Opposition — Nesbitt v. United States

, Rh de te 1d

No. 80-1256 { APR 17 198)

Sn. saunas —senwen ee OS

In the Supreme Court of the Hnited States

OcTORER TERM, 1980

MARIE D. NESBITT, PETITIONER

Vv.

UNITED STATES OF AMERICA, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

Wape H. McCREE, JR.

Solicitor General

JOHN F. MURRAY

Acting Assistant Attorney General

WILLIAM S. ESTABROOK

JOAN |. OPPENHEIMER

Attorneys

Department of Justice

Washington, D.C. 20530

202) 633-2217

QUESTION PRESENTED

