Malakoff v. Washington

• Decision Date: 06 August 1981
• Docket Number: No. 79-739.,79-739.
• Citation: 434 A.2d 432
• Parties: Norman MALAKOFF, et ux., Appellants, v. Walter E. WASHINGTON, et al., Appellees.
• Court: D.C. Court of Appeals

434 A.2d 432

Norman MALAKOFF, et ux., Appellants, v. Walter E. WASHINGTON, et al., Appellees.

No. 79-739.

District of Columbia Court of Appeals.

Argued September 30, 1980.

Decided August 6, 1981.

B. William Smink and M. Michael Klein, Washington, D.C., for appellants.

Richard G. Amato, Asst. Corp. Counsel, Washington, D.C., with whom Judith W. Rogers, Corp. Counsel, Richard W. Barton, Deputy Corp. Counsel, Washington D.C., at the time the brief was filed, James E. Lemert, Deputy Corp. Counsel and Richard L. Aguglia, Asst. Corp. Counsel, Washington, D.C., were on the brief, for appellees.

Before MACK and FERREN, Associate Judges, and GALLAGHER, Associate Judge, Retired.^*

GALLAGHER, Associate Judge, Retired:

The single issue presented by this appeal is whether the District of Columbia's claims for unpaid sales and withholding taxes take priority over a prior perfected security interest in property distrained and sold at a tax sale. The trial court found that the District had a superior claim with respect to both the sales and withholding taxes notwithstanding the valid pre-existing security interest, and entered summary judgment for appellees. Because we hold that the District of Columbia Code fails to accord absolute priority to the District's claim for delinquent withholding taxes, we reverse in part and remand.

The facts of this case are not in dispute. On August 18, 1971, appellants, Norman and Marjorie Malakoff, sold their hardware store business (located at 3430 14th Street, N.W.) to a newly-formed District of Columbia corporation, Mals Hardware, Inc. (Mals).¹ Mals executed a promissory note in the amount of $30,000 and gave the Malakoffs a security interest in all of the fixtures, equipment, and inventory of the store, including replacements and substitutions. A financing statement was duly recorded with the Office of the Recorder of Deeds on September 22, 1971. On January 15, 1975, the Chief Enforcement Officer for the District of Columbia Department of Finance and Revenue seized certain of the property covered by the security agreement for failure of Mals to pay withholding and sales taxes accruing subsequent to the recording of the financing statement. On March 17, 1975, a private auctioneer sold the property at public auction on behalf of the District for the gross sum of $5,090.00 and the net sum of $4,077.40. The District retains the net proceeds in satisfaction of its claims for taxes. At the time of the sale, $18,656.95 was still outstanding on the promissory note held by the Malakoffs. While the items were purportedly sold "subject to any lawful liens of encumbrances," the auction house failed to obtain the full names and addresses of the purchasers of the 224 lot items.² For all practical purposes, then, the Malakoffs' security interest has been wholly extinguished, unless, of course, we conclude that it takes priority over one or both of the District's claims for taxes.

THE LAW OF TAX LIEN PRIORITY GENERALLY

Generally, priority of liens or security interests is determined according to the well-known principle of "first in time, first in right." District of Columbia v. Franklin Investment Co., D.C.App., 404 A.2d 536, 540 (1979); District of Columbia v. Hechinger Properties Co., D.C.App., 197 A.2d 157, 160 (1964) [hereinafter cited as Hechinger]; Rankin v. Scott, 25 U.S. (12 Wheat.) 177, 179, 6 L.Ed. 592 (1827). The Uniform Commercial Code (UCC), effective in the District of Columbia on January 1, 1965, preserves this common-law principle, but refines it through the general rule that a party who first notifies the public of his security interest in a particular piece of property, either through possession of the collateral or filing of his financing statement (so-called "perfection"), prevails over all other parties with a security interest in the same collateral, regardless of which party first acquired the security interest itself (so-called "attachment"). Uniform Commercial Code — Secured Transactions, D.C. Code 1973, §§ 28:9-204(1), -301(1), -302, -303, -305, -312(5). In this connection, we note that the Malakoffs had perfected their security interest on September 22, 1971, well before the accrual of the District's claims for taxes.

