United States v. Bond

• Citation: 279 F.2d 837
• Decision Date: 31 May 1960
• Docket Number: No. 7987.,7987.
• Parties: UNITED STATES of America, Appellant, v. V. F. BOND, Audrey A. Bond, et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

279 F.2d 837 (1960)

UNITED STATES of America, Appellant, v. V. F. BOND, Audrey A. Bond, et al., Appellees.

No. 7987.

United States Court of Appeals Fourth Circuit.

Argued January 8, 1960.

Decided May 31, 1960.

COPYRIGHT MATERIAL OMITTED

David O. Walter, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., John M. Hollis, U. S. Atty., Norfolk, Va., and Henry St. J. FitzGerald, Asst. U. S. Atty., Alexandria, Va., on brief), for appellant.

Dillard C. Laughlin, Arlington, Va., (Jesse, Phillips, Klinge & Kendrick, Arlington, Va., on brief), for appellees.

Before SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.

BOREMAN, Circuit Judge.

The principal question for decision is whether a tax lien of the United States is prior in right to payments of real estate taxes made by the mortgagee under a prior recorded mortgage, the taxes having accrued and the payments having been made subsequent to the recordation of the notice of federal tax lien. In addition, there is a question of priority as between the federal tax lien and an attorney fee allowed by the District Court for payment to the mortgagee out of the proceeds of the sale of the mortgaged property.

The United States brought this action in the United States District Court for the Eastern District of Virginia on October 29, 1957, for the foreclosure of tax liens upon property and rights to property of appellees, the taxpayers.

There is no dispute as to pertinent facts. On December 20, 1955, deficiencies were assessed against the taxpayers for the years 1943 through 1947, totaling $318,832.84, and on the same day deficiencies were assessed against taxpayer, V. F. Bond, for the year 1942 in the amount of something over $18,000.00. On or about December 20, 1955, notices of such assessments were served upon the taxpayers and demand for payment was made but taxpayers refused to pay.

On December 21, 1955, notice of lien for each assessment was recorded in the proper county and municipal offices pursuant to 26 U.S.C.A. § 6323(a) (1). On July 2, 1957, the assessments had been reduced to judgment.

The complaint listed various properties owned by the taxpayers, among them being the Arlington Hotel, at Arlington, Virginia, the property and the proceeds of sale thereof involved in controversy before this court. The United States requested the appointment of a Receiver to take charge of, marshal and liquidate the properties, and prayed inter alia that the court determine the validity and priority of all liens and claims and order a foreclosure of the liens of the United States and a sale of the properties.

On November 27, 1957, the District Court found that the United States had valid liens in the principal sum of $357,484.18, plus interest, for the years involved, and that the taxpayers were insolvent. The court then appointed a Custodial Receiver to take charge of the properties of the taxpayers and appointed a Special Master to ascertain and report to the court the claims against the taxpayers, the value of their properties and the validity and priority of liens on such properties. Pursuant to the recommendations of the Receiver, the Arlington Hotel property was sold for $172,500.00.

The Arlington Hotel property was subject to a mortgage,¹ executed by taxpayers as mortgagors, securing a loan in the original principal sum of $100,000.00 made by Perpetual Building Association, hereinafter called "Perpetual". This mortgage was recorded on July 15, 1955, some six months prior to the recordation of the notice of federal tax lien. Monthly payments were made by the mortgagors until October 4, 1956, after which no further payments were received by Perpetual.

Under the mortgage each monthly payment was allocated not only to the payment of principal and interest, but a portion, $331.00, was also set aside in a fund for the payment of taxes accruing against the mortgaged property. The mortgage contained other provisions as follows:

"It Is Hereby Covenanted: * * (2) that any and all taxes and assessments, general or special, now or hereafter assessed against said realty shall be paid when due, * * * (7) that the title to said realty and the record of said title shall be kept free of litigation, infirmity and lien, * * * (10) that any and all disbursements made by the Treasurer of Perpetual because of the failure of the grantor to make any payment or do any act required to be or done, with interest thereon at six percent (6%) per annum, shall be demandable at any time by the Treasurer and, until repaid to the Treasurer, shall be deemed to be secured by this Deed of Trust, and (11) that if there shall be any default in the performance of any of the foregoing covenants the Treasurer shall have the right and power to do any one or more of the following: (a) do any act or make any disbursement, in his name or the name of the grantor, which he may deem necessary or proper to protect the lien of this Deed of Trust, * * *."

