Smith v. United States
| Citation | 113 F. Supp. 702 |
| Decision Date | 28 July 1953 |
| Docket Number | Civ. No. 1219. |
| Parties | SMITH v. UNITED STATES et al. |
| Court | United States District Courts. 9th Circuit. United States District Court (Hawaii) |
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COPYRIGHT MATERIAL OMITTED
Smith, Wild, Beebe & Cades, Honolulu, Hawaii, J. Edward Collins, Honolulu, Hawaii, for plaintiff.
A. William Barlow, U. S. Atty. District of Hawaii, Winston C. Ingman, Asst. U. S. Atty. District of Hawaii, for defendant United States of America.
Harold W. Nickelsen, Deputy Atty. Gen., Territory of Hawaii, for defendant Territory of Hawaii.
This action is for declaratory relief under 28 U.S.C. §§ 2201-2202, wherein Alvin A. Smith, the United States and Territory of Hawaii Tax Commissioner Torkel Westly (hereinafter referred to as Territory) seek a decree establishing the order of priority to be accorded their liens upon a certain escrow fund.
The evidence shows the following facts: Airways Hotel, Limited, (hereinafter referred to as Airways), a Territory of Hawaii corporation, was sorely pressed by creditors prior to September 30, 1949. Airways was unable to meet its obligations as they matured, and a few collection suits were initiated against it. In order to continue in business, representatives of Airways consulted Smith, doing business under the style name of Credit Bureau of Hawaii. Smith informally discussed with Airways' creditors, the Territory Tax Commission and the Bureau of Internal Revenue his "pooled account plan," whereby Airways would pay a specified sum each month to Smith as trustee, who in turn would prorate such amount to the various creditors. Substantially all of the creditors, including the Territory and United States, agreed to such a plan.
Under the "pooled account plan," Airways executed and delivered a promissory note to Smith for $45,985.09 on September 30, 1949. The $45,985.09 represented approximately $36,675 due to secured and unsecured creditors, $2,575 to the United States for taxes, $3,640 to the Territory for taxes and $3,100 to Smith for services. Under the terms of the note, Airways promised to pay $750 each month with interest of 12% per annum. Simultaneously, Airways executed and delivered an instrument called a trust chattel mortgage, with Smith as trustee, to secure the above note. Substantially all of the physical assets of Airways were covered by the alleged mortgage. The alleged mortgage was duly recorded on October 3, 1949. Under the arrangement, Smith did not personally assume the debts of Airways.
Monthly installment payments on the note were duly made by Airways until March 27, 1952. On that date, Airways defaulted in payment, and a balance of $21,875.23 still remains unpaid. On March 27, 1952, Airways executed and delivered to Smith a power of attorney, which included the powers to operate the business and to sell or transfer the business or business premises. Some time in April 1952, Smith took physical possession and began running the business of Airways. Between May 1949 and October 1952, various tax liens of the Territory and United States had attached to the assets and property of Airways.
Later, Smith found a purchaser who agreed to buy the assets and property of Airways for $31,000. Whereupon Smith, the United States, the Territory and the Bishop National Bank of Hawaii, the escrow holder, signed an escrow agreement on October 29, 1952. Under the terms of the escrow agreement, the United States and Territory agreed to release all tax liens on the assets and property of Airways upon deposit of the entire purchase price in the escrow account. Smith, the United States and the Territory agreed to look to the escrow fund for satisfaction of their claims after judicial determination of the priority of their respective liens. Subsequently, this declaratory judgment suit was initiated.
