United States v. Kings County Iron Works

• Decision Date: 29 June 1955
• Docket Number: No. 268,Docket 23310.,268
• Citation: 224 F.2d 232
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. KINGS COUNTY IRON WORKS, Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

224 F.2d 232 (1955)

UNITED STATES of America, Plaintiff-Appellant, v. KINGS COUNTY IRON WORKS, Inc., Defendant-Appellee.

No. 268, Docket 23310.

United States Court of Appeals Second Circuit.

Argued April 12, 1955.

Decided June 29, 1955.

Leonard P. Moore, U. S. Atty., Brooklyn, N. Y. (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack, A. F. Prescott, Frederic G. Rita, Sp. Assts. to Atty. Gen., and Elliott Kahaner and William C. Gordon, Asst. U. S. Attys., Brooklyn, N. Y., on the brief), for plaintiff-appellant.

Samuel F. Berkon, New York City, for defendant-appellee.

Before CLARK, Chief Judge, and FRANK and HASTIE, Circuit Judges.

CLARK, Chief Judge.

This appeal by the United States involves the relative priority of a federal tax lien and a mechanic's lien under state law. The defaulting taxpayer, Preferred Contractors, Inc., had performed contracting services on premises in New York City for Standard Tinsmith & Roofer Supply Corporation for which it had not been fully paid. When the United States sought to assert its statutory lien under I.R.C. § 3670 on this debt, it was informed that Standard was holding the sum in trust for Kings County Iron Works, Inc., a subcontractor of Preferred, which claimed a mechanic's lien. Ultimately Standard paid the amount in question into court for judicial determination of priority between the United States and Kings. The facts of indebtedness of Preferred to the United States, of Preferred to Kings, and of Standard to Preferred have not been contested by any of the parties concerned. The district court awarded priority to Kings as a "purchaser" protected from unfiled federal liens pursuant to I.R.C. § 3672, and as a prior lienor by virtue of its filing of its mechanic's lien in New York County on August 27, 1947. Judge Abruzzo concluded that the government's prior filing on August 21 in Kings County, where Preferred resided, was defective in that under N.Y. Lien Law, McKinney's Consol.Laws, c. 33, § 240 the government should also have filed in New York County, where the funds and premises in question were located. D.C.E.D.N.Y., 122 F.Supp. 219. The government's appeal challenges Judge Abruzzo's final conclusion, as well as his subordinate findings concerning the character of the mechanic's lien and the sufficiency of the government's filing.

The Internal Revenue Code gives the government a broad lien for tax collection purposes. I.R.C. §§ 3670-3672, 26 U.S.C. §§ 3670-3672. This lien attaches to property of the taxpayer at the time that the local collector receives the appropriate assessment lists. From then on, the lien is fully perfected against all subsequent liens and interests except that of a mortgagee, pledgee, purchaser, or judgment creditor of the taxpayer. For full protection, even against these special classes, notice of the tax lien must be filed in the places designated by state law, or in the appropriate district court if the state has failed so to designate. Here the assessment lists were all received prior to August 21, 1947, when notices of the liens were filed. Apart from the appropriateness of this filing under N.Y. Lien Law § 240, the government argues that no perfected prior interests existed as of this date and that filing is not required for perfection of its lien against Kings.

New York law provides Kings as a mechanic's lienor with two separate and distinct forms of protection for its claim. One of these is the ordinary lien on the real estate improved by Kings' services, which lien Kings perfected by filing on August 27, 1947. N.Y. Lien Law § 13 (5). The other, on which Kings mainly relies here, is an interest in the funds which the owner of the improved real estate owes the prime contractor. These funds are deemed a trust fund for the payment of subcontractors, N.Y. Lien Law §§ 13(7), 36-a, and the trust fund arises when the subcontractor performs his services. Thus the main question before us is the relative priority of the federal tax lien and the antedating interest which Kings has in this state-created trust fund.

