PPG Industries, Inc. v. Hartford Fire Insurance Co.

• Decision Date: 11 November 1974
• Docket Number: No. 73 Civ. 3550 (WCC).,73 Civ. 3550 (WCC).
• Citation: 384 F. Supp. 91
• Parties: PPG INDUSTRIES, INC., Plaintiff, v. The HARTFORD FIRE INSURANCE COMPANY et al., Defendants.
• Court: U.S. District Court — Southern District of New York

384 F. Supp. 91

PPG INDUSTRIES, INC., Plaintiff, v. The HARTFORD FIRE INSURANCE COMPANY et al., Defendants.

No. 73 Civ. 3550 (WCC).

United States District Court, S. D. New York.

November 11, 1974.

Jacob F. Gottesman, New York City, for plaintiff.

Paul J. Curran, U. S. Atty., for the Southern District of New York, New York City, for defendant United States of America; T. Gorman Reilly and David P. Land, Asst. U. S. Attys., of counsel.

OPINION AND ORDER

CONNER, District Judge:

This proceeding was initiated to resolve conflicting claims to insurance proceeds in the amount of $7,354.29, plus interest from April, 1972, now held by The Hartford Fire Insurance Company ("Hartford") as a stakeholder. PPG Industries, Inc. ("PPG") originally commenced this action in the New York State Supreme Court, New York County, to obtain the fund as a secured creditor of Car Color, Inc. ("Car Color"), the insured. Subsequently, the United States of America intervened as a tax creditor and the action was removed to this Court, pursuant to 28 U.S.C. § 1441, 28 U.S.C. § 1340 and 26 U.S.C. § 7402.

Presently before the Court is an application by the United States of America for an order setting aside that portion of a Report issued by Magistrate Harold J. Raby on July 25, 1974, which held the Government's tax liens against Car Color to be subordinate to the claim of PPG.

I.

To render understandable the nature of the claims asserted, it is necessary to describe briefly the events which preceded the filing of the action.

In October, 1970, Car Color entered into a Security Agreement with PPG whereby PPG obtained a security interest in all of the equipment of Car Color, as well as its inventory and any future proceeds of the inventory. In addition, Car Color agreed to insure the equipment and inventory for the benefit of PPG. The agreement further provided that Car Color would assign the right to receive the proceeds of the insurance to PPG and direct the insurer to pay such proceeds to PPG.

The Security Agreement was duly filed with the Secretary of State, and the County Clerk, Westchester County, in accordance with the provisions of the New York Uniform Commercial Code ("UCC").

On December 10, 1971 and March 27, 1972, the Internal Revenue Service assessed taxes against Car Color totaling $2,078.10, but neglected to file notices of these tax liens until May 4, 1972. Prior to this filing, on December 23, 1971, a fire destroyed the premises of Car Color and it ceased doing business.

Thereafter, PPG commenced an action against Car Color in the New York Supreme Court, New York County, for goods sold and delivered. A default judgment was entered on April 14, 1972 in the sum of $12,300.90. That judgment is still unsatisfied.

On November 29, 1972, Car Color commenced an action in the New York Supreme Court, Westchester County, against Hartford to recover the proceeds of the fire insurance policy it obtained pursuant to the Security Agreement. That action was removed to this Court, and resulted in a verdict and judgment on April 24, 1973, in favor of Car Color for $7,354.29 with 6% interest from April 3, 1972. 73 Civ. 157. To date, the attorneys who represented Car Color in that proceeding have not received their fee.

In May, 1973, the New York State Department of Labor filed claims against Car Color for unemployment insurance taxes; and in July, 1973 the State of New York filed tax liens for sales and withholding taxes.

The competing claims presented to Magistrate Raby were:

                United States                $ 2,078.10
                PPG                           12,300.90
                Henkin & Henkin, Esqs.         2,451.53
                New York State Tax
                 Commission                    7,933.03
                The Hartford Fire Ins
                Co. Attorney's Fees              500.001
                

In an extremely thorough Report, Magistrate Raby determined that the fund should be distributed as follows:

                Henkin & Henkin, Esqs
                  (first priority)                 $2,654.25
                The Hartford Fire Ins
                  Co. Attorney's Fees
                  (second priority)                   500.00
                PPG (third priority)                4,200.04
                United States (fourth priority)        -0-
                New York State (fifth
                  priority)                            -0-
                

II.

The Magistrate concluded that when the fire occurred, PPG had a legal right to the proceeds of the insurance policy, and therefore ruled that: a) although the assignment to PPG was initially equitable, it became a legal and "choate" assignment when the fire occurred; and b) an assignment or pledge of an owner's rights under a fire insurance policy as collateral security for an indebtedness is valid.

