United States v. Lebanon Woolen Mills Corporation

• Decision Date: 09 July 1964
• Docket Number: Civ. A. No. 2287.
• Parties: UNITED STATES of America v. LEBANON WOOLEN MILLS CORPORATION et al.
• Court: U.S. District Court — District of New Hampshire

241 F. Supp. 393

UNITED STATES of America v. LEBANON WOOLEN MILLS CORPORATION et al.

Civ. A. No. 2287.

United States District Court D. New Hampshire.

July 9, 1964.

Louis M. Janelle, U. S. Atty., Concord, N. H., for plaintiff.

Robert H. Reno, Concord, N. H., for John C. Cone, receiver.

Shulins & Duncan, Richard C. Duncan, Newport, N. H., for Miller Auto Co., Inc.

CONNOR, District Judge.

This is a motion wherein Miller Auto Company, Inc., seeks a judgment granting its conditional sales contract priority over a federal tax lien, and an order permitting it to prove its claim as a secured creditor of Lebanon Woolen Mills Corporation.

From the representations at the hearing and from the memoranda supplied thereafter, it appears that both Miller and the Government are in agreement as to the following facts. On October 4, 1961, Miller sold to Lebanon Woolen Mills Corporation a 1961 Pontiac Catalina Vista sedan automobile, Serial #361L-17631, under a conditional sales agreement which was not recorded until February 23, 1962. Sometime during October, 1961, Miller made an attempt to record the conditional sales contract in Lebanon, New Hampshire, but for some reason the City Clerk of the City of Lebanon refused to record the contract.

The complaint alleges, and it is nowhere disputed by Miller, that the Commissioner of Internal Revenue made assessments against Lebanon Woolen Mills Corporation for income taxes, penalties, and interest, on January 24, 1962, and that notice and demand was made and refused two days later. The complaint further alleges that the District Director thereafter "duly filed notices of the tax lien * * * in the proper offices as provided by law." A Receiver for Lebanon Woolen Mills Corporation was appointed by order of this court on February 14, 1962.

The question to be determined on the above set of facts is whether the security interest of a conditional vendor is superior to a lien for federal taxes against the vendee, assessed and filed subsequent to the execution of the conditional sales contract, but prior to the filing of that contract. For the purposes of the present motion, no question is raised as to the validity of the federal tax lien or as to the amount claimed to be due under the conditional sales contract, or as to the priorities of other creditors.

In cases involving a contest as to the priority as between a federal tax lien and a lien or other interest arising under state law, there are, generally speaking, two main areas of inquiry. The first is to determine the nature and extent of the interest arising under state law; this is a question of state law. See Poe v. Seaborn, 282 U.S. 101, 110, 51 S.Ct. 58, 75 L.Ed. 239 (1930); Campbell v. Bagley, 276 F.2d 28 (5th Cir. 1960). The second is to determine the priority as between the state created interest and the federal tax lien; this is a federal question. E. g., United States v. Security Trust & Savings Bank, 340 U.S. 47, 49-50, 71 S.Ct. 111, 95 L.Ed. 53 (1950).

As a matter of state law, the conditional sales contract in question, though unfiled, was effective to create a security interest according to its terms between the parties. NH RSA 382-A:9-201. Although the form of the agreement prescribed the retention of title in the conditional vendor, Miller, it would be more appropriate, under the terminology of the Uniform Commercial Code, NH RSA ch. 382-A, to consider Miller as the holder of a purchase money security interest and to consider his status as analogous to that of a chattel mortgagee.

Due to the insolvency of the taxpayer corporation here involved, the question of priority is determined, in the first instance, by 31 U.S.C. § 191 which provides that "whenever any person indebted to the United States is insolvent, * * * the debts due to the United States shall be first satisfied; * * *." "Debts," as used in this section, includes federal taxes. Price v. United States, 269 U.S. 492, 46 S.Ct. 180, 70 L.Ed. 373 (1926).