While the UCC is by its own terms inapplicable to liens acquired by the District on account of delinquent taxes, id. § 28:9-102(2), the principle of "first in time, first in right" prevails as the general rule in contests between the Department of Finance and Revenue and private secured parties. See District of Columbia v. Franklin Investment Co., supra at 540. This rule is subject to an important exception, however. The legislature may, by statute, declare that the District's claims for taxes shall be liens preferred to all other liens or security interests of whatever kind and however created, and whether attaching or perfected before or after the tax lien arises.³ Krumpelman v. Louisville & Jefferson County Metropolitan Sewer District, 314 S.W.2d 557, 561 (Ky.1958); Linn County v. Steele, 223 Iowa 864, 866, 273 N.W. 920, 921 (1937); Union Central Life Insurance Co. v. Black, 67 Utah 268, 270, 247 P. 486, 487 (1926); Miller v. Anderson, 1 S.D. 539, 544, 47 N.W. 957, 959 (1891); United States v. Elliott, 209 F.Supp. 374, 376 (D.Colo. 1962); 3 T. Cooley, Taxation § 1230, at 2451-52 (4th ed. 1924). See District of Columbia v. Franklin Investment Co., supra at 540. Moreover, "super-priority" may be conferred upon the government's bare claim for taxes, whether or not they are also made liens. See Wethered v. Alban Tractor Co., 224 Md. 408, 417, 168 A.2d 358, 363 (1961). But this legislative intent to make claims or liens for taxes absolutely preferred must clearly appear from a strict construction of the statute. Linn County v. Steele, supra 223 Iowa at 866, 872, 273 N.W. at 921, 924; Miller v. Anderson, supra 1 S D. at 544, 47 N.W. at 959; 3 Sutherland Statutory Construction § 66.08, at 203 (4th ed. 1974); 2 L. Jones, Chattel Mortgages & Conditional Sales § 474, at 245 (6th rev. ed. 1933). See generally 72 Am.Jur.2d State and Local Taxation §§ 898-99 (1974); 84 C.J.S. Taxation § 599, at 1207 (1954). Although appellants do not here argue that such statutory grants of absolute priority to tax claims or liens violate some provision of the Constitution, we note that such arguments have uniformly been rejected so long as the statute in question is sufficient to place the public effectively on notice of the sovereign's claim of priority. See, e. g., Schlothan v. Territory of Alaska, 276 F.2d 806, 813, 814 (9th Cir.), cert. denied, 362 U.S. 990, 80 S.Ct. 1079, 4 L.Ed.2d 1022 (1960) (no impairment of contractual obligations or violation of due process); Krumpelman, supra at 561 (same). Our task, then, is to determine whether Congress (as the legislature of the District when the relevant portions of Title 47 of the District of Columbia Code were enacted) has sufficiently manifested an intent that claims for withholding and sales tax be absolutely prior to all other encumbrances.⁴

THE LAW OF TAX LIEN PRIORITY IN THE DISTRICT OF COLUMBIA

Title 47 of the District of Columbia Code makes the methods provided therein for the collection of personal property taxes available for the enforcement of all other taxes except real property taxes.⁵ D.C.Code 1973, § 47-312 provides:

In addition to any other methods or devices or both provided by law or regulation for the collection of various taxes (except real property taxes) due the District, any tax imposed by any law applicable to District taxes, and penalties and interest thereon, when such tax has become due and payable, may be collected in the manner provided by law for the collection of taxes due the District on personal property in force at the time of such collection; and liens for all such taxes, penalties, and interest may be acquired in the same manner that liens for personal property taxes are acquired.

One method by which delinquent personal property taxes may be collected is by distraint and sale. D.C.Code 1973, § 47-1301 provides that the collector of taxes may seize "sufficient goods and chattels" (or, for want of such personalty, the real property) of the delinquent taxpayer and, after notice by publication (or, if realty is distrained, after personal notice by letter), sell the property at public auction, with any surplus proceeds going to the taxpayer. See also id. -1402. It is important to note that the District's lien for personal property taxes does not merely arise from the fact of a delinquency. The lien must be "acquired" (see id. -312, supra), either by the filing of a certificate of delinquency with the recorder of deeds (id. -1406) or by the more immediate means of distraint (id. -1301, -1402).⁶ Moreover, a lien so acquired is entitled only to the priority given by the principle of "first in time, first in right," for the Code contains no provision making liens for personal property taxes superior to pre-existing perfected security interests. See discussion supra.

Having laid this foundation, we proceed to examine the taxes at issue — sales tax and withholding tax.

a. Sales Tax

Like personal property taxes, sales taxes are not an automatic lien on the taxpayer's property from the time they are due and owing. Section 47-2610 of the Code reiterates the prescription of § 47-312 (quoted supra) that sales taxes "may be collected . . . in the manner provided by law for the collection of taxes due the District on personal property" and that "liens for [sales] taxes . . . may be acquired in the same manner that liens for personal property taxes are acquired." D.C.Code 1973, § 47-2610. Thus, the District acquires no lien for unpaid sales taxes unless and until it files a certificate of delinquency or (as it did here) distrains the property of the taxpayer. But while the Code does not purport to give personal property tax liens priority over preexisting encumbrances, § 2609 does give special...