The Government now asserts that the Magistrate erred and that PPG's lien cannot take priority over its lien because PPG had not perfected a security interest within the meaning of Section 6323 of the Internal Revenue Code before the filing of the Government's tax lien.

The Government does not contest the validity of PPG's security interest in the secured property, but claims that:

"the assignment of fire insurance proceeds — the fulfillment of which depends upon a subsequent fire, the determination of loss, and the insurance company's fixed obligation to pay — is the assignment of a future right which does not grant to the assignee priority over lienors who have attached before the insurance proceeds come into existence."

Thus, the Government does not contest the priorities assigned to Henkin & Henkin, Esqs. and Hartford, but seeks a redetermination of PPG's third priority designation. It asserts that the fund should be divided as follows:

                Henkin & Henkin, Esqs.        $2,654.25
                The Hartford Fire Ins
                  Co.                            500.00
                United States                  2,078.10
                PPG                            2,121,94
                

PPG, on the other hand, bases its claim upon the assignment of the proceeds of the fire insurance covering Car Color's inventory. Although PPG now seeks to maintain its priority by reaffirming its position as an assignee, in order for PPG to prevail it must establish that it had a valid security interest.²

III.

Section 6321 of the Internal Revenue Code provides that if a person neglects or refuses to pay any federal tax, a lien arises automatically in favor of the United States, upon all property rights to property belonging to such person. Section 6322 provides that this lien arises on the date of assessment. Therefore, even though a taxpayer may purport to transfer an interest in his property to a third person, the rights of the transferee will be subject to the tax lien except to the extent that on the date of assessment, the transfer is "choate." United States v. City of New Britain, 347 U.S. 81, 84, 74 S.Ct. 367, 98 L.Ed. 520 (1954). In order for a competing lien to be "choate," the amount of the lien, the property subject to the lien and the identity of the lienor must be certain. Id.

There are, however, exceptions to the rule. Section 6323(a) provides that:

"The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed . . . ."

Thus, if PPG qualifies as the holder of a security interest, the date by which its interest must have been "choate" is May 4, 1972.

To qualify as the holder of a security interest, PPG must come within the definitional requirements of Section 6323(h). That section provides that:

"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 ultimate issue whether PPG holds a security interest entitled to priority over the Government's tax liens is a federal question. See Aquilino v. United States, 363 U.S. 509, 513-514, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); United States v. Acri, 348 U.S. 211, 213, 75 S.Ct. 239, 99 L.Ed. 264 (1955); United States v. Security Trust & Savings Bank, 340 U.S. 47, 49, 71 S.Ct. 111, 95 L.Ed. 53 (1950); Dugan v. Missouri Neon & Plastic Advertising Co., 472 F. 2d 944, 949 (8th Cir. 1973); Texas Oil & Gas Corp. v. United States, 466 F.2d 1040, 1049-1050 (5th Cir. 1972), cert. denied, 410 U.S. 929, 93 S.Ct. 1367, 35 L.Ed.2d 591 (1973). However, to resolve that question, it is necessary to look to the law of New York to determine the nature of PPG's interest in the insurance proceeds. Aquilino v. United States, supra, 363 U.S. at 512-513, 80 S.Ct. 1277; Dugan v. Missouri Neon & Plastic Advertising Co., supra.

A review of the New York law compels this Court respectfully to disagree with the Magistrate's conclusion that PPG had an equitable assignment of the insurance proceeds which "became a full-fledged legal and `choate' assignment immediately upon the happening of the fire." The law in New York is well settled that an assignment of a future interest in the proceeds of a claim is equitable only, and does not become a legal assignment until the proceeds have come into existence. Harold Moorstein & Co. v. Excelsior Insurance Co., 25 N.Y.2d 651, 306 N.Y.S.2d 464, 465, 254 N.E.2d 766 (N.Y.C.A.1969). In other words, an equitable assignment becomes a legal assignment when there is a judgment or appropriation of the proceeds in favor of the assignor. City of Utica v. Gold Medal Packing Corp., 54 Misc.2d 708, 283 N.Y.S.2d 611, 614 (Sup.Ct.Oneida Cty.1967), citing, Fairbanks v. Sargent, 117 N.Y. 320, 336-337, 22 N.E. 1039, (1889); In re Modell, 71 F.2d 148 (2d Cir. 1934), and others; Bernstein v. Allstate Insurance Co., 56 Misc.2d 341, 288 N.Y.S.2d 646, 648 (Civ.Ct.N.Y.Cty. 1968). Moreover, the ripening of an equitable lien into a legal lien does not relate...