United States v. Sampsell

• Decision Date: 15 February 1946
• Docket Number: No. 10932.,10932.
• Parties: UNITED STATES v. SAMPSELL et al.
• Court: U.S. Court of Appeals — Ninth Circuit

153 F.2d 731 (1946)

UNITED STATES v. SAMPSELL et al.

No. 10932.

Circuit Court of Appeals, Ninth Circuit.

February 15, 1946.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, A. F. Prescott, Leonard Sarner, and Muriel S. Paul, Sp. Assts. to Atty. Gen., and Charles H. Carr, U. S. Atty., E. H. Mitchell, Asst., Eugene Harpole, Sp. Asst. to Chief Counsel, Bureau of Internal Revenue, all of Los Angeles, Cal., for appellant.

Grainger & Hunt, of Los Angeles, Cal., for appellee Paul W. Sampsell.

Robert W. Kenny, Atty. Gen. of Cal., and John L. Nourse, Deputy Atty. Gen., for appellee State of California.

C. E. McDowell, McIntyre Faries, and Allan M. Carson, all of Los Angeles, Cal., for appellee Universal Consolidated Oil Co.

Before STEPHENS, BONE and ORR, Circuit Judges.

STEPHENS, Circuit Judge.

The United States, deeming itself aggrieved by a judgment of the United States District Court adverse to its claim of priority as a lien holder upon a sum of money held in the Bankruptcy Court, appeals.

The El Camino Refining Company, a corporation, filed a petition for reorganization on May 12, 1942, under Chapter X of the Bankruptcy Act of 1898, c. 541, 30 Stat. 544, as amended by the Act of June 22, 1938, c. 575, 52 Stat. 840, 883, 11 U.S. C.A. § 501 et seq. It was adjudicated a bankrupt on March 27, 1943, and Paul W. Sampsell was appointed trustee in bankruptcy of the estate on March 27, 1943. On March 31, 1943, he was qualified and assumed the duties of that office. In conformity with the agreement of all lien claimants and the court, the assets of the bankrupt were sold and the net proceeds received in the sum of $19,927.85. In further conformity with the agreement in which all lien claimants joined, all claims of liens together with their priority as they existed before the sale were transferred to the fund realized, subject to the expenses of administration to be fixed by the court.

There are three lien claimants, whose claims together exceed the value of the assets of the estate.

(1) The State of California, by and through the California State Franchise Tax Commissioner, filed a claim for April 3, 1943, for corporate franchise taxes in the sum of $3,701.35 plus interest at 6% per annum from January 15, 1944, until paid. The taxes were for the years 1939 and 1940 accruing January 1, 1939, and January 1, 1940, respectively. The exact amount of the taxes was not fixed prior to the date of the commencement of these bankruptcy proceedings. The California law provides that such taxes (imposed by the Bank and Corporation Tax Act of the State of California, Deering, California General Laws, 1939 Supp., Act 8488) shall constitute a lien upon the real property of the taxpayer, the lien to have the same force, effect and priority as a judgment lien, and shall attach on the first day of the taxable year.

(2) The Universal Consolidated Oil Company, a corporation, filed a claim for $11,234.78 plus interest based upon real property mortgage given as security for a promissory note, which was executed and delivered on January 19, 1941. The obligation of the note is for the principal sum of $8,444.08 with interest at the rate of 5% per annum from March 15, 1943, until paid, together with the provision for attorney fees. On May 10, 1943, the Referee made an order allowing to the mortgagee a secured claim upon the real property so mortgaged to the extent of the total indebtedness. The mortgage was recorded on May 3, 1941, in the Official Records of Orange County, California. The balance due upon the said note and mortgage, principal and interest, exclusive of attorney's fees, is the sum of $10,484.78 plus interest thereon thereafter at the rate of 5% per annum until paid. The claim under the mortgage was contested by the United States and after legal notice of hearing (§ 58 of Bankruptcy Act, 11 U.S. C.A. § 94), the sum of $750 was fixed by the court as reasonable compensation for legal services performed by the law firm of Faries & McDowell for the mortgagee in connection with the mortgage in the bankruptcy proceedings.

