United States v. The Pomare

• Decision Date: 14 August 1950
• Docket Number: Admiralty No. 428.
• Citation: 92 F. Supp. 185
• Parties: UNITED STATES v. THE POMARE et al.
• Court: U.S. District Court — District of Hawaii

92 F. Supp. 185

UNITED STATES v. THE POMARE et al.

Admiralty No. 428.

United States District Court D. Hawaii. First Division.

August 14, 1950.

Norman K. Chung, Honolulu, T. H., King & McGregor, Honolulu, T. H., James A. Leavey, Honolulu, T. H., for claimants.

Ray J. O'Brien U. S. Atty., District of Hawaii, Honolulu, T. H., and Winston C. Ingman, Asst. U. S. Atty., Honolulu, T. H., for libelant.

METZGER, District Judge.

1. Statement of the Case.

On March 3, 1950, the United States of America filed in this Court a libel in rem and in personam against the Oil Screw Vessel Pomare and the South Seas Shipping Company, Ltd., the recorded owner of the ship. The libel recited that on February 4, 1948, the shipping company executed and delivered to the libelant, for a valuable consideration, a promissory note bearing that date, in the principal sum of $37,500, with interest at 4% per annum from date. The note is payable in 36 monthly installments, the final installment falling due on February 4, 1951.

The libel further alleged that on June 8, 1948, in order to secure the payment of the note, the respondent shipping company, in accordance with the Ship Mortgage Act of 1920, as amended, 46 U.S.C.A. §§ 911-984, executed and delivered to the libelant a preferred marine mortgage covering the respondent vessel. Both note and mortgage are attached to the libel as exhibits.

After formal recitals as to recordation, endorsement, affidavits of good faith, and the like, the libel sets forth that there now remains due and unpaid on the principal of the note the sum of $20,000, together with interest. According to the testimony of Hyman Wongham, president of the respondent corporation, the accrued interest amounted to $338.65, as of February 4, 1950.

Electing to declare this entire balance of $20,000, together with the unpaid interest thereon; to be "immediately due and collectible," the libelant prays that the Pomare be condemned and sold, after notice to all persons claiming any interest therein, to pay the libelant's claims; and that the preferred marine mortgage be declared a valid and existing lien upon the vessel superior to all save "preferred maritime liens".

In its answer, the respondent corporation admits the libel's allegation as to the principal amount due, $20,000, but leaves the libelant to its proof as to the amount due on a certain installment date, not material here.

In accordance with a writ of venditioni exponas issued under the authority of this Court on March 24, 1950, the Pomare was sold at public auction by the United States Marshal at Honolulu to Juan Perlo, of Los Angeles, California, the highest bidder, for $24,000, on April 14, 1950. This Court confirmed the sale on April 20, 1950.

Many petitions in intervention have been filed herein by creditors of the respondents. Since the proceeds of the public sale are insufficient to satisfy completely the claims of even the preferred creditors, the discussion that follows will be confined to an inquiry into the order of priority among such creditors alone.

2. The Priority of the Claims of the Seamen over Those of the Government.

The two classes of claims that are the leading contenders for the spoils of the Pomare are those of the seamen and those of the United States Government. Indeed, the available sum of $24,000 will not be sufficient to satisfy both groups of claims in full.

The demands of the crewmen are bottomed upon unpaid wages. Those of the United States are based upon (1) various taxes owed to the Collector of Customs and the Collector of Internal Revenue; and (2) the preferred marine mortgage. All these preferred claims are sufficiently itemized in the Recapitulation, infra.

(a) The Rank of the Federal Tax Claims.

We will first consider the standing that the tax claims of the United States have vis-a-vis the wage claims of the crew.

A. The Rank of the Government's Tax Liens Depends Upon Statute.

It is well settled that the claim of the Government for taxes does not stand upon any conception of sovereignty but upon specific statutory authority.

