Rosenberg's Will, In re

• Decision Date: 20 February 1970
• Parties: , 25 A.F.T.R.2d 70-741, 70-1 USTC P 9293 In re Samuel ROSENBERG'S WILL. In re Accounting of MANUFACTURERS HANOVER TRUST COMPANY and Nathan B. Bernstein, as Trustees under the Will of Samuel Rosenberg, Deceased. In re Merwin ROSENBERG'S WILL. In re Accounting of MANUFACTURERS HANOVER TRUST COMPANY and Nathan B. Bernstein, as Trustees under the Will of Merwin Rosenberg, Deceased. Surrogate's Court, Kings County
• Court: New York Surrogate Court

Page 51

308 N.Y.S.2d 51

62 Misc.2d 12, 25 A.F.T.R.2d 70-741,

70-1 USTC P 9293

In re Samuel ROSENBERG'S WILL In re Accounting of MANUFACTURERS HANOVER TRUST COMPANY and Nathan B. Bernstein, as Trustees under the Will of Samuel Rosenberg, Deceased In re Merwin ROSENBERG'S WILL In re Accounting of MANUFACTURERS HANOVER TRUST COMPANY and Nathan B. Bernstein, as Trustees under the Will of Merwin Rosenberg, Deceased.

Surrogate's Court, Kings County.

Feb. 20, 1970.

Kelley, Drye, Newhall, Maginess & Warren, and Nathan B. Bernstein, New York City, for petitioning co-trustees (one of whom is Bernstein).

Edward Pious, New York City, for claimants John W. and Christine L. Rainwater.

Ferdinand J. Wolf, New York City, for respondent West Credit Corp.

Benjamin Greenspan, New York City, for respondents Price and Karen.

Vincent T. McCarthy, Brooklyn, by Joseph Rosenzweig, Brooklyn, of counsel, for the United States.

Silverman & Lifschitz, Brooklyn, for respondent Marshall H. Sevin.

Alex E. Nashman, New York City, for respondent Frank F. Millman.

Arthur Litz, New York City, for respondent Lynn Starr Hull.

Margolin & Schekter, New York City, by Dreyer & Traub, New York City, of counsel, for respondent First Nat. Bank in Yonkers.

Strasser, Spiegelberg, Fried & Frank, New York City, for respondent Alfred S. Karlsen.

Robert W. Mullen, New York City, for respondent Nathaniel S. Ruvell.

Matthew J. Donaldson, Brooklyn, Guardian ad litem for Dorothy R. Frawley and attorney for Eugene Trope, Conservator for Dorothy R. Frawley.

Louis Cherry, pro se, c/o Michael R. Chalfin, Beverly Hills, Cal.

Leah Schmer & Issac Stillwater, pro se, c/o Michael R. Chalfin, Beverly Hills, Cal.

Joel Reims, pro se, c/o Michael R. Chalfin, Beverly Hills, Cal.

Solomon Seigel, pro se, Los Angeles, Cal.

NATHAN R. SOBEL, Surrogate.

At issue in this accounting proceeding (which has been tried and decision rendered on related issues) is the priority to be afforded to federal tax liens against competing state-created liens. The Government has raised the issue of the 'choateness' of the competing liens, an issue which as been before the United States Supreme Court some thirty times in the past twenty years.

Because of the trend of these decisions, it can well be said that the Supreme Court is the only as well as the ultimate arbiter of the law in this area. The Court's earlier decisions developed the choate lien doctrine to the point where few competing liens against delinquent taxpayers were able to prevail against later federal tax liens. But in later cases--and noticeably so--the doctrine has been liberalized (Crest Finance Co. v. United States, 368 U.S. 347, 82 S.Ct. 384, 7 L.Ed. 342 (security interest); United States v. Vermont, 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (state tax lien); Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (mechanic's lien)).

Finally, and for all purposes at the 'invitation' of the Supreme Court, Congress enacted the Federal Tax Lien Act of 1966 (hereafter FTLA; Public Law 89--719, 80 Stat. 1125 amending Internal Revenue Code of 1954, principally section 6323 (26 U.S.C. § 6323), effective November 2, 1966 but applicable Retroactively except as it may impair a previously vested right or priority of a perfected competing lien (FTLA § 114)).

There is no question but that the FTLA was intended to and did relieve certain specified competing lien interests of the 'choateness' requirement imposed by prior Supreme Court decisions. The question is to what extent.

It will be helpful to discuss the choate lien doctrine pre-1966 as it was developed by court decision and as well the post-1966 effect of FTLA.

The facts are fully stated in the decision of the Court heretofore filed. On this issue, only that bare essentials are stated.

Dorothy R. Frawley was both the income beneficiary and the remainderman of two trusts. The principal was payable to her if And only if she reached age 50; if not, her daughter was substituted. Mrs. Frawley did survive, however, and became entitled to the principal on July 15, 1968. Until then she had a remainder interest subject to a condition precedent (EPTL 6--4.10).