After default by the mortgagors, Perpetual paid the local real estate taxes assessed for the years 1957 and 1958 which had accrued and had been assessed subsequent to the recordation of the notice of federal tax liens. While a portion of the payment made for 1957 taxes came from the accumulated fund paid and held for this purpose, Perpetual paid from its own funds on August 16, 1957, $4,759.16 for the year 1957 and on August 11, 1958, $4,787.16 for the year 1958. Perpetual claims that it has a lien for those amounts, with interest, by virtue of the provisions of the mortgage, and that such lien is prior to the federal tax liens.

The District Court (United States v. Bond, 172 F.Supp. 759) held that Perpetual was entitled to be reimbursed for the real estate taxes paid by it, prior to the lien for federal taxes. In a separate unreported memorandum opinion, the court allowed an attorney fee of $1,000.00, payable to Perpetual from the proceeds of sale as a cost of liquidating the mortgage, the attorney fee to take priority also over the federal tax liens. From these decisions United States appeals.

The United States contends that in determining priorities, where a federal tax lien is involved, the "inchoate lien test" is applied so as to defeat the competing lien if it be shown that the competing lien was uncertain and inchoate at the time of the recordation of the federal tax liens. Therefore, it is urged that since both the necessity and amount of the local real estate taxes and attorney fee were uncertain at the time the federal tax liens were recorded, both must necessarily be inferior and junior in priority to the federal tax liens. Perpetual, on the other hand, contends that 26 U.S. C.A. § 6323(a) gives priority to a prior recorded mortgage over a federal tax lien not only as to the mortgage debt but also as to the covenants and provisions contained in the mortgage and payments made by mortgagee thereunder; and that the inchoate lien test is not applicable here.

The federal tax lien was created by statute many years ago and present enactments are identified as § 6321² and § 6322³ of the Internal Revenue Code of 1954. For the lien to become valid and effective under these sections, notice, filing or recording are not required. Section 6322, originally Act of July 13, 1866, ch. 184, 14 Stat. 107, was considered in United States v. Snyder, 1893, 149 U.S. 210, 13 S.Ct. 846, 37 L.Ed. 705, wherein the Supreme Court of the United States held that an unrecorded tax lien was valid against a purchaser without notice thereof. This decision prompted Congress to at least partially abrogate the effect of the secret, unrecorded lien, and by Act of March 4, 1913, ch. 166, 37 Stat. 1016, the tax lien statute was supplemented by requiring recordation of the federal tax lien to render it valid as against mortgagees, pledgees, purchasers and judgment creditors. Under the Internal Revenue Act of 1954, this is designated § 6323(a)⁴. While § 6323(a) is not a priority statute as such, if it is to have any meaning its necessary effect is to give priority to the interests mentioned therein.

31 U.S.C.A. § 191, R.S. 3466⁵, is a statute which purports to fix priority of debts due the United States where the debtor is insolvent. While the priority of such debts mentioned in this statute would appear to be absolute, it was held in Brent v. Bank of Washington, 1836, 10 Pet. 596, 9 L.Ed. 547, that this priority in insolvency cases is not to supersede prior encumbrances, including mortgages. The court there said that it had never been decided that the preference given the United States would affect any lien, general or specific, existing "when the event took place which gave the United States a claim of priority." In the instant case, even though the court found insolvency of taxpayers, the United States did not present, before the District Court, any claim of priority under this insolvency priority statute and, for that reason, it is precluded from first raising the point here. 36 C.J.S. Federal Courts § 292(b) (1) (1943).

Several cases have been decided by the Supreme Court of the United States involving the application of the insolvency priority statute, 31 U.S.C.A. § 191, and while a discussion thereof may serve no real purpose here, we note them to indicate that, in insolvency cases, the Supreme Court considered and determined the question as to whether state created liens were so specific, perfected and choate as to be accorded priority over federal tax liens. In establishing the "choate lien test", these cases have developed exacting requirements, the substance of which is to require that the state created liens be specific to the point that nothing further need be done to make the lien enforceable. See United States v. Gilbert Associates, 1953, 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071; United States v. Waddill Co., 1945, 323 U.S. 353, 65 S.Ct. 304, 89...