United States v. General Douglas MacArthur Sr. Vil., Inc.

• Decision Date: 05 December 1972
• Docket Number: Docket 72-1433.,No. 148,148
• Citation: 470 F.2d 675
• Parties: UNITED STATES of America, Appellant, v. GENERAL DOUGLAS MacARTHUR SENIOR VILLAGE, INC., et al., Appellees.
• Court: U.S. Court of Appeals — Second Circuit

470 F.2d 675 (1972)

UNITED STATES of America, Appellant, v. GENERAL DOUGLAS MacARTHUR SENIOR VILLAGE, INC., et al., Appellees.

No. 148, Docket 72-1433.

United States Court of Appeals, Second Circuit.

Argued November 13, 1972.

Decided December 5, 1972.

Morton Hollander, Washington, D. C. (Robert A. Morse, U. S. Atty. for the E. D. N. Y., Harlington Wood, Jr., Asst. Atty. Gen., Walter H. Fleischer, Thomas G. Wilson, Washington, D. C., on the brief), for appellant.

John M. Farrell, Jr., Great Neck, N. Y. (Schiffmacher, Rochford & Cullen, Great Neck, N. Y., on the brief), for appellee D. C. R. Holding Corp.

Stanley Beals, Jericho, N. Y., for appellee Sadie Schwartz.

Matthew Feinberg, Hempstead, N. Y. (Saul Horowitz, Corp. Counsel, Hempstead, N. Y., on the brief), for appellee Village of Hempstead.

Louis A. Rossano, Mineola, N. Y. (Joseph Jaspan, County Atty., Mineola, N. Y., on the brief), for appellee County of Nassau.

Before SMITH, KAUFMAN and MULLIGAN, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge:

The financial needs of local governments allegedly caught in a squeeze between rising costs of vital public services and the diminishing availability of revenues are pressed upon us in this appeal. We are asked to decide whether liens for unpaid real property taxes should be satisfied prior to a mortgage lien held by the Secretary of the Department of Housing and Urban Development, where the mortgage was recorded before assessment of the property taxes. The district court, 337 F.Supp. 955, answered in the affirmative, giving the local governments first priority. Our review of the law, however, compels us to conclude that the United States has a right to priority for its claim. Accordingly, the judgment below is reversed.

I.

In April, 1966, the Department of Housing and Urban Development, acting pursuant to § 202 of the Housing Act of 1959, 12 U.S.C. § 1701q, advanced $1,774,000 as a loan to General Douglas MacArthur Senior Village, Inc., a private, non-profit corporation organized in New York. The loan was made to facilitate construction of a 144-unit senior citizen apartment structure at 260 Clinton Street, Hempstead, New York. To secure the loan, a note and mortgage were executed by MacArthur on April 28, 1966, and were recorded with the Nassau County clerk on May 9.¹ The mortgage agreement provided that the failure to pay real property taxes was a default entitling HUD, the mortgagee, to declare the entire principal amount immediately due and payable.

Beginning in 1968, MacArthur failed to pay property taxes assessed by the County of Nassau, the Village of Hempstead, and the Town of Hempstead, but HUD did not declare a default at that time. By August, 1971, however, when the property tax arrearage was in excess of $200,000, HUD, now doubtful of MacArthur's ability to operate as a going enterprise, instituted foreclosure proceedings in the district court.² The unpaid principal as of June 30, 1971, was $1,717,542.91.

Among those named as defendants, in addition to MacArthur,³ were the County of Nassau, the Village of Hempstead, the Town of Hempstead, Sadie Schwartz, David Rand,⁴ and D.C.R. Holding Corp.⁵ The municipal defendants were local governments that had assessed property taxes against MacArthur. Schwartz, Rand and D.C.R. had purchased some of the unpaid liens as investments from the taxing authorities. See Art. XIV, Real Property Tax Law (McKinney's Consol. Laws, c. 50-A). The United States, apparently anticipating that a sale of the property would not produce sufficient funds to satisfy all outstanding liens, asserted that its mortgage lien had priority over all other liens outstanding against the property.

The answers filed by the defendants, while not disputing MacArthur's default, asserted that the property tax liens should have priority over the federal mortgage lien. In addition, Sadie Schwartz and D.C.R. Holding Corp. crossclaimed against the municipal defendants seeking to recover the amounts paid for the property tax liens in the event the lien of the United States was given priority. The United States, thereafter, moved for summary judgment on its claim pursuant to F.R.Civ.P. 56.

