satz, Jr., U. S. Atty., Martin Tuman, Asst. U. S. Atty., by Maurice Adelman, Jr., Attorney, Department of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Fred B. Ugast, Maurice Adelman, Jr., Attorneys, Department of Justice Washington, D. C., on the brief, for petitioner.

Louis Kraemer, Newark, N. J., for Pak-Mor Mfg. Co.

Evans, Hand, Evans, Allabough & Amoresano, Paterson, N. J., for Truck Equipment Corporation. Louis Kraemer, Newark, N. J., on the brief, for respondents.

SHAW, District Judge.

This matter comes before the Court pursuant to the provisions of 11 U.S.C.A. § 67, subs. c, a(8) on Petition for Review of an order by the Referee in Bankruptcy. The order of the Referee in Bankruptcy dated June 4, 1963 determined that two judgment liens were entitled to priority in satisfaction over tax liens of the United States of America out of a real estate fund being administered by the Court.

The pertinent facts may be recited briefly as follows: On May 2, 1962 Nicholas Fornabai individually and doing business as Fornaby Equipment Co. was adjudicated a bankrupt in a Chapter XI proceeding. The realty of the bankrupt was sold and valid liens against the realty transferred to the proceeds of the sale. The amount thereof held by the Trustee in Bankruptcy is insufficient for full satisfaction of all valid liens.

The parties here involved, who assert liens against the proceeds of the sale of realty by virtue of judgments obtained against the bankrupt are Truck Equipment Corp. and Pak-Mor Manufacturing Co. The lien of the United States is for taxes assessed against the bankrupt pursuant to provisions of the Internal Revenue Code of 1954. Truck Equipment Corporation recovered a judgment in the Superior Court of New Jersey against the bankrupt on December 8, 1960. The amount is $13,716.85 plus interest. PakMor Manufacturing Co. recovered its judgment against the bankrupt in the United States District Court for the District of New Jersey on March 10, 1961. The amount of this judgment is $18,199.61 plus interest. Both judgments were docketed as of the dates of recovery thereof. The United States filed notice of tax liens against the bankrupt on the following dates and in the amounts stated:

                (1) April 10, 1961 .......... $ 8,272.28
                (2) June 20, 1961 ...........   9,495.72
                (3) August 24, 1961 .........  13,744.33
                (4) February 14, 1962 .......   4,333.58
                (5) March 16, 1962 ..........     722.01
                (6) April 12, 1962 ..........   3,166.70
                

The precise question presented is whether the liens of the two judgment creditors above mentioned were perfected in the sense that they became choate liens on the realty of the bankrupt prior to the date when the United States filed its notice of tax liens. If so, the judgment liens are entitled to priority.

A judgment docketed in the Superior Court of New Jersey is a lien upon all real estate of the judgment debtor located within the State of New Jersey from the date the judgment is docketed. N.J.S.A. 2A:16-1. Venetsky v. West Essex Building Supply Co., 28 N.J.Super. 178, 100 A.2d 291 (App.Div.1953).

By federal statute it is provided with respect to judgments of the United States District Court that:

"Every judgment rendered by a district court within a State shall be a lien on the property located in such State in the same manner, to the same extent and under the same conditions as a judgment of a court of general jurisdiction in such State, and shall cease to be a lien in the same manner and time. * * *"

28 U.S.C.A. § 1962.

Taxes assessed against a taxpayer pursuant to the provisions of the Internal Revenue Code of 1954 become liens in favor of the United States upon all property and rights to property belonging to the taxpayer. 26 U.S.C.A. § 6321. But the lien for taxes is not valid "as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed." (Emphasis supplied.) 26 U.S.C.A. § 6323. As noted above, the earliest date on which the Government filed notice of a tax lien was April 10, 1961.

Federal law determines which secured creditors are judgment creditors for purposes of protection under Section 6323. United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53 (1950); United States v. Gilbert Associates, Inc., 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953); United States v. Acri, 348 U.S. 211, 75 S.Ct. 239, 99 L.Ed. 264 (1955); United States v. Scovil, 348 U.S. 218, 75 S.Ct. 244, 99 L. Ed. 271 (1955); Stevan v. Union Trust Co., 115 U.S.App.D.C. 36, 316 F.2d 687 (1963).

In the case of United States v. Gilbert Associates, Inc., supra, the Supreme Court stated:

"Congress enacted § 3672 (now 26 U.S.C.A. 6323) to meet the harsh condition created by the holding in United States v. Snyder, 149 U.S. 210, 13 S.Ct. 846, 37 L.Ed. 705, when federal liens were few, that a secret federal tax lien was good against a purchaser for value without notice.

"A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a `judgment creditor' should have the same application in all the states. In this instance, we think Congress used the words `judgment creditor' in § 3672 in the usual, conventional sense of a judgment of a court of record, since all states have such courts."

The priority of a lien created by state law over a tax lien of the federal government depends on the time it attached to the property in question and became choate. It is perfected to the point of being a choate lien "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. Pioneer American Insurance Co., 374 U.S. 84, 88, 89, 83 S.Ct. 1651, 1655, 10 L.Ed. 2d 770 (1963).

Each of the judgments here were recovered in a court of record and docketed therein. The identity of each judgment lienor, the property subject to the judgment lien and the amount thereof has been established. Nevertheless, the Government contends that neither of the judgments imposed a choate lien upon realty of the bankrupt because neither of the judgment creditors caused a writ of execution to issue against the real estate of the bankrupt. In support of its argument, the Government cites N.J.S.A. 2A:17-39 which reads as follows:

"SALE OF REAL ESTATE FREE OF LIEN OF JUDGMENTS OR RECOGNIZANCES ON WHICH EXECUTIONS NOT ISSUED

"Whereas, other judgments, and recognizances, besides those, or some of those, by virtue whereof the sale aforesaid was made, might affect the real estate so sold, if no provision be made to remedy the same, and whereas, the persons who have not taken, or will not take out executions upon their judgments, or recognizances, ought not to hinder or prevent such as do take out executions from having the proper effect and fruits thereof, therefore, in any such case, the purchaser, his heirs and assigns, shall hold the lands, tenements, hereditaments, and real estate by him or her purchased as aforesaid, free and clear of all other judgments and recognizances, whatsoever, on or by virtue of which no execution has been taken out and executed on the real estate so purchased." (Emphasis supplied.)

The effect and purpose of the above cited statutory provision is misconstrued. A writ of execution on a judgment does not create the lien; it is merely the procedural means by which the judgment creditor obtains satisfaction out of the...