(3) The United States filed a claim on June 20, 1942, for gasoline taxes for a sum in excess of $20,000. The liens attached on several dates between January 6, 1942, and June 18, 1942, both dates being included, by virtue of the fact that the assessment lists of the Commissioner of Internal Revenue were received by the Collector at Los Angeles on those dates. Internal Revenue Code, §§ 3670, 3671, 3672, 53 Stat. 448-490, § 3412, 53 Stat. 413, 26 U.S.C.A.Int.Rev.Code, §§ 3412, 3670-3672. No lien claim was recorded for these taxes in the office of the County Recorder of Orange County, State of California, or filed for record in the Office of the Clerk of the United States District Court for the Southern District of California, within which jurisdictions the oil refinery plant was located. The government's lien arises by virtue of §§ 3670, 3671 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, §§ 3670, 3671. Section 3672 of the same Act, 26 U.S.C.A.Int.Rev.Code, § 3672, provides that no lien shall be valid as against a mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector.

Expenses of administration amounting to $6,929.83 were ordered to be paid out of the estate before any of the liens were to be paid.

The Referee, affirmed by the District Court, ruled that the liens were entitled to priority in the order in which they attached, and since the assets were insufficient to pay both the state's claim and the mortgagee's claim in full, the legality of the United States' claim, aside from the priority phase was not passed upon.

The appellant contends that the District Court erred in holding that the United States was not entitled to priority in payment for gasoline taxes out of the bankrupt estate over the claims of the State of California for franchise taxes, and of the Universal Consolidated Oil Company for interest and attorney's fees relating to its mortgage.

Three questions are presented for determination by this court:

"(1) Whether the District Court erred in holding that under § 67 of the Bankruptcy Act, 11 U.S.C.A. § 107, the liens of the United States for gasoline taxes were not entitled to priority in payment over the inchoate general liens of the State of California for franchise taxes.

"(2) Whether the District Court erred in allowing interest to the Universal Consolidated Oil Company on the principal sum due under its mortgage, subsequent to the date of adjudication in bankruptcy, or sale with the mortgagee's consent, of the mortgaged property free and clear of all liens.

"(3) Whether the District Court erred in subordinating the tax liens of the United States to the payment of attorney's fees and interest on the principal sum due under the mortgage to the Universal Consolidated Oil Company subsequent to the date of adjudication in bankruptcy."

The lien and priority claims of the United States are based upon §§ 3670-3672 of the Internal Revenue Code, 26 U.S. C.A.Int.Rev.Code, §§ 3670-3672, for gasoline taxes due under § 3412(a) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev. Code, § 3412(a). In substance these sections provide that when a tax is not paid it becomes a lien, effective at the time the assessment list is received by the collector. It is provided that the lien shall not be valid against a mortgagee, pledgee, purchaser, or judgment creditor until notice of the lien is filed with certain local officials or with the clerk of the District Court. The language of § 3672, however, has been interpreted to mean that a lien of the United States is inferior to all mortgage or judgment liens which were acquired prior to the date of recording or filing of the notice. See Fox v. Queens County Sales Co., Inc., D.C.N.Y.1931, 52 F.2d 794; Minnesota Mutual Life Insurance Co. v. United States, D.C.Tex.1931, 47 F.2d 942.

All requisites for the attachment of government's liens for gasoline taxes claimed on appeal were fulfilled prior to the filing of the petition on May 12, 1942. Specifically the issue deals with the relative priorities of the United States as a lien claimant and California as a lien claimant under the facts obtaining. The tax liens asserted by the State of California were inchoate as to amount, but were fixed and attached to the real property of the debtor on January 1, 1939, and January 1, 1940, both of these dates being prior to the time that the Federal tax liens attached to such property. See California Bank and Corporation Franchise Tax Act, Deering California General Laws (1939 Supp.), Act 8488, §§ 25, 29.

The government contends that since the state lien is general and inchoate that the United States lien being specific and perfect, arising at the times the assessment lists were received, was thereby given priority over the state lien. It is also contended by the government that § 3672 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 3672, which requires recordation in certain instances does not defeat this priority since a state is not among the enumerated classes protected by the statute.

The California courts have held that even though the taxes are not fixed or payable until the assessment has been made, such subsequent assessment does not create the lien but is only a step in its enforcement. County of San Diego v. County of Riverside, 1899, 125 Cal. 495, 58 P. 81.

The determination of this controversy rests upon statutory construction. The statutes involved are the Bankruptcy Act and certain sections of the Internal Revenue Code, supra. In general, the lien claimants fall under § 67 of the National Bankruptcy Act of 1898, as amended by the Chandler Act of 1938, 11 U.S.C.A. § 107. This section provides, in substance and for purposes herein concerned, that statutory liens for taxes and debts owing to the United States or any State or subdivision thereof, created or recognized by the laws of the...