United States v. Cutting & Trimming, Inc.

• Decision Date: 06 June 1962
• Docket Number: Civ. A. 3177.
• Citation: 206 F. Supp. 951
• Court: U.S. District Court — District of Vermont
• Parties: UNITED STATES of America v. CUTTING & TRIMMING, INC., Chittenden Trust Company of Burlington, Rainbow Children's Dress Co. of New York, and the State of Vermont.

206 F. Supp. 951

UNITED STATES of America v. CUTTING & TRIMMING, INC., Chittenden Trust Company of Burlington, Rainbow Children's Dress Co. of New York, and the State of Vermont.

Civ. A. 3177.

United States District Court D. Vermont.

June 6, 1962.

Joseph F. Radigan, U. S. Atty., Rutland, Vt., and John G. Penn, Tax Division, U. S. Dept. of Justice, Washington, D. C., for plaintiff.

Lisman & Lisman, Burlington, Vt., and Halperin, Morris, Granett & Cowan, New York City, for defendant Cutting & Trimming, Inc.

George R. McKee, Burlington, Vt., for defendant Chittenden Trust Co. of Burlington, Vermont.

No appearance for defendant Rainbow Children's Dress Co. of New York.

Charles J. Adams, Atty. Gen., and Charles E. Gibson, Jr., Deputy Atty. Gen., of Montpelier, Vt., for defendant State of Vermont.

GIBSON, District Judge.

The United States, seeking to foreclose its tax liens, filed this action against the taxpayer, Cutting & Trimming, Inc. It named as party defendants, Chittenden Trust Company, Rainbow Children's Dress Co., and the State of Vermont. Defendant Rainbow Children's Dress Co. went out of business sometime in 1961, and has entered no appearance in this action. The background facts essential to this particular problem may be simply stated. Defendant, Chittenden Trust Company, has possession of the sum of $1,878.82, which was deposited with it by the defendant, Cutting & Trimming. To enforce its liens on this sum of money, the plaintiff has moved for judgment on the pleadings. That the plaintiff is entitled to the bank deposit is admitted by all of the defendants except the State of Vermont. The State of Vermont has opposed the motion insofar as it claims a prior right to a portion of the money held on deposit by the Trust Company, and in its answer to the complaint, the State has set up a prayer for a decree stating its prior right.

There is no dispute about the remaining facts. On October 21, 1958, the State of Vermont made an assessment and demand on defendant Cutting & Trimming for $1628.15 for state withholding taxes it then claimed due for the third quarter of 1958. The State filed notice of lien on October 30, 1958, pursuant to 32 V.S. A. Sec. 5765. The federal Commissioner of Internal Revenue made an assessment on the taxpayer, Cutting & Trimming, amounting to $5,365.96 on February 9, 1959. This assessment was for taxes arising in the year of 1958 under the Federal Unemployment Tax Act. Notice of lien was filed by the Commissioner on June 2, 1959, pursuant to 26 U.S.C.A. § 6323. There were other assessments and notices of lien by both the State and the United States, but it is not necessary to consider them here. It is necessary to note only that the first lien of the State of Vermont was filed in October of 1958, and the first lien of the federal government was filed in June of 1959. The priority of right to the money held by the Trust Company must be determined according to the relative priority of these liens.

Before examining the liens in question here, it should be noted that the State instituted a suit against Cutting & Trimming in a Vermont state court on May 21, 1959, joining the Chittenden Trust Company as trustee. Judgment for the State for the taxes owing by Cutting & Trimming was rendered on October 23, 1959. Realizing that it can claim no priority as a judgment creditor over the earlier lien of the United States the State now relies entirely on its status as a holder of a lien for taxes.

The record discloses no insolvency on the part of the taxpayer, Cutting & Trimming. The Federal Priority Statute, R.S. Sec. 3466, 31 U.S.C.A. § 191, therefore is not applicable here. The United States relies upon its position as holder of a lien created by Sec. 6321 of Title 26 U.S.C.A. This statute does not confer priority upon the federal liens so created. Sec. 6322 of the same title states when the lien shall arise, and how long it shall last. Sec. 6323 of the same title sets out the validity of the lien as it relates to certain classes of persons (none of which is applicable in this case), and the filing and notice requirements. The United States then has two methods of enforcing the tax lien. Sections 6331-6344 of Title 26 U.S.C.A. provide for the seizure of property for collection of taxes. Section 6331 in particular refers to levy and distraint upon all property of the defaulting taxpayer on which, in one instance, there is a lien for the payment of taxes. The second enforcement method is found in Section 7403 of Title 26, U.S.C.A., which provides for enforcement of the lien by civil action. That provision is the basis for the action now before this Court.

