United States v. Trigg

• Decision Date: 17 August 1972
• Docket Number: No. 71-1519,71-1532.,71-1519
• Citation: 465 F.2d 1264
• Parties: UNITED STATES of America, Appellant, v. T. C. TRIGG et al., Appellees and Cross-Appellants, First State Bank, Crosset, Arkansas, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

465 F.2d 1264 (1972)

UNITED STATES of America, Appellant, v. T. C. TRIGG et al., Appellees and Cross-Appellants, First State Bank, Crosset, Arkansas, Appellee.

Nos. 71-1519, 71-1532.

United States Court of Appeals, Eighth Circuit.

Submitted May 9, 1972.

Decided August 17, 1972.

COPYRIGHT MATERIAL OMITTED

Norwood Phillips, El Dorado, Ark., for Trigg.

Karl Schmeidler, Atty., Tax Division, Department of Justice, Washington, D. C., Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Attys., Tax Division, Department of Justice, Washington, D. C., for the United States; Bethel B. Larey, U. S. Atty., Sam H. Park, Asst. U. S. Atty., of counsel.

J. V. Spencer, Jr., J. S. Brooks, Spencer & Spencer, El Dorado, Ark., for First State Bank of Crossett, Ark.

Before LAY, BRIGHT, and ROSS, Circuit Judges.

BRIGHT, Circuit Judge.

On this appeal, we consider three competing claims of priority to progress payments earned by a contractor performing construction projects for two Arkansas municipalities. The United States claims priority to the funds under assessments and levies for the contractor's unpaid payroll taxes. A bank claims priority under an earlier unrecorded assignment of accounts receivable. Finally, three individuals, who agreed to indemnify the contractor's surety, claim priority as subrogees of mechanic's lienors and as successors in interest to the surety.

In an unreported opinion, the district court rejected the priority claims of the United States and awarded first priority to the bank, second priority to the indemnitors. The United States has appealed, and the indemnitors have cross-appealed; each claims first priority to the funds. For the reasons stated below, we reverse and award priority to the United States.

The parties have stipulated to the facts. On June 17, 1968, the Sutton Construction Co., Inc., entered into a contract to construct sanitary water and storm improvement facilities at McGehee, Arkansas. On August 14, 1968, the contractor entered into a similar contract with the City of Hope, Arkansas. The Maryland Casualty Company entered into performance-payment bonds, binding itself to both Arkansas municipalities as surety for the contractor under these construction contracts. In connection with the execution and issuance of the bonds, T. C. Trigg, Ovid Switzer, and Victor Scott, as individuals, entered into a "Blanket Indemnity Agreement" with Maryland Casualty Company, agreeing to indemnify Maryland Casualty for any liability which it might incur as surety for the contractor under the construction contracts.

To obtain financing for these projects, the contractor, on August 2, 1967, had executed an "Accounts Receivable Security Agreement" with the First State Bank, Crosset, Arkansas, assigning to the bank, as security for existing or future loans, all accounts receivable arising during the term of the agreement. In late 1968, the contractor directed both Arkansas municipalities to make future payments due under the construction contracts payable jointly to the contractor and the bank. Relying on the security agreement and the written directions to the Arkansas municipalities, the bank advanced approximately $15,000 to the contractor to pay for labor and to purchase materials in performing the construction contracts. At the time the bank filed the complaint against the United States, the contractor remained indebted to the bank for $13,919.41. The bank failed to file the security agreement with the Arkansas Secretary of State or with the Clerk of the Circuit Court, the offices designated by the Arkansas Uniform Commercial Code. See, Ark.Stat.Ann. § 85-9-401(1) (c) (1961).

For each taxable period between March 31, 1968 and March 31, 1969, the contractor failed to withhold income and to pay taxes due under the Federal Insurance Contribution Act. The amount assessed against the contractor by the government for taxes, interest, and penalties far exceeded the amount of the progress payments in question here. On March 3, 1969, the United States served a notice of levy upon McGehee, Arkansas, and received, on April 21, 1969, the sum of $10,763.59, the amount due the contractor for work performed between February 11, 1969, and March 1, 1969. On March 8, 1969, the United States served a notice of levy upon the City of Hope, Arkansas, and received, on March 20, 1969, the sum of $8,336.16, the amount due the contractor for work performed from February 1, 1969, to March 7, 1969.