While 'contingent' on her reaching age 50, that interest was alienable, i.e., assignable (EPTL 6--5.1) there being no restriction in the will (Matter of Vought, 25 N.Y.2d 163, 303 N.Y.S.2d 61, 250 N.E.2d 343). Commencing in 1950, long before the remainder became her property, she made some 30 assignments exceeding by far the total value of the principal. This Court has decided the relative priorities among these secured creditors. Among such creditors are a few who 'perfected' their assignments by recording same in this Court (EPTL 13--2.2). The issue to be decided in this proceeding is the priority between these assignees and the federal tax liens.

There is no issue of Time priority. All of the assignments were long prior in time to the filing of the federal tax liens (26 U.S.C. § 6323(a)). The Government's claim is that the interests of the assignees despite being antecedent in time were 'inchoate'; and for That reason, not priority in time, the federal tax lien is superior and entitled to priority in payment.

Obviously the critical factor here is the nature of the interest assigned by Mrs. Frawley to her creditors.

It would be pointless to discuss the many cases in which the Supreme Court has prior to the FTLA found competing liens to be 'inchoate'. These are as varied as are the nature of the competing liens--contract, statutory, litigation, etc. No case in the Supreme Court or it seems in any other court has dealt with the choateness of an assignment of a Future interest in an estate whether contingent or vested. Some cases do however concern assignments of future interests of other kinds such as future acquired property, and proceeds of future sales of property, etc. (see e.g., United States v. R. F. Ball Construction Co., 355 U.S. 587, 78 S.Ct. 442, 2 L.Ed.2d 510 (future payments on contract); United States v. Pioneer American Insurance Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (future costs of foreclosure)). Our State courts too have dealt with related issues (Moorstein & Co. v. Excelsior Ins. Co., 31 A.D.2d 177, 296 N.Y.S.2d 2, affd. with memo. 25 N.Y.2d 651, 306 N.Y.S.2d 464, 254 N.E.2d 766 (after acquired proceeds); cf. Matter of City of New York (U.S.A.-Coblentz) 5 N.Y.2d 300, 184 N.Y.S.2d 585, 157 N.E.2d 587 (charging lien, condemnation award); Matter of Gruner, 295 N.Y. 510, 520, 68 N.E.2d 514, 519, 167 A.L.R. 628 (assignment of proceeds of sale of stock exchange seat under insolvency statute (U.S.R.S. § 3466; U.S.Code, tit. 31, § 191) priority)).

In the earliest Supreme Court decision dealing with the inchoate lien doctrine, United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53, the court held that a competing lien to be choate must be definite in three respects--(1) the identity of the lienor; (2) the property subject to the lien, and (3) the amount of the lien. As applied in Security Bank which concerned a pre-judgment attachment, this made sense. As reiterated in a great many later decisions it had limited or no application to the facts of those cases. It has none in this case for reasons now discussed.

There is a Basic element of choateness from which the three requirements of Security Trust were derived.

That element is loosely referred to as the 'no property' doctrine.

As originally applied by the Supreme Court it dealt with 'divestiture' contentions used defensively by competing lienors against the Government's claims (All claims including taxes) under the insolvency statute, R.S. § 3466 (31 U.S.C. § 191). That statute gave the Government absolute priority over all creditors secured or not. (see New York v. Maclay, 288 U.S. 290, 53 S.Ct. 323, 77 L.Ed. 754; Matter of Lincoln Chair & Novelty Co., 274 N.Y. 353, 9 N.E.2d 7). The contention was made by competing creditors, as the only defense against the Government's priority, that the debtor had 'no property' interest having already divested himself of the property and that title or possession had already passed to the competing creditor. Some few were successful since courts generally were unsympathetic to the harsh insolvency statute.

The 'choateness' doctrine was in a sense derived from the 'no property' doctrine. Under the pre-1966 federal tax lien statutes, the Government used the 'no property' doctrine offensively with respect to the delinquent taxpayer's Future rights, executory contracts, future proceeds, etc. The Government contended that since the delinquent taxpayer had As yet 'no property' rights in the security, the competing liens could not attach and were therefore 'inchoate'. (see United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135; Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277 (on remand see 10 N.Y.2d 271, 219 N.Y.S.2d 254, 176 N.E.2d 826); United States v. L. R. Foy Construction Co., 10 Cir., 300 F.2d 207; cf. Matter of Halprin, 3 Cir., 280 F.2d 407). When applied to commonplace secured commercial transactions where collateral consists of inventory or accounts receivable which might change from day to day, the consequences could be disastrous. The competing lien could not have priority over a filed federal tax lien with respect to additional advances made or security substituted After tax lien filing. Some of such fears proved groundless (Crest Finance Co. v. United States, 368 U.S. 347, 82 S.Ct. 384, 7 L.Ed.2d 342). For it was recognized by Crest and lower court cases that a difference exists between the assignment of present rights involving future consequences and truly future interests. In another context, Judge Breitel's discussion of this distinction is the clearest explanation of the law in this complex area. (see Stathos v. Murphy, 26 A.D.2d 500, 276 N.Y.S.2d 727, affd. w.o. 19 N.Y.2d 883, 281 N.Y.S.2d 81, 227 N.E.2d 880).

The...