United States v. State of Vermont

• Decision Date: 09 May 1963
• Docket Number: Docket 27779.,No. 272,272
• Citation: 317 F.2d 446
• Parties: UNITED STATES of America, Appellant, v. The STATE OF VERMONT, Cutting & Trimming, Inc., Chittenden Trust Company of Burlington, Rainbow Children's Dress Company of New York, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

317 F.2d 446 (1963)

UNITED STATES of America, Appellant, v. The STATE OF VERMONT, Cutting & Trimming, Inc., Chittenden Trust Company of Burlington, Rainbow Children's Dress Company of New York, Appellees.

No. 272, Docket 27779.

United States Court of Appeals Second Circuit.

Argued April 11, 1963.

Decided May 9, 1963.

Joseph Kovner, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Fred E. Youngman, Washington, D. C. (Joseph F. Radigan, U. S. Atty., John H. Carnahan, Asst. U. S. Atty., on brief), for United States of America.

Charles E. Gibson, Jr., Atty. Gen., Montpelier, Vt., for the State of Vermont.

Before MOORE, FRIENDLY and HAYS, Circuit Judges.

FRIENDLY, Circuit Judge.

This case raises a question in the vexed field of federal tax lien priority not squarely ruled by any of the numerous decisions of the Supreme Court. It involves a conflict between a state tax assessment, definite in amount, which became a lien on all of a taxpayer's property but did not relate to specific assets, and a later federal tax assessment with precisely the same attributes, in a situation to which the federal priority-in-insolvency statute, R.S. § 3466, now codified in 31 U.S.C. § 191, is not in terms applicable. The District Court for Vermont upheld the priority of the state tax lien, 206 F.Supp. 951. We agree.

The circumstances giving rise to the controversy are these:

The Vermont statutes provide, 32 V.S. A. § 5765, that if an employer who is required to deduct and withhold a tax from an employee's wages fails to pay the same after demand, "the amount, including interest after such demand, together with any costs that may accrue in addition thereto, shall be a lien in favor of the state of Vermont upon all property and rights to property, whether real or personal, belonging to such employer," and further that "Such lien shall arise at the time the assessment and demand is made by the commissioner of taxes and shall continue until the liability for such sum, with interest and costs, is satisfied or becomes unenforceable." The lien becomes valid "as against any subsequent mortgagee, pledgee, purchaser or judgment creditor" once notice is filed with the clerk of the town, city or, in some instances, county where the property is situated. On October 21, 1958, Vermont made an assessment and demand on Cutting & Trimming, Inc. for $1,628.15 for withholding taxes due for the third quarter of 1958; it filed notice of lien on October 30 with the city clerk of Burlington. On May 21, 1959, it instituted suit in a state court against Cutting & Trimming, Inc., and joined Chittenden Trust Co., a Burlington bank, as a defendant. In consequence of a writ served on May 25, Chittenden Trust Co. disclosed that it had in hand $1,278.82 owing to Cutting & Trimming plus another $600 previously attached by Rainbow Children's Dress Company. On October 23, 1959, judgment was entered for Vermont against Cutting & Trimming for $4,049.22 — this including other assessments not here relevant — and against Chittenden Trust Co. for $1,278.82.

Meanwhile, on February 9, 1959, the Commissioner of Internal Revenue made an assessment of $5,365.96 against Cutting & Trimming for 1958 taxes under the Federal Unemployment Tax Act. Under §§ 6321 and 6322 of the Internal Revenue Code of 1954, this amount thereupon became "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." On June 2, 1959, notice of lien was filed pursuant to § 6323 of the Code.

Later, in 1961, the United States brought this action, against Cutting & Trimming, Chittenden Trust Co., the State of Vermont, and Rainbow Children's Dress Company, to establish the indebtedness of Cutting & Trimming for taxes in a larger amount than the February 9, 1959, assessment, and to foreclose its lien against the property of Cutting & Trimming held by the trust company ahead of Vermont's lien. Vermont's answer alleged that its lien had priority as a result of the October 21, 1958, assessment.¹ On cross-motions for judgment on the pleadings, the District Court decreed that Chittenden Trust Co. apply the $1,878.52 held by it first to the principal and then to the interest of Vermont's lien, with any balance payable to the United States, and directed, under F.R.Civ.Proc. 54(b), that this be a final judgment as to the trust company and the state.

