Southern Ohio Sav. Bank & Trust Co. v. Bolce

• Decision Date: 09 May 1956
• Docket Number: No. 34570,34570
• Citation: 135 N.E.2d 382,165 Ohio St. 201,59 O.O. 290
• Court: Ohio Supreme Court
• Parties: , 59 O.O. 290, 56-1 USTC P 9600 The SOUTHERN OHIO SAVINGS BANK & TRUST CO., Appellant, v. BOLCE et al., Appellees. RENNER, Treas., Appellee, v. MERRIWEATHER et al., Appellees; Lockland Building & Loan Ass'n Co., Appellant.

Page 201

165 Ohio St. 201

135 N.E.2d 382, 59 O.O. 290, 56-1 USTC P 9600

The SOUTHERN OHIO SAVINGS BANK & TRUST CO., Appellant, v. BOLCE et al., Appellees.

RENNER, Treas., Appellee, v. MERRIWEATHER et al., Appellees; Lockland Building & Loan Ass'n Co., Appellant.

No. 34570.

Supreme Court of Ohio.

May 9, 1956.

Syllabus by the Court

1. Section 5671, General Code (Section 5719.01, Revised Code), provides that the lien of the state for taxes levied for all purposes in each year shall attach to all real property, subject to such taxes, on the day preceding the second Monday of April (now the first day of January), annually, and shall continue until such taxes accruing thereon are paid, and Section 5692, General Code (Section 5719.25, Revised Code), provides that, where real estate is sold at judicial sale, the taxes, penalties and assessments then due which are liens on such land or real estate at the time of the sale shall be discharged from the proceeds of such sale; whereas Section 3670 of the United States Internal Revenue Code, 26 U.S.C.A. § 3670, provides that, if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person, and Section 3672 of the United States Internal Revenue Code provides that such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector under state or territorial laws.

2. Under such statutes, as construed by the federal courts, even in the absence of a showing that the debtor owner of real estate is insolvent (see Section 3466, U.S. Revised Statutes, 31 U.S.C.A. § 191), priority, as between federal tax liens and specific and perfected state statutory tax liens on such real estate, is determined by the principle that 'the first in time is the first in right,' and under such principle a federal tax lien once filed has priority over state and local tax liens thereafter accruing.

3. Where, in a judicial sale of land incumbered by a state tax lien, a federal tax lien and other creditor liens, which latter liens are preferred by federal statute over the federal tax lien, the proceeds of the sale are insufficient to pay all such lien incumbrances in full, there shall be set aside from the proceeds of the sale a fund equal to the amount of the creditor liens so preferred over the federal tax lien to the extent that the proceeds of sale are sufficient, out of which fund the state taxes shall first be paid, and the remainder of such fund shall be paid to creditor lienholders, whose liens are so preferred over the federal tax lien, according to their lien priority, and the remainder of the proceeds of sale, if any, shall be paid to the United States on its tax lien.

This case is before this court on an appeal as of right and by the allowance of a motion to certify the record.

The statement of facts as set out in appellants' brief will be closely restated herein for the reason that all parties agree that the facts so stated are substantially correct.

The questions involved arose in two separate cases in the Common Pleas Court of Hamilton County, but such cases were consolidated in the Court of Appeals and are so presented here.

In the Bolce case the petition was filed by the plaintiff on October 30, 1953, to foreclose its mortgage on the real estate of the defendants, Edward L. Bolce and Frederica M. Bolce, and the property was sold pursuant thereto.

In the Merriweather case the petition was filed by the treasurer of Hamilton County on August 12, 1948, to foreclose real estate tax liens, but the property was sold pursuant to the cross-petition of defendant the Lockland Building & Loan Association Company to foreclose its mortgage.