Generally speaking, the federal tax lien can be defeated only in one of three ways. Competing lienors may establish that the property on which the government seeks to levy is not the property of the taxpayer at all. They may claim a prior specific and perfected lien entitled to precedence under the rule that "`the first in time is the first in right.'" United States v. City of New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L. Ed. 520. Or, as long as the federal lien is unfiled, they may seek to bring themselves within the classes of creditors discussed above, which are specifically protected by I.R.C. § 3672.¹ All these questions — whether the property is that of the taxpayer, whether a prior lien is sufficiently perfected, whether a creditor can qualify as "mortgagee, pledgee, purchaser, or judgment creditor" — are, in the final analysis, matters of federal law, although state law will be considered where relevant. United States v. Security Trust & Savings Bank of San Diego, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53; United States v. Gilbert Associates, Inc., 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071; United States v. Acri, 348 U.S. 211, 75 S.Ct. 239; United States v. Liverpool & London & Globe Ins. Co., 348 U.S. 215, 75 S.Ct. 247; United States v. Scovil, 348 U.S. 218, 75 S.Ct. 244; Rowen v. C. I. R., 2 Cir., 215 F.2d 641. The reason for broad reference to federal principles is the obvious desirability of uniformity in the application of our federal tax laws.

Kings here argues that on all three rationales it is entitled to priority over the federal tax lien, as Judge Abruzzo held. Its main argument for precedence is based on the trust fund created by New York law for the benefit of subcontractors out of funds owing from the owner of the improved property to the contractor. N.Y. Lien Law §§ 13(7), 36-a. This trust fund is available to the mechanic's lienor without filing, Wade v. Nassau Suffolk Lumber & Supply Corp., 275 App.Div. 864, 89 N.Y. S.2d 294, and has been said to make him a statutory assignee of the fund. Cranford Co. v. L. Leopold & Co., 189 Misc. 388, 70 N.Y.S.2d 183, affirmed 273 App. Div. 754, 75 N.Y.S.2d 512, affirmed 298 N.Y. 676, 82 N.E.2d 580, followed in Bain v. Caruso-Sturcey Corp., Sup., 134 N.Y.S.2d 246, and Aquilino v. United States, Sup., 140 N.Y.S.2d 355.

We cannot see, however, that the trust fund given by these statutory provisions either divests the contractor of his property interest in his chose in action against the property owner or gives the mechanic's lienor a specific and perfected lien, for federal tax purposes. Even if we were to follow the New York cases, they would not take us this far. In Cranford Co. v. L. Leopold & Co., supra, the lienor was held entitled to priority by analogy to a purchaser, under I.R.C. § 3672 — a contention with which we shall deal later. The case does not purport to give the lienor any specific property right beyond the status of a "statutory assignee." The other case on which appellee relies, United States Fidelity & Guaranty Co. v. Triborough Bridge Authority, 297 N.Y. 31, 74 N.E.2d 226, is even more remote to the issues now under discussion, for it deals with the rights of a surety who has paid the subcontractor's claims. The surety was held to have perfected his claim to the trust fund as of the date when he first gave the required bond. This allowed the surety an earlier date of perfecting than even the subcontractor would have had, and antedated also the government's receipt of assessment lists. Whether or not such a predating of the surety's rights would be upheld as against perfected federal tax liens under the more recent decisions of the Supreme Court, we need not now decide. The case as it stands adds nothing to our knowledge of New York's appraisal of the status of the mechanic's lienor as such.

Our reading of the statutes and the cases leads us to conclude that, at least for purposes of federal taxation, Kings must be considered essentially like the holder of an attachment or a garnishment lien before it has matured into a judgment. The use of a trust fund rationale by New York in order to give the mechanic's lienor this kind of lien may be the result of the severe restrictions ordinarily imposed by that law on the attachment of debts. See N.Y. Civil Practice Act § 916. Until and unless the mechanic's lienor perfects his rights to the trust fund by filing a timely civil action in accordance with § 75 of N.Y. Lien Law, the contractor...