Pine Builders, Inc. v. United States

• Decision Date: 19 March 1976
• Docket Number: 75-0251-R.,Civ. A. No. 75-0250-R
• Parties: PINE BUILDERS, INC. v. The UNITED STATES of America.
• Court: U.S. District Court — Eastern District of Virginia

413 F. Supp. 77

PINE BUILDERS, INC. v. The UNITED STATES of America.

Civ. A. Nos. 75-0250-R, 75-0251-R.

United States District Court, E. D. Virginia, Richmond Division.

March 19, 1976.

COPYRIGHT MATERIAL OMITTED

Walter F. Witt, Jr., T. S. Ellis, III, Frank A. Thomas, III, Richmond, Va., for plaintiff.

N. George Metcalf, Asst. U. S. Atty., Eddie Cantor, Henry A. Conner, Jr., Richmond, Va., for defendant.

MEMORANDUM

WARRINER, District Judge.

This suit is a consolidation of two actions of interpleader filed pursuant to 28 U.S.C. § 1335 and Fed.R.Civ.P. 22 whereby defendants United States and Joseph M. Zamoiski Co., are adverse claimants to a sum of money which plaintiffs Pine Builders, Inc., and Parham Company have paid into the registry of this Court so that we may resolve the conflicting claims between defendants relative thereto. Jurisdiction is envoked under 28 U.S.C. §§ 1335, 1340, 2410.

On 30 December 1975 Pine and Parham filed their respective motions for summary judgment requesting that they be discharged from this proceeding and from any further liability with regard to the interpleader funds. With all interested counsel consenting this Court entered an order granting said motion. By agreement of counsel for the remaining parties the issue of priority in the funds has been submitted to the Court for a decision on the merits as evidenced by the pleadings, stipulations and depositions.

The Court makes the following findings of fact: In late June or early July of 1974 Industrial Carpet Sales, Inc. (Industrial) entered into an oral contract with Pine Builders, Inc. (Pine) and a separate oral contract with Parham Company (Parham). Industrial contracted to install carpeting and the necessary padding in approximately 1,000 apartments, 500 located at Chelsea Square and 500 located at Jarrett Apartments, constructed by Parham and Pine, respectively. The pricing of Industrial's services was on a per apartment unit basis. Pine and Parham were to pay Industrial on Friday of each work week for the number of apartments Industrial had completed through Wednesday of that work week. The contract between Industrial and Pine was identical to the contract between Industrial and Parham with variations only in the price per apartment unit.

Shortly after work on the contracts commenced Industrial's supplier of carpeting and padding, Joseph M. Zamoiski Company (Zamoiski), demanded security from Industrial as a prerequisite to continued supply, apparently because Industrial owed a considerable sum of money on an open account it had with Zamoiski. This demand was met by an agreement amongst Zamoiski, Industrial, Pine and Parham whereby Zamoiski continued to furnish the necessary carpeting materials to Industrial while Pine and Parham made the weekly checks payable jointly to Industrial and Zamoiski. Upon receipt of each check Zamoiski deducted a predetermined amount as indicated by specified invoices for materials furnished. This arrangement was substantially complied with from its inception through completion of the Chelsea and Jarrett projects. Zamoiski set up an account separate from the delinquent open account covering these transactions.

As additional security Zamoiski, required Industrial to enter into a Security Agreement that secured "all of the obligations" of Industrial to Zamoiski. Such obligations included the delinquent open account as well as the Pine-Parham account. On 15 July 1974 Zamoiski filed with both the State Corporation Commission of Virginia and the Clerk's Office of the County of Henrico a Financing Statement and Security Agreement describing the collateral as follows:

All of Debtor's present and future accounts receivable, general intangibles, contract rights, returned, repurchased, repossessed goods, and monies due and to become due from banks, credit card companies, and other issuers of credit cards. All of Debtor's contract rights now and hereafter arising from all present and future contracts and agreements between Debtor and Gumenick Properties for the furnishing by Debtor of goods and/or services for Chelsea Square Apartments and Jarrett Apartments and all of Debtor's accounts receivable now and hereafter arising from the aforesaid agreements, contracts or furnishing of goods and/or services and all returned, repurchased and repossessed goods.