On April 13, 1969, the contractor defaulted on its contracts with both Arkansas municipalities. The municipalities demanded that Maryland Casualty Company, as surety, complete performance of the contracts. Maryland Casualty, in turn, demanded that the indemnitors, Trigg, Switzer, and Scott, hold Maryland harmless under the indemnity agreement. Pursuant to Maryland's demands, the indemnitors paid the contractor's previously unpaid material and labor claimants and secured a second contractor to complete the projects.

In awarding first priority to the bank, the district court determined that the contractor's assignment of accounts receivable to the bank divested the contractor of any property interest in the progress payments. Therefore, the court reasoned, the contractor held no property interest in the progress payments which the government could attach through a tax lien.

The judgment in favor of the bank did not exhaust the full amount of the progress payments plus interest.¹ Accordingly, the district court went on to determine the relative priorities of the United States and the indemnitors against the remainder. The court awarded second priority to the indemnitors, ruling that, by making payments to the materialmen and laborers who had filed mechanic's lien claims, the indemnitors succeeded to the priority rights granted the materialmen and laborers by Arkansas law. Because we hold that the United States is entitled to the total amount of the progress payments, we need not determine the relative priorities between the bank and the indemnitors.

BANK v. UNITED STATES

We consider first the claim of the bank against the United States. The Federal Tax Lien Law provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, additional to tax, or assessable penalty, 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. 26 U.S.C. § 6321

On this appeal, the bank leans heavily upon a series of Supreme Court cases holding that the Federal Tax Lien Statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law * * *." United States v. Bess, 357 U.S. 51, 55, 78 S.Ct. 1054, 1056, 2 L. Ed.2d 1135 (1958); see United States v. Durham Lumber Co., 363 U.S. 522, 526, 80 S.Ct. 1282, 4 L.Ed.2d 1371 (1960); Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). In Aquilino the Court said:

The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute. 363 U.S. at 512-513, 80 S.Ct. at 1280

The bank argues that, under Arkansas law, the contractor's assignment of accounts receivable to the bank effected a transfer to the bank of the property rights in the accounts receivable, leaving the contractor with no property interest which the United States could reach under the statute.

We do not agree that, under Arkansas law, the assignment of accounts receivable placed the progress payments beyond the reach of a tax lien. Arkansas adopted the Uniform Commercial Code (UCC) in 1961. Ark.Stat.Ann. § 85-1-101 et seq. (1961). The UCC requires holders of certain security interests in property to record their interest in order to protect it from the claims of third parties. Assignees of accounts receivable fall under this filing requirement. Ark.Stat. Ann. § 85-9-302 (1961).² In Arkansas assignees of accounts receivable must file their interest both centrally with the Secretary of State and locally with the Clerk of the Circuit Court. Ark.Stat. Ann. § 85-9-401(1)(c) (1961).

Unless the security interest is perfected by filing, third party creditors may gain rights against the collateral. See Ark.Stat.Ann. § 85-9-301. The UCC subordinates the right of a holder of an unperfected security interest to the right of a "person who becomes a lien creditor without knowledge of the security interest * * *." Ark. Stat.Ann. § 85-9-301(1)(b). The term "lien creditor" is defined as follows:

A "lien creditor" means a creditor who has acquired a lien on the property involved by attachment, levy or the like * * *. Ark.Stat.Ann. § 85-9-301(3)

The United States qualifies as a "lien creditor" under this definition of the term. See L. B. Smith, Inc. v. Foley, 341 F.Supp. 810, 813-814 (W.D.N.Y.1972).

The UCC does not classify the debtor's interest in the collateral securing the debt as "property" or "rights to property," the terms traditionally used by the Supreme Court. See Aquilino v. United States, supra, 363 U.S. at 514, 80 S.Ct. 1277. The draftsmen made no attempt to fix location of title to collateral securing a creditor's interest. Ark. Stat.Ann. § 85-9-202 provides:

Each provision of Article 9 with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor.

The comment to this section explains:

The

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