The United States's tax claims against Airways are as follows:
----------------------------------------------------------
Kind Amount Date Assessment Date Lien
of Tax1 Due2 List Received Filed3
----------------------------------------------------------
W $ 656.47 5-23-49 7-12-49
IC 184.04 5-26-49 "
W 65.40 6- 6-49 7-13-49
U 189.96 9- 7-49 10-19-49
U 517.56 12-14-50 2-15-51
W&IC 62.05 2-20-51 3-28-51
W&IC 1043.98 5- 8-51 6-12-51
U 928.27 6- 8-51 7- 9-51
W&IC 1745.73 8- 9-51 9-12-51
W&IC 1546.31 11-14-51 12-19-51
W&IC 2063.05 2- 8-52 3-12-52
U 250.41 2-26-52 4- 7-52
W&IC 1786.71 5- 9-52 5-16-52
U 776.29 6- 6-52 6-18-52
W&IC 450.15 -- 10-17-52
__________________________________________________________
$12,266.38
__________________________________________________________
The Territory's tax claims against Airways are as follows:
----------------------------------------------------------
Kind Amount Date Lien
of Tax Due1 Attached2
----------------------------------------------------------
General Excise $1,224.41 1-19-51
" " 1,067.08 3-30-51
" " 1,721.56 11-15-51
" " 350.56 12-14-51
" " 76.90 2-11-52
" " 677.45 5- 5-52
" " 894.46 5- 5-52
Compensation &
Dividends 82.81 4-24-52
" 74.76 "
" 75.69 "
" -- 10-10-52
(Penalty & interest
due only)
--------------------------------------------------------------
$6,245.68
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I
The United States contends that the delivery of the alleged trust chattel mortgage by Airways to Smith on September 30, 1949 was in effect a voluntary assignment for the benefit of creditors, therefore, the debts owed the United States must be accorded priority under 31 U.S.C.A. § 191. Furthermore, the United States argues that, if the alleged trust chattel mortgage did not amount to a voluntary assignment, surely such an assignment resulted when the power of attorney was given Smith on March 27, 1952.
31 U.S.C.A. § 191 provides:
"Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."
Section 191 "had its origin in 1790 and after several later accretions took substantially its final form in 1797," United States v. Press Wireless, Inc., 2 Cir., 1951, 187 F.2d 294. It is also generally known as section 3466 of the Revised Statutes. Being an old law, it has been much construed by the courts.
Section 191 is not limited to the orthodox general assignment for the benefit of creditors. Where the directors passed a resolution placing the property and business of their bank in the exclusive possession and control of the state superintendent of banks for the benefit of creditors, there was a voluntary assignment within the meaning of section 191. Bramwell v. United States Fidelity & Guaranty Co., 1926, 269 U.S. 483, 46 S. Ct. 176, 7 L.Ed. 368. A consent receivership is equivalent to a section 191 voluntary assignment. Price v. United States, 1926, 269 U.S. 492, 46 S.Ct. 180, 70 L.Ed. 373; United States v. Butterworth-Judson Corp., 1926, 269 U.S. 504, 46 S.Ct. 179, 70 L.Ed. 380; People of New York v. United States, 3 Cir., 1939, 106 F.2d 210.
Section 191 "priority does not attach while the debtor continues the owner and in possession of the property". Bramwell v. U. S. Fidelity Co., supra, 269 U.S. at page 488, 46 S.Ct. at page 177, 70 L.Ed. 368. See also Beaston v. Farmers' Bank, 1838, 12 Pet. 102, 133, 9 L.Ed. 1017. In the Bramwell, Price and Butterworth-Judson cases, the Supreme Court emphasized the fact that the state superintendent or the receiver took possession and control of all the property and business of the debtor. The facts here clearly show that Airways remained in possession and control of its property and business after the execution and delivery of the trust chattel mortgage. Consequently, this Court finds that the delivery of the mortgage by Airways on September 30, 1949, was a bona fide security transaction and not a voluntary assignment within the meaning of section 191.
Opinions of the Supreme Court indicate that a section 191 priority can attach only when there is a divestment of all the property of the debtor. United States v. Hooe, 1805, 3 Cranch. 73, 91, 2 L.Ed. 370; Conard v. Atlantic Insurance Co., 1828, 1 Pet. 386, 439, 7 L.Ed. 189; United States v. State of Oklahoma, 1923, 261 U.S. 253, 260, 43 S.Ct. 295, 67 L.Ed. 638. A power of attorney creates an agency relationship, and the giver of the power remains the legal owner. 2 Am.Jur., Agency, § 26, p. 29. In Bramwell v. U. S. Fidelity Co., supra, the appellant vigorously argued the necessity of a transfer of title under section 191, which Justice Butler overruled. However, his opinion did...
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