This principle goes back to the earliest reaches of American jurisprudence. In United States v. State Bank of North Carolina, 1832, 6 Pet. 29, 35, 8 L.Ed. 308, Mr. Justice Story said: "The right of priority of payment of debts due to the government, is a perogative (sic) of the crown well known to the common law. It is founded not so much upon any personal advantage to the sovereign, as upon motives of public policy, in order to secure an adequate revenue to sustain the public burdens, and discharge the public debts. The claim of the United States, however, does not stand upon any sovereign perogative (sic) but is exclusively founded upon the actual provisions of their own statutes." (Emphasis supplied).

See also In re Wyley Co., D.C.Ga.1923, 292 F. 900, 901; City of Winston-Salem v. Powell Paving Co., D.C.N.C.1934, 7 F. Supp. 424, 428.

B. The Absolute Priority Given to the Government by 31 U.S.C.A. § 191 Does Not Apply Here.

(a) The Statute.

Section 191 of Title 31 U.S.C.A., reads as follows:

"Section 191. Priority established. Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed."

(b) The Taxpayer Herein Is Not "Insolvent" Within the Purview of the Foregoing Section.

While it was generally conceded by all sides during oral argument that the tax-payer herein — the South Seas Shipping Company, owner of the "Pomare" — does not have sufficient resources with which to meet its debts, the Company is not "insolvent" within the meaning of Section 191, supra.

The definition of "insolvency" within the ambit of that statute was thus expounded in Bramwell v. United States Fidelity & Guaranty Company, 269 U.S. 483, 487-488, 46 S.Ct. 176, 177, 70 L.Ed. 368: "The act applies to all debts due from deceased debtors whenever their estates are insufficient to pay all creditors, and extends to all debts due from insolvent living debtors when their insolvency is shown in any of the ways stated in section 3466 (31 U.S. C.A. § 191). The decisions of this court show that no lien is created by the statute; that priority does not attach while the debtor continues the owner and in possession of the property; that no evidence can be received of the insolvency of the debtor until he has been divested of his property in one of the modes stated; and that `whenever he is thus divested of his property, the person who becomes invested with the title, is thereby made a trustee for the United States, and is bound to pay their debt first out of the proceeds of the debtor's property.' (Cases cited)" (Emphasis supplied).

(c) Conclusion.

From the foregoing, it is clear that the absolute preference given to the United States because of a tax lien is not present in the instant case.

C. Section 3670 of the Internal Revenue Code Does Not Establish Priorities.

(a) The Statute.

Section 3670 of the Internal Revenue Code, 26 U.S.C.A. § 3670, reads as follows: "§ 3670. Property subject to lien.

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

(b) This Section Does Not Give the Government a Preference.

It will readily be seen that Section 3670 does not give the United States a preferred lien upon the property of the taxpayer. In City of Winston-Salem v. Powell Paving Co., supra, 7 F.Supp. at page 428, the Court said: "The lien established by section 3186 (26 U.S.C.A. § 3670) is a general lien upon all the property of the taxpayer, and resembles, in many respects, a mortgage. While it is a lien, it is not necessarily to be preferred over any other lien."

See also Exchange National Bank of Tulsa v. Davy, D.C.Okl.1936, 13 F.Supp. 226, 229.

D. Nor Does the Ship Mortgage Act Establish the Priority of a Federal Tax Lien.

A reading of Section 953 of Title 46, which is part of the Ship Mortgage Act of 1920, discloses that, while "preferred maritime liens", including those for crewmen's wages, are there given high priority no mention is made of tax liens:

"§ 953. Preferred maritime lien; priorities; other liens.

"(a) When used hereinafter in this chapter, the term `preferred maritime lien' means (1) a lien arising prior in time to the recording and indorsement of a preferred mortgage in accordance with the provisions of this chapter; or (2) a lien for damages arising out of tort, for wages of a stevedore when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for wages of the crew of the vessel, for general average, and for salvage, including contract salvage.

"(b) Upon the sale of any mortgaged vessel by order of a district court of the United States in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all preexisting claims in the vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of section 952 of this title, shall be held terminated and shall thereafter attach, in like amount and in accordance with their respective priorities, to the proceeds of the sale; except that the preferred mortgage lien shall have priority over...