People of Puerto Rico v. Federal Land Bank

• Decision Date: 19 January 1940
• Docket Number: 3459.,No. 3458,3458
• Citation: 108 F.2d 275
• Parties: PEOPLE OF PUERTO RICO v. FEDERAL LAND BANK OF BALTIMORE (two cases).
• Court: U.S. Court of Appeals — First Circuit

108 F.2d 275 (1939)

PEOPLE OF PUERTO RICO v. FEDERAL LAND BANK OF BALTIMORE (two cases).

Nos. 3458, 3459.

Circuit Court of Appeals, First Circuit.

December 15, 1939.

Rehearing Denied January 19, 1940.

William Cattron Rigby, of Washington, D. C. (B. Fernandez Garcia, of San Juan, P. R., and Nathan R. Margold, of Washington, D. C., on the brief), for appellant.

Frank Martinez, of San Juan, P. R., for appellee.

Before WILSON and MAGRUDER, Circuit Judges, and McLELLAN, District Judge.

MAGRUDER, Circuit Judge.

The plaintiff bank in these two cases became the holder of real estate mortgages given to secure long-term loans. At the times when the bank acquired these security interests, 1928 in the first case and 1925 in the second, Puerto Rico had an unusual provision of law relating to liens for real estate taxes. Section 315 of the Political Code provided:

"* * * The tax that is assessed for the current fiscal year, and for the three prior fiscal years, against each piece or parcel of real property, including any improvements that may be thereon, or that may be subsequently placed thereon, shall constitute the first lien thereon, and shall be prior to all other liens whatsoever on said property, whether the said liens attach before or after the lien of said taxes: * * *."

As the law then stood, this prior lien would lapse after a tax had been more than three years in arrears, which tended to bring about a rather prompt collection of taxes, by tax sales if necessary. Depressed economic conditions prompted the passage of the Act of July 16, 1936, which authorized the Treasurer of the Island, upon application by any taxpayer owing real estate taxes for 1934-1935 or preceding years, to defer the collection of such taxes and extend the time for payments thereon over a period of twenty years in equal annual installments. Section 5 of this Act reads:

"The amount of the deferred-tax receipts issued under this Act shall constitute a preferred lien on the property subject to the unpaid and deferred tax. This lien shall have preference and priority over any other lien which already burdens or may be hereafter constituted on said properties. The term of duration of this lien for taxes levied on real property, which is established by Section 315 of the Political Code, * * * is extended for a period of twenty (20) years and shall not be extinguished until the deferred taxes and the interest thereon have been totally paid; * * *"

In 1937 the bank instituted these suits to foreclose the mortgages above mentioned. Jurisdiction in the federal district court was based upon the Act of June 16, 1933, 48 Stat. 184, 12 U.S.C. § 632, 12 U.S. C.A. § 632. The People of Puerto Rico levied attachments on the mortgaged properties, to cover installments due on "extended" taxes. After decreeing foreclosure and sale to satisfy the claims of the plaintiff bank, the court, on motion of the bank, ordered the People of Puerto Rico to show cause why the attachments for extended taxes should not be cancelled. After hearing, the court decreed in each case that such attachments should be cancelled and "that the only lien for taxes in favor of the People of Puerto Rico which has priority to complainant's mortgage is for taxes for the current year and the three preceding fiscal years." These are the decrees now appealed from.

The District Court thought that the Act of 1936 was invalid as "a violation of the terms of the Organic Act which prohibits the Legislature from passing any law which would impair the obligation of contracts." 48 U.S.C. § 737, 48 U.S.C.A. § 737.

We believe that the Act is valid and that the attachments for extended taxes take priority over the mortgages held by the bank.

There has been no impairment of the obligation of contract. In each case the obligation of the debtor to pay off the mortgage note in the installments originally specified remains unimpaired, and the full interest of the mortgagor in the property remains pledged to the fulfillment of this obligation. But the mortgagor's interest was always subject to the paramount taxing power of the Territory. Baldwin v. Moroney, 173 Ind. 574, 583-584, 91 N.E. 3, 7, 30 L.R.A.,N.S., 761. A lien for taxes attaches to the land itself, irrespective of whatever subdivision of beneficial or security interests may exist therein.

Appellee concedes that its vested mortgage interest may, even by subsequent legislation, be subordinated to a lien for taxes levied on the land, where the lien is established in support of taxes imposed and accruing from and after the date of such legislation. Wabash E. Ry. Co. v. Commissioners, 134 Ill. 384, 25 N.E. 781, 10 L.R.A. 285; German Savings & Loan Society v. Ramish, 138 Cal. 120, 124, 125, 69 P. 89, 70 P. 1067; Murphy v. Beard, 138 Ind. 560, 38 N.E. 33; see Provident Institution for Savings v. Mayor and Aldermen of Jersey City, 113 U.S. 506, 514-516, 5 S.Ct. 612, 28 L.Ed. 1102; Note, 30 L.R.A.,N.S., 762. We decided nothing to the contrary in Domenech v. Lee, 1 Cir., 66 F.2d 31, which related to excise taxes, not taxes on real estate. It is contended, however, that the legislature cannot, to the prejudice of pre-existing mortgage interests, create a new tax lien or revive an expired one, in support of past-due taxes levied on the land. In our opinion the taxing power is not subject to this limitation. The needs of revenue are served by the collection of delinquent taxes as well as by the collection of current taxes.

The records in the cases at bar do not indicate what years are covered by the attachments for extended taxes involved in this appeal. If they were for the fiscal year 1934-1935, and perhaps also for the fiscal year 1933-1934, then at the time the taxes were extended the old prior liens given by Section 315 of the Political Code were still valid and subsisting. As to them, the legislature could without question say, as it did in the Act of 1936: "We might enforce these liens now in preference to all other outstanding interests, but to avoid oppressive tax sales in these hard times we shall give the taxpayer the option to apply for a twenty-year extension of the taxes so secured, in which case the liens instead of lapsing within three years shall be extended until the deferred taxes have been paid."

We think the Act of 1936 is equally valid as applied to extended taxes for years as to which the old three-year lien had already lapsed.

Let us assume that the taxpayer failed to pay the taxes assessed for the fiscal year 1931-1932. At the time those taxes accrued and for three years thereafter they constituted a lien on the mortgaged property superior to the lien of the bank. As a matter...