The State of Vermont in turn relies upon its position as holder of a lien created by Section 5765 of Title 32, V.S.A. This statute is applicable only in cases of employers, and in connection with nonpayment of withholding taxes. Otherwise, it is an identical state counterpart of the federal lien provisions in 26 U.S. C.A. §§ 6321, 6322 and 6323.¹ The state enforcement provision is also similar to that in the federal statutes. By reference to the Vermont chattel mortgage statute,² the tax lien foreclosure provision incorporates the remedy of either public sale by a public officer, or foreclosure by a bill in equity.

The determination of priority of the competing liens in this case is governed by federal law. United States v. Brosnan, 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960); Aquilino v. United States, 363 U.S. 509, 80 S.Ct. 1277, 1285, 4 L.Ed.2d 1365, 1371 (1960). Further, the determination of this Court is to be guided by the principles outlined by the Supreme Court in United States v. City of New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). Indeed, both the State and the United States rely entirely on the New Britain case. Thus it is important to examine that case carefully in connection with the matter at hand. An enlightening study of New Britain is found in an article by Professor Frank Kennedy³ in which he examines the development of federal tax lien priority from Spokane County v. United States, 279 U.S. 80, 49 S.Ct. 321, 73 L.Ed. 621 (1929) to United States v. City of New Britain, supra. However, since that article was written, the Supreme Court has found the federal tax lien to be superior to competing liens in several cases.⁴ This might well alter some conclusions gained from the article. No case has dealt with a tax lien as here asserted by the State of Vermont. These more recent cases, therefore do not alter this Court's conclusions about New Britain, as it particularly relates to the present action.

Statutory liens must be unquestionably complete to overcome the federal tax lien priority. This is most obvious in the cases just cited. The test established by the New Britain case, 347 U.S. at page 86, 74 S.Ct. at page 370, is that the "priority of each statutory lien contested here must depend on the time it attached to the property in question and became choate." Choate, as defined in Webster's New International Dictiontary, 2nd Ed., 1952, means complete. It comes from the word inchoate, derivative of the Latin, incohare, which means to begin or to initiate. As used in connection with liens, as indicated by the rulings of the Supreme Court, it means that not only must a lien be more than initiated, it means that all steps must be taken that will insure that the lien will not be lost. In some cases, it has meant that the lienor must bring suit and obtain judgment. See particularly in this respect the dissent by Mr. Justice Douglas in United States v. White Bear Brewing Co., 350 U.S. 1010, 76 S.Ct. 646, 100 L.Ed. 871 (1956). Another word is used in the New Britain case in connection with the requirements of a successfully competing lien, i. e. "perfected". Perfection in the sense used means that "there is nothing more to be done to have a choate lien — when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. City of New Britain, supra, 347 U.S. at page 84, 74 S.Ct. at page 369.

Here is the nub of the whole matter in this case. Of the federal tax lien created by Section 6321, the Supreme Court said in the New Britain case, again at 84, 74 S.Ct. at 369, "The federal tax liens are general and, in the sense above indicated, perfected." The Court referred to the use of the word perfected as set out above. There is no question that the federal tax lien is considered a choate and perfected lien upon all of the property of the taxpayer when properly filed according to Section 6323. And there is no question that the lien of the United States attached to the property of Cutting & Trimming, including the money deposited in the Chittenden Trust Company, at the time the assessment was made. The same must be true of the tax lien of the State of Vermont, as created and given force by identical statutory language. Compare Ersa, Inc. v. Dudley, 234 F.2d 178 (C.C.A. 3rd Cir., 1956) where a Pennsylvania state tax lien was characterized by the Pennsylvania courts as not attaching to personal property until a writ of fieri facias was issued on a judgment entered on the lien. In that case, the federal tax lien prevailed where it was filed after the state tax lien was filed, but before the writ of fieri facias had been issued.

I cannot agree with the contention of the United States that the New Britain case establishes a requirement of specificity that defeats the State's lien in this case. While the terms "general" and "specific", and in particular the combination of "general and inchoate lien", are used by the courts in discussing competing liens,⁵ this factor is not a controlling one here.⁶

Indeed the federal tax lien is a general lien, and this fact does not deprive it of validity or effectiveness. United States v. City of New Britain, supra; United States v. City of Greenville, 118 F.2d 963, 965 (C.C.A.4th Cir. 1941). Moreover, the...