During the course of these projects, Industrial suffered severe financial reverses and consequently was unable to pay federal withholding and other taxes which were, as of their assessment dates, in the amounts as follows: 10 February 1975—$7,438.04; 24 March 1975—$4,755.35; 12 May 1975— $218.40. As a result federal tax liens, pursuant to 26 U.S.C. § 6321, arose in favor of the United States for the amount of Industrial's tax liability.

Subsequently the government filed notice of these liens, in compliance with the Federal Tax Lien Act, Code § 6323, with the State Corporation Commission of Virginia on the respective dates of 20 February 1975, 27 March 1975 and 13 May 1975.

On 20 May 1975 the government served, pursuant to 26 U.S.C. § 6155, Notice of Final Demand on both Pine and Parham. At that time Pine and Parham owed a sum total of $19,900.36 to Industrial for services rendered under the aforementioned contracts. Being confronted with demands from the government, Industrial, and Zamoiski and realizing reasonable doubt existed as to which party was entitled to what portion, if any, of the funds, Pine and Parham filed interpleader actions with this Court which have been consolidated into one suit.

The sole issue for the Court to resolve is whether Zamoiski has rights as a secured creditor which are entitled to priority over the federal tax liens on the funds deposited herein by Pine and Parham.¹

Where the federal government is a competing lienor the question of priorities is determined by reference to federal law. Agsten and Sons, Inc. v. Huntington Trust and Savings Bank, 388 F.2d 156 (4th Cir. 1967) cert. denied 390 U.S. 1025, 88 S.Ct. 1413, 20 L.Ed.2d 282 (1968); Purcell v. Henson, 405 F.Supp. 1130 (E.D.Va.1975). It is undisputed that the Federal Tax Lien Act of 1966 (FTLA) 26 U.S.C. §§ 6321, 6323 is controlling in this case. The purpose of the Act, we believe, was to fit tax liens into the priority scheme of the UCC.²

The priority of a federal tax lien provided by Code Section 6321 as against liens created by State law is governed by the rule-first in time first in right. United States v. City of New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). In order to apply the first in time first in right rule the times at which the federal tax lien and the competing State created lien came into existence and became valid must be determined. United States v. Pioneer American Insurance Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963).

A federal tax lien arises when the tax is assessed, 26 U.S.C. § 6322. However, it is not valid as against a holder of a "security interest" until notice thereof has been filed in accordance with 26 U.S.C. § 6323(a), (f). The dates are clear with respect to the filing of the government's tax lien notices. Thus, the issue narrows down to a determination of the time at which Zamoiski became the "holder of a security interest" in the funds deposited with the Court within the meaning of Code Section 6323(a).

Code Section 6323(h)(1) defines the term security interest as follows:

(1) Security interest.—The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

The House Ways and Means Committee Report states further in this regard, H.R. Rep.No.1884, supra at 49:

A security interest must be in existence, within the provisions of section 6323(h)(1), at the time as of which its priority as against a Federal tax lien is determined. For example, a security interest, to be afforded priority under section 6323(a), as amended by the bill, must be in existence within the meaning of subsection (h)(1) before notice of tax lien is filed.

For purposes of subsection (h)(1), a security interest becomes protected against a subsequent judgment lien on the date on which all actions required under local law to establish the priority of the security interest against such a judgment lien have been taken, or, if later, the date on which all such actions are deemed effective, under local law, to establish such priority. . . .

The undisputed facts show that on 15 July 1974 Zamoiski, pursuant to an agreement with Industrial and for the purpose of securing present and future obligations of Industrial to Zamoiski, perfected its security interest in the "property" of Industrial then in "existence" that was subject to the security agreement filed on that date. It is undisputed that under Virginia law such perfection would protect Zamoiski's interest in existing property of Industrial from a subsequent judgment lien arising out of an unsecured obligation. It is also undisputed that, although the nature of Industrial's right in the funds in question, if any, is controverted, that right, whatever it may be, was subject to the security agreement if and when the right accrued to Industrial. Additionally, the undisputed facts show that Zamoiski departed with "money or moneys worth" prior to the filing of the tax lien notices.

Hence, the issue further narrows down to whether or not, prior to the filing of the tax lien notices, Industrial's rights, if any, in the funds deposited with this Court constituted "property" in "existence" under FTLA Code Section 6323(h)(1).

Code Section 6323(h)(1) is...