In both causes the proceeds of the sales were insufficient to pay in full costs, state real estate taxes, mortgage liens, and federal tax liens. In both causes the mortgages became liens prior to the federal tax liens, and it is conceded that the mortgages are entitled to priority of payment over the federal tax liens, in accordance with the federal statute. In the Merriweather cause, some of the state taxes became accrued or perfected liens subsequent to some of the federal tax liens; and as to accruing state taxes the federal government claims priority of payment, and the state claims priority for the payment of all its real estate taxes accrued and accruing at time of sale over all other liens in accordance with Section 5671, Ohio General Code, Section 5719.01, Ohio Revised Code. In both causes the federal taxes are in the nature of creditor claims against the principal mortgagors for federal taxes and became liens after the mortgages were in default. The accruing state taxes involved ripened into perfected or accrued liens during the pendency of the litigation. The mortgagees sought merely to foreclose the mortgagors' equity of redemption in the subject properties, but the state claims it is entitled to have its perfected or accrued tax claims at the time of distribution paid out of the proceeds of all judicial sales in accordance with Section 5692, Ohio General Code (now Section 5719.25, Ohio Revised Code). The properties were ordered sold free of the claims of all the parties to the actions. In both causes the mortgagors were obligated to the mortgagees under their contracts to keep real estate taxes paid and the mortgagees had the right, but not the obligation, to pay such taxes and have then when so paid secured by the mortgages.

There are some factual differences in the two causes. The Merriweather cause involves only the rights of the state, the federal government and the mortgagee; the Bolce cause involves also the rights of a judgment creditor whose lien is subsequent to the mortgage but prior to the federal liens. In the Bolce cause the federal liens for which priority is claimed over state taxes would be so large in amount as to absorb the entire fund were it not for the fact that the mortgage and judgment had priority over the federal liens. In the same cause the wife of the mortgagor had a dower interest in the real estate which was released in favor of the mortgagee but which was not subject to either the federal liens or the judgment lien.

In both causes the Court of Common Pleas held that state real estate taxes accrued at the time of sales must be first paid out of the entire proceeds of the sales, and that the other liens should then be paid in the order of their priority in time. The United States appealed both causes to the Court of Appeals, which court held that the federal government liens are entitled to priority of payment over state taxes to the extent that federal liens attached prior in time to the accrual of state tax liens. The Court of Appeals held further that to the extent the state could not collect its taxes out of the funds because of the priority of federal liens there should first be set aside amounts necessary to pay the mortgages and other liens which do enjoy priority over the federal liens and that the unpaid state taxes should then be deducted and paid from these funds so set aside. In the Bolce cause the court held that this deduction should be made on a pro rata basis from the fund so set aside and otherwise payable on the prior mortgage and on the judgment.

In both causes the United States was a defendant in the Court of Common Pleas and the appellant in the Court of Appeals.

In the Bolce cause the trial court found as follows:

'* * * the United States of America on January 16, 1952, filed with the recorder of Hamilton County, Ohio, a notice of tax lien under internal revenue laws against said real property described in the petition herein of said defendant, Edward L. Bolce, in the amount of $15,705.01, setting forth in part that the nature of said lien is 'income,' and that the tax assessment list was received by the Director of Internal Revenue on or about January 14, 1952. Said lien is recorded in mortgage book 2444, page 195, of the Hamilton County, Ohio, recorder's office, and constitutes a valid and subsisting lien upon the real property described in the petition herein as of the date aforesaid, and that there is now due said United States of America the sum of $15,705.01 with interest thereon from January 14, 1952.'

In the Merriweather cause the trial court found as follows:

'* * * the defendant, the United States of America, on April 11, 1949, filed with the recorder of Hamilton County, Ohio, a notice of a tax lien under internal revenue laws in the amount of $457.01, which notice sets forth the nature of said lien, the date the assessments were received by the Director of Internal Revenue, and the amounts of said taxes * * * [in the sum of $457.10].

'That notice was given to the said James Merriweather of each of the above items making up said lien and that demand has been made upon him for payment for those taxes.

'That on June 6, 1951, defendant, United States of America, filed with the recorder of Hamilton County, Ohio, a notice of a tax lien under internal revenue laws in the amount of $1,215.53, for income taxes for the year 1947, and that the assessment list was received on February 5, 1951, by the Director of Internal Revenue; that notice was given to the said James Merriweather and that demand was made upon him for the payment of said taxes.

'That the balance remaining unpaid on said taxes for withholding taxes and accrued interest to February 1, 1954, is $317.91, plus interest at 6 per cent per annum from February 1, 1954, and the balance unpaid on the income taxes, together with accrued interest to February 1, 1954, is $571.64, plus interest at 6 per cent per annum thereafter. That the effective dates of these federal tax liens are the dates they were received for assessment as set forth above.'

In both causes, a...