Despite the seemingly absolute priority thus attaching to federal tax liens in insolvency situations, it has long been recognized that certain classes of prior transfers and interests are exempt from the operation of the present statute and its predecessors. Thus, for example, a prior conveyance or mortgage executed by the taxpayer is not affected by the "absolute" priority of a federal tax lien or other subsequent debt owing to the United States; and, despite recent dicta of the United States Supreme Court to the contrary, the same may well be true of other classes of prior specific and perfected liens. See Savings and Loan Society v. Multnomah County, 169 U.S. 421, 428, 18 S.Ct. 392, 42 L.Ed. 803 (1898); Brent v. Bank of Washington, 35 U.S. (10 Pet.) 596, 611-612, 9 L.Ed. 547 (1836); United States v. Hack, 33 U.S. (8 Pet.) 271, 8 L.Ed. 941 (1834); Conard v. Pacific Insurance Co., 31 U.S. (6 Pet.) 262, 8 L.Ed. 392 (1832); Conard v. Nicoll, 29 U.S. (4 Pet.) 291, 7 L.Ed. 862 (1830); Conard v. Atlantic Insurance Co., 26 U.S. (1 Pet.) 386, 437-450, 7 L.Ed. 189 (1828); Thelusson v. Smith, 15 U.S. (2 Wheat.) 396, 426, 4 L.Ed. 271 (1817); United States v. Hooe, 7 U.S. (3 Cranch) 73, 2 L.Ed. 370 (1805); United States v. Fisher, 6 U.S. (2 Cranch) 358, 390, 395, 2 L.Ed. 304 (1805); United States v. Bond, 279 F.2d 837, 841 (4th Cir. 1960), cert. denied 364 U.S. 895, 81 S.Ct. 220, 5 L.Ed.2d 189 (1960); Exchange Bank & Trust Co. v. Tubbs Mfg. Co., 246 F.2d 141 (5th Cir. 1957), cert. denied, City of Dallas, Texas v. Tubbs, 355 U.S. 868, 78 S.Ct. 118, 2 L.Ed.2d 75 (1957); United States v. Atlantic Municipal Corp., 212 F.2d 709 (5th Cir. 1954). The rationale of these cases appears to be that to the extent that the taxpayer has conveyed, mortgaged, or in any other way alienated a property interest, that property interest is no longer his and cannot be made subject to a subsequent lien for taxes owed by him.

The security interest held by Miller in the present case appears to fit well within this judicially maintained exception. Whether the vendee taxpayer corporation be deemed to have mortgaged away a property interest in the automobile or never to have received the full property interest in the automobile, it is clear that the conditional sales contract operated to create in Miller a distinct and separate security interest. To the extent of this security interest, the automobile has been alienated from the assets of the taxpayer vendee and a lien for the unpaid taxes of the vendee cannot attach to it. Accordingly, the prior purchase money security interest of Miller takes priority over the subsequent attaching federal tax liens.

Having thus indicated the decision of the question at issue in this case, and the basis for that decision, it might also be well, in light of the welter of sometimes confusing and inconsistent precedent in this area, to indicate what has not been the basis of decision.

One possible ground for decision which, at first glance, seems appealing, is found in 26 U.S.C. § 6323(a) which provides that a federal tax lien "shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate * * *." Although the broad language of the statute would appear to apply to all mortgage-like agreements regardless of the time when they were executed, there are several reasons why this statutory provision has not been singled out as the basis of the decision herein.

First, section 6323 is designed to protect persons who acquire their interest during the time gap between the attaching of the federal tax lien and the recording thereof;¹ Miller Auto, however, obtained its interest prior to the attaching of the federal tax lien, prior to the gap.

Second, as a pre-gap transaction, the conditional sales agreement here is already fully protected.²

Third, to apply section 6323 to a pre-gap transaction is to run the risk of inflicting upon a prior and superior interest otherwise fully protected by law, the same infirmities of strict and narrow statutory construction which are visited upon gap interests whose sole hope for gaining priority is qualification under one of the four magic categories denominated in the statute.

Fourth, there is in the recent case of United States v. Pioneer American Insurance Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963), dictum (with which this court does not wish to express its agreement hereby) to the effect that in order for a mortgage to qualify for protection under section 6323, it must have the same degree of choateness which is supposedly³ required of a pre-gap mortgage.⁴ Pioneer thus emphasizes that the one true purpose of section 6323 is to protect gap mortgages, and not to go about offering protection to pre-gap mortgages which are already fully protected.

Another decisional path which the court has not followed, is that described in United States v. Anders Contracting Co., 111 F.Supp. 700 (W.D.S.C.1953), a case granting priority over a federal tax lien to an unfiled conditional sales agreement under circumstances similar to those in the case at bar. The rationale of Anders stressed the theory of retention of title; since the conditional vendee never received title to the truck, the lien for the vendee's unpaid taxes could not attach to the truck. This court is reluctant to rest the decision herein on retained title theory, however, in view of NH RSA 382-A:9-202 which provides:

"Each provision of this Article with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor."

While the annotation to this section bears out the sensible suggestion that resort to title theory or lien theory may be had in contexts not governed primarily by the Code, such resort seems unnecessary here. Miller possesses a valid security interest, complete as against his vendee; the security interest was executed prior to the attaching of the...