In re Halprin

• Decision Date: 01 July 1960
• Docket Number: No. 13034.,13034.
• Parties: In the Matter of Norman E. HALPRIN, Bankrupt. Commercial Sales, Inc., Assignee of Norman E. Halprin, Appellant. United States of America, Claimant-Appellee.
• Court: U.S. Court of Appeals — Third Circuit

280 F.2d 407 (1960)

In the Matter of Norman E. HALPRIN, Bankrupt Commercial Sales, Inc., Assignee of Norman E. Halprin, Appellant United States of America, Claimant-Appellee.

No. 13034.

United States Court of Appeals Third Circuit.

Argued March 21, 1960.

Decided July 1, 1960.

Irving L. Epstein, Scranton, Pa., for appellant.

George F. Lynch, Washington, D. C., (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., Daniel H. Jenkins, U. S. Atty., William D. Morgan, Asst. U. S. Atty., Scranton, Pa., on the brief), for appellee.

Before McLAUGHLIN, KALODNER and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

The question on this bankruptcy appeal is whether an outstanding obligation to pay money is property subject to a tax lien filed by the United States against property of the bankrupt, or is property of a third person to which no such lien has attached.

Norman E. Halprin, the bankrupt, was a manufacturer. In January 1956 federal withholding taxes in the amount of $7735.25 were assessed against him. On February 2, 1956 notice of lien for these taxes was duly filed and publicly recorded. It is clear that thereafter, pursuant to Sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 6321-6323,¹ a lien in favor of the United States attached to and had been perfected against all tangible and intangible property owned or acquired by Halprin. Glass City Bank of Jeanette, Pa. v. United States, 1945, 326 U.S. 265, 66 S.Ct. 108, 90 L.Ed. 56.

Prior to that time in the regular course of business, Halprin had contracted with David D. Doniger & Co. to sew and complete jackets from cut-out material to be supplied by Doniger. This contract provided that Halprin was to receive an agreed price on delivery of the jackets, properly sewn and completed by him. In June 1956, Halprin, needing funds to meet current payrolls, borrowed money from the present claimant, Commercial Sales, Inc., giving as security an irrevocable assignment in writing of all sums to become due in the future under the then executory Doniger contract. Doniger was given written notice of this assignment and consented to it in a writing wherein Doniger expressly promised to pay Commercial all monies which should become due under its contract with Halprin.

Thereafter goods were manufactured and delivered by Halprin and accepted by Doniger. When Halprin became bankrupt Doniger admitted an outstanding obligation to pay $3017.16 for goods thus manufactured and delivered after the assignment. Believing Commercial entitled to this money, the trustee petitioned in the bankruptcy proceeding for authority to disclaim title of this debt owed by Doniger. The referee denied the petition, viewing the debt as property of the bankrupt, to which the government's tax lien against the bankrupt had attached. The court below sustained that holding. Commercial, the defeated claimant, has appealed.

We begin our analysis of the foregoing transactions with the assignment and Doniger's promise to pay Commercial pursuant thereto. All relevant transactions occurred in Pennsylvania which has adopted the Uniform Commercial Code. P.S.Tit. 12A. Sections 9-102 and 9-204 of that title sanction and make immediately effective such a creation of a security interest in a right under an executory contract as the parties attempted here. Analytically, the three parties created a new primary obligation by substituting a new promise by Doniger to pay Commercial for Doniger's original promise to pay Halprin. If the original manufacturing contract had been a third-party beneficiary contract, with Doniger promising from the outset to pay Halprin's creditor for Halprin's work, it would have been apparent that the parties had created no obligation to pay Halprin and that Doniger's promise to pay the third-party could not have been reached by any lien filed against Halprin. This is essentially the contractual situation created in this case albeit by a three party arrangement modifying the obligations of an original bilateral contract. For, after Doniger agreed to make payment direct to Commercial, pursuant to Halprin's assignment, Halprin ceased to be entitled even formally, much less beneficially, to receive Doniger's performance. Cf. Taylor v. Stanley Co., 1932, 305 Pa. 546, 158 A. 157. Therefore, if the lien against Halprin had not attached to Doniger's obligation before this third-party agreement, it could not attach thereafter.

This brings us to the critical question in the case. Did the government's tax lien attach to the Doniger-Halprin contract before Commercial entered the picture?

Under the terms of Section 6321 of the Internal Revenue Code of 1954 a duly perfected lien of the United States for taxes attaches to "all property and rights to property, whether real or personal, belonging to" a delinquent taxpayer. Application of this statute involves a two-step inquiry in which both state and federal law must be consulted. State law creates legal interests and defines their incidents, but the ultimate question whether an interest thus created and defined falls within a category stated by a federal statute requires an interpretation of that statute, which is a federal question. Morgan v. Commissioner, 1940, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585; Fidelity & Deposit Co. of Md. v. New York City Housing Authority, 2 Cir., 1957, 241 F.2d 142.² Our federal problem is whether, in a wholly executory bilateral contract, valid under state law, a promise to pay for goods or services which are yet to be delivered or performed is property of the promisee within the meaning of this lien-creating statute. We must apply what relevant data we can find, including our understanding of the nature and characteristics of contract rights and property rights at common law, in order to decide what kinds of intangible rights Congress covered in the phrase "property and rights to property", as it is used in Section 6321.

Of course a debt, an unqualified obligation to pay money, is property of the creditor to which a lien for his taxes may attach. And such a property right usually arises from a...