United States v. Truss Tite, Inc.

• Decision Date: 11 March 1968
• Docket Number: Civ. A. No. 66-G-110.
• Citation: 285 F. Supp. 88
• Parties: UNITED STATES of America, Plaintiff, v. TRUSS TITE, INC., Alvin State Bank, Alvin State Bank as the Administrator of the Estate of Terry A. Newman, Defendants.
• Court: U.S. District Court — Southern District of Texas

285 F. Supp. 88

UNITED STATES of America, Plaintiff, v. TRUSS TITE, INC., Alvin State Bank, Alvin State Bank as the Administrator of the Estate of Terry A. Newman, Defendants.

Civ. A. No. 66-G-110.

United States District Court S. D. Texas, Galveston Division.

March 11, 1968.

Joel Kay, Asst. U. S. Atty., Houston, Tex., for plaintiff.

Olin G. Wellborn, Wellborn, Britt & Kelly, Alvin, Tex., for Alvin State Bank.

MEMORANDUM AND ORDER

NOEL, District Judge.

This is an often litigated area of the law in the United States District Courts —the battle of priorities between a tax lien of the United States and a competing lien of another party. This action was commenced as a suit whereby the government sought to obtain judgment against a taxpayer, Truss Tite, Inc., for employment taxes due and owing the United States. Default judgment was granted and entered on October 10, 1967, as to the taxpayer. Alvin State Bank, as the administrator of the estate of Terry A. Newman, was also named as a defendant in order that a determination could be made as to the priority of competing liens between the United States and the bank. The government and the bank have agreed to all the facts involved in the suit in a pre-trial stipulation entered on May 29, 1967. The parties further agreed that there was only one issue of law remaining to be determined by the court. Both parties having filed briefs and reply briefs, the case is now before the court for decision.

The relevant facts as agreed by the parties are as follows: Defendant Truss Tite, Inc., entered into a one-year lease agreement with the Alvin State Bank, in its representative capacity, in March 1964. The lease contract provided, inter alia, that the lessor would have a lien as security for the rent upon all the personal property and fixtures on the demised premises. By November 10, 1964, Truss Tite was in default, and has failed to pay any further amount to date.

In December 1964, the government made an assessment against Truss Tite (hereinafter called taxpayer) for past due taxes. Notice of federal tax lien was filed on December 11, 1964. In January 1965, the bank filed suit against the taxpayer for the past due rent and breach of the lease agreement. In February, the plaintiff made a further assessment and filed a second notice of federal tax lien.

In March 1965, the taxpayer filed a general denial in the suit the bank had brought against it. In late April, with the approval of both a major stockholder of taxpayer and the Internal Revenue Service, the bank sold personal property located in the leased premises for a total amount of $3,203.02. This is the fund over which both the government and the bank claim priority. The bank is holding this sum in escrow pending the outcome of this suit.

In addition to the above facts, the parties also stipulated that, "The following issue of law, and no others, remains to be determined by the court herein:

Whether the federal tax liens for the third and fourth quarters of 1964 having a total unpaid balance of $3,275.49, plus interest as provided by law, are entitled to priority to the contractual landlord's lien contained in the lease agreement between the Alvin State Bank, as administrator of the estate of Terry A. Newman, and Truss Tite, Inc., as to the fund of money resulting from the sale of certain personal property located on the leased premises at the time of the default in the lease agreement."¹ (Emphasis added.)

Section 6321 of the Internal Revenue Code of 1954 provides for the imposition of a tax lien upon all property and rights to property in which a delinquent taxpayer has an interest. It arises as a secret lien, effective from the date of the assessment of the tax. In order to protect certain creditors, Congress passed Section 6323. This section requires that the government file notice of the lien before it is valid against purchasers, holders of security interests, mechanics lienors, or judgment lien creditors.²

The federal courts look to state law to determine the nature of a party's interest in property in tax lien litigation. United States v. Bess, 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958); United States v. Creamer Industries, 349 F.2d 625 (5th Cir. 1965), (5th Cir. 1965), cert. denied, 382 U.S. 957, 86 S.Ct. 434, 15 L.Ed.2d 361 (1965). The rule is usually stated that when the priority of a federal tax lien is asserted as against a state-created interest, state law will determine the existence and characteristics of the state lien, but federal law sets standards for priority, and determines whether the status of a holder of a security interest within the meaning of § 6323 (a) was attained before notice of tax lien was filed.

In regulating the competition between federal tax liens and non-federal liens, the Supreme Court has ruled that the common law rule of "the first in time is the first in right" will control. United States v. Equitable Life Assur. Soc. of United States, 384 U.S. 323, 86 S.Ct. 1561, 16 L.Ed.2d 593 (1966). However, in determining the priority of liens against a government tax lien, the one which is first in time will be deemed first in right, if and only if, the one first in time is specific and perfected in the federal sense. United States v. Morrison, 247 F.2d 285 (5th Cir. 1957). A lien is not choate or perfected in the federal sense, unless, inter alia, (1) it has at least complied with all state requirements for perfection, (2) the identity of the lienor is known, (3) the property subject to the lien is established, and (4) the amount of the lien is established. United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 83 S.Ct. 1651, 10 L.Ed.2d 770 (1963).

For those classes of persons not protected by § 6323, the "choateness" test is applied at the time of the tax assessment. For those that are protected, e. g. purchasers, holders of a security interest, etc., the test is applied as of the date notice of the tax lien is filed in the appropriate state office. Should the competing lien not meet any one of the choateness standards, it is inchoate. In determining the priority of a federal tax lien over competing liens, there has been a persistent application of the "choate lien test," first in insolvency cases, then in statutory lien cases, and finally in non-statutory contractual lien cases. United States v. Bond, 279 F.2d 837 (4th Cir. 1960). Even though prior in time, an inchoate lien is inferior to a federal tax lien. Fore v. United States, 339 F.2d 70 (5th Cir. 1964), cert denied, 381 U.S. 912, 85 S.Ct. 1532, 14 L.Ed.2d 433 (1965). However, a choate state-created lien will take priority over later federal tax liens. United States v. Pioneer Am. Ins. Co., supra....