United States v. Davis
| Decision Date | 07 October 1965 |
| Docket Number | Civ. No. 23847. |
| Citation | 247 F. Supp. 84 |
| Parties | UNITED STATES of America, Plaintiff, v. Louis F. DAVIS, Trustee, Midwest Steel Fabricators, Inc., County of Wayne, Michigan Corporation and Securities Commission, Michigan Department of Revenue, Michigan Employment Security Commission, Defendants. |
| Court | U.S. District Court — Western District of Michigan |
Lawrence Gubow, Robert F. Ritzenhein, Detroit, Mich., for plaintiff.
Kenney, Rockwell, Kenney & Chapman, Detroit, Mich., for defendants Louis Davis and Midwest Steel Fabricators, Inc.
Burns, Boigon & Winston, Detroit, Mich., for defendant Midwest Steel Fabricators, Inc.
Sam'l H. Olsen, Aloysius J. Suchy and William F. Koney, Detroit, Mich., for defendant County of Wayne.
Frank J. Kelley, Francis Edwards and Philip Wuntner, Detroit, Mich., for defendants Mich. Corp. and Securities Comm., Mich. Dept of Revenue and Mich. Employment Security Comm.
This is an action instituted by the United States of America to foreclose certain tax liens against a fund held by defendant Louis F. Davis, as Trustee, of assets of the defendant-taxpayer, Midwest Steel Fabricators, Inc., under a trust mortgage for the benefit of creditors of assets.
The trust mortgage was executed on April 29, 1961, for the purpose of completing existing contracts and liquidating the company. The Trustee carried out the contracts, realized profits, collected the accounts receivable and liquidated the assets by public auction. The total fund remaining after the payment of certain expenses was $13,034.97.1 Tax claims in the amount of $24,066.10 were filed by various taxing authorities. By agreement, the Internal Revenue Service was paid $8,210.08 on a lien which all agreed was prior. In this action, the United States seeks to foreclose other tax liens against the remaining $4,824.89, by virtue of four tax assessments made against the Midwest Steel Fabricators, Inc., the pertinent facts of which are summarized as follows:
Amt. Outstanding Amt. Interest
Period Date of on Original Accrued to
of tax Assessment Assessment 4/29/61
4Q 1959 2/26/60 $1,230.68 $90.86
4Q 1960 2/24/61 2,252.32 33.45
1Q 1961 6/2/61 3,660.42 0
2Q 1961 6/2/61 881.56 0
Other tax liens against this fund are:
Amount
Date of Lien Taxing Authority of Lien
12/1/60 Wayne County $ 197.08
4/25/61 Michigan Employment Securities Comn. 914.23
5/3/61 Wayne County 247.88
5/15/61 Michigan Corporation & Securities Comn. 39.50
7/7/61 Michigan Dept. of Revenue (2) 4195.34
7/25/61 Michigan Employment Security Comn. 235.27
The Trustee makes no claim on the fund and asks only that the Court determine the ownership thereof.
The United States filed a motion for a summary judgment on the ground that, as a matter of law, it is entitled to an award of the entire fund now before the Court, in partial satisfaction of its tax liens. In support of the motion it relies upon the statement of facts filed with the Court by defendant Trustee Davis and affidavits of the District Director of Internal Revenue.
Section 6321 of the Internal Revenue Code of 1954 creates a lien against all property or rights to property belonging to the taxpayer.2 This lien attaches to the property on the date of assessment pursuant to Section 6322 of the Internal Revenue Code of 1954.3
The Federal government claims $3,804.39 on a theory set forth in United States v. City of New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954), that local tax liens compete with Federal tax liens on a first in time, first in right basis, the priority of each lien depending on the time it attached and became choate. Since a Federal lien arises on the date of assessment, following this principle the fund would be substantially used up by four of the claims in the following order:
Amount Lien Date
Internal Revenue Service $1,321.54 2-26-60
Wayne County 197.08 12-1-60
Internal Revenue Service 2,285.77 2-24-61
Michigan Employment Security
Commission 941.23 4-25-61
All parties accept this principle and there is no dispute as to its application.
However, in addition to this theory of priority the United States is also claiming a priority pursuant to Revised Statute § 3466, 31 U.S.C. § 191.4 This Section provides that claims of the United States against any person who is insolvent have absolute priority. It is clear from the pleadings that Midwest Steel Fabricators, Inc. was insolvent at the time of the execution of the trust mortgage. This is not now disputed by the County, which is the only defendant actively contesting this motion.
It has been held by state and lower Federal courts that the priority accorded by Section 3466 is not equivalent to a specific and perfected lien, e. g. United States v. O'Dell, 160 F.2d 304 (6th Cir. 1945); New York v. United States, 106 F.2d 210 (3 Cir. 1939); United States v. South Carolina, 227 S.C. 187, 87 S.E.2d 577 (1955). Although the Supreme Court, in United States v. Gilbert Associates, 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953), remarked that it has never actually held that there is such an exception, the Federal government does not here contest its existence.
The County of Wayne asserts that it had a prior specific and perfected lien for unpaid ad valorem property taxes pursuant to local acts and the General Property Tax Law of Michigan Comp. Laws 1948, § 211.1 et seq..5 It argues that the liability of the taxpayer to the County arose prior to the assessment by the Federal government and that, although no physical possession of the assets subject to the County's lien were taken, under Section 7.81 Michigan Statutes Annotated, all taxes became a debt owed to and a lien in favor of the County on the tax day provided for in the law. The County relies upon the decision of the Michigan Supreme Court in In re Ever Krisp Food Products Co., 307 Mich. 182, 11 N.W.2d 852 (1943), which applied the judicial exception to the absolute priority rule and held that a lien is specific and perfected when nothing further need be done to perfect it. This decision was followed by the Court of Appeals for the Sixth Circuit in United States v. O'Dell, supra.
However, several years later, in United States v. Gilbert Associates, supra, the United States Supreme Court enunciated the test of specificity in the following language, 345 U.S. at page 366, 73 S.Ct. at page 704:
"In claims of this type, `specificity' requires that the lien be attached to certain property by reducing it to possession, on the theory that the United States has no claim against property no longer in the possession of the debtor. Thelusson v. Smith, 2 Wheat. 396 4 L.Ed. 271. Until such possession, it remains a general lien. There is no ground for the contention here that the Town had perfected its lien by reducing the property to possession. The record reveals no such action. The mere attachment of the Town's lien before the recording of the federal lien does not, contrary to the holding of the Supreme Court of New Hampshire, give the Town priority over the United States. The taxpayer had not been divested by the Town of either title or possession. The Town, therefore, had only a general, unperfected lien. United States v. Waddill Holland & Flinn, Inc., supra 323 U.S. 353, 65 S.Ct. 304, 89 L.Ed. 294; People of State of Illinois ex rel. Gordon v. Campbell, 329 U.S. 362,...
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