Judge Weinstein agreed that there was no genuine dispute as to any material facts, but decided against the government, holding that liens arising from local property taxes are superior to federal mortgage liens and are to be satisfied first from the proceeds of foreclosure sales. Although conceding that if the "first in time is the first in right" principle announced in United States v. New Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954), were applicable, the federal lien would have priority, the district judge concluded that Congressional enactment of the Federal Tax Lien Act of 1966, principally codified at 26 U.S.C. § 6323, had sufficiently eroded the first in time, first in right principle to obviate the necessity of applying it in this case. This appeal followed.

II.

The common law rule of lien priority referred to above and characterized by the Supreme Court as "widely accepted and applied, in the absence of legislation to the contrary," United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. at 370 (1954), has roots in Rankin v. Scott, 25 U.S. (12 Wheat.) 177, 6 L.Ed. 592 (1827), and has been applied uniformly in more recent decisions. See, e. g., United States v. Equitable Life Assurance Society of United States, 384 U.S. 323, 86 S.Ct. 1561, 16 L.Ed.2d 593 (1966). Under this principle, the federal mortgage lien, having been recorded in 1966, would be superior to property tax liens arising in 1968 and succeeding years. See United States v. Roessling, 280 F.2d 933 (5th Cir. 1960); United States v. Ringwood Iron Mines, Inc., 251 F.2d 145 (3d Cir.), cert. denied, 356 U.S. 974, 78 S.Ct. 1138, 2 L.Ed.2d 1148 (1958), (mortgage liens held by federal agencies superior to liens for local property taxes assessed after recording date).

But, it is interesting to note that even prior to the New Britain decision, federal application of the first in time, first in right rule had been criticized. See Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L.J. 905 (1954). The attack focused mainly upon what is known as the "choateness" requirement, which is a part of the first-in-time axiom. A nonfederal lien does not become choate until "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. Pioneer American Insurance Co., 374 U.S. 84, 89, 83 S.Ct. 1651, 1655, 10 L.Ed.2d 770 (1963), quoting United States v. New Britain, 347 U.S. 81, 84, 74 S.Ct. 367 (1954). With few exceptions, "no common law, equitable or statutory lien could meet that judicial standard of `choateness' unless the lienor's claim had been reduced to judgment." Plumb, Federal Liens and Priorities — Agenda for the Next Decade, 77 Yale L.J. 228, 230 (1967). Consequently, federal liens took priority over state liens in almost every instance. See, e. g., United States v. White Bear Brewing Co., 350 U.S. 1010, 76 S.Ct. 646, 100 L.Ed. 871 (1956), rev'g mem. 227 F.2d 359 (7th Cir. 1955). In 1958 the Report of the American Bar Association's Special Committee on Federal Liens, 84 A.B.A.Rep. 645 (1959), stated that "This extension of the scope of the federal tax lien and the uncertainties the decisions have created have had a severe impact on innumerable business and commercial transactions and have caused increasing concern on the part of many lawyers throughout the country."

In an attempt to initiate remedial change, the ABA charged the Special Committee "with the responsibility of making a comprehensive report . . . regarding the present status of federal liens, and of submitting proposed draft amendments to the lien statutes `and such other related statutes as appear desirable in order to provide greater equity as between federal tax liens and other lienors and claimants, and to clarify the entire matter.'" 84 A.B.A.Rep. 645 (1959). In response to this mandate, the Special Committee drafted legislation designed to make substantial revisions in the enforcement of federal tax liens.

Although initial reaction was not enthusiastic, Congress, in 1966, enacted legislation which put into effect the Special Committee's proposals. 26 U.S.C. § 6323(b)(6)(A) subordinates a federal tax lien to the local lien, even where the federal lien arose first, wherever state law would grant the local property tax lien a priority over a prior competing interest held by any other person.⁶ Accordingly, if the lien asserted by the United States in this case arose from an income tax assessment rather than a mortgage, the local property tax liens would have priority.

We are unable to conclude, however, that a Congressional enactment, carefully drawn, which affects the priority of federal tax liens leaves the courts free to disregard prior precedents and thus to broadly extend the scope of the statute's principle to other unspecified areas which, though somewhat analogous, were simply not addressed by the Congress. Although Judge Weinstein's carefully considered opinion forcefully argues that such an extension represents the best balancing of competing interests, his discussion would more appropriately be addressed to Congress. But where Congress has considered proposals of a highly qualified committee and has enacted specific, carefully-tailored legislation,⁷ it would be inappropriate for a court to undertake piecemeal extensions of the principles reflected in this legislation merely because it is desirable, especially in view of the fact that Congress saw fit not to provide for these extensions.⁸ Several cases have made this clear. See T. H. Rogers Lumber Co. v. Apel, 468 F.2d 14, (10th Cir. 1972) (federal mortgage lien given priority over mechanics lien); Aetna Insurance Co. v. United States, 456 F.2d 773 (Ct. Cl.1972) (right...