In defending against the appeal of the United States from this judgment, Vermont relies on the principle that, at least as between liens of the same sort, the first in time is the first in right. It emphasizes that its lien, which predated the federal lien, was in every other material respect identical to it. The state lien, like the federal, attaches to "all property and rights to property, whether real or personal, belonging to" the taxpayer, arises "at the time the assessment * * * is made," and is valid once notice has been filed as against any subsequent "mortgagee, pledgee, purchaser or judgment creditor." 32 V.S.A. § 5765; 26 U.S.C. §§ 6321-6323. The verbatim similarity is not a coincidence; as Judge Gibson pointed out, 206 F.Supp. at 956, the Vermont legislation was avowedly modeled on the Internal Revenue Code. Enforcement also is similar; Vermont, like the federal government, could have enforced its lien on the fund here at issue either by a civil action in the courts or by direct seizure and public sale.² Against this the United States argues that the first-in-time principle is inapplicable because (1) decisions of the Supreme Court have established that the federal lien would prime Vermont's if Cutting & Trimming had been insolvent so that the federal priority-in-insolvency statute, 31 U.S.C. § 191 (former R.S. § 3466), would have come into play, and (2) the same principle should be — or at any rate has been — applied when the Government relies only on the tax lien statutes, §§ 6321-23 of the Internal Revenue Code.

The Government's first proposition is beyond successful challenge. In cases governed by R.S. § 3466, the Supreme Court has upheld the priority of United States tax claims against an Illinois tax lien, arising prior to the Government's, which we find indistinguishable from Vermont's here, State of Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 370-376, 67 S.Ct. 340, 91 L.Ed. 348 (1946), and even against an antecedent lien for state property taxes assessed upon certain machinery owned by the taxpayer, United States v. Gilbert Associates, Inc., 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953). It is the Government's second proposition that is debatable.

Considering the two statutes solely on the basis of their language and purpose, we find nothing that calls for identical results and much that leads to different ones. R.S. § 3466, which goes back to 1796, 1 Stat. 515, says, in the strongest possible terms, that "Whenever any person indebted to the United States is insolvent * * * the debts due to the United States shall be first satisfied." In cases to which it applies, it gives this prime position to all "debts due to the United States," whether liens or not; the only issue in such cases is how far the words of the statute should be restricted by withdrawing from their sweep property of the insolvent upon which a rival claimant has secured a "lien."³ It is in this connection that the Supreme Court has developed the rule that a lien contesting against the priority of the United States cannot escape the literal impact of R.S. § 3466 unless at "the crucial time" it was "definite, and not merely ascertainable in the future by taking further steps," as to the identity of the lienor, the amount of the lien, and the property to which it attaches, State of Illinois ex rel. Gordon v. Campbell, supra, 329 U.S. at 375, 67 S.Ct. at 347-348, 91 L.Ed. 348; whether a lien passing even this severe test will in fact escape the breadth of R.S. § 3466, the Court has not decided. Spokane County v. United States, 279 U.S. 80, 49 S.Ct. 321, 73 L.Ed. 621 (1929); People of State of New York v. Maclay, 288 U.S. 290, 53 S.Ct. 323, 77 L.Ed. 754 (1933); United States v. Texas, 314 U.S. 480, 62 S.Ct. 350, 86 L.Ed. 356 (1941); United States v. Waddill, Holland & Flinn, Inc., 323 U.S. 353, 65 S.Ct. 304, 89 L.Ed. 294 (1945); State of Illinois ex rel. Gordon v. Campbell, supra; United States v. Gilbert Associates, Inc., supra; See Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L.J. 905, 911-19(1954). In contrast, the federal tax lien statutes, which trace their ancestry to 1865, 13 Stat. 470-71, and were re-enacted for the first time in 1866, 14 Stat. 107, have remained silent for nearly a century on the very issue as to which R.S. § 3466 has spoken so clearly since the earliest days; they say nothing to create a priority for tax liens of the United States over similar but earlier tax liens of the states or municipalities. This silence of the lawmakers of 1865-66 becomes more eloquent when the language of the tax lien statutes is contrasted with the Bankruptcy Act of 1867, 14 Stat. 517, 531, passed by the same Congress that had reenacted the former legislation and by many of the same Congressmen who had passed it originally. Section 28 of the Bankruptcy Act gave priority, immediately after administration expenses, to "All debts due to the United States, and all taxes and assessments under the laws thereof," these being ranked ahead of "All debts due to the State in which the proceedings in bankruptcy are pending, and all taxes and assessments made under the laws of such State." Thus, when the Congress of those days wished to prefer the federal government, it knew how to say so.⁴ Furthermore, it was not until United States v. Security Trust & Savs. Bank, infra, decided in 1950, that Congress could have had any reason to suppose that what it had failed to say with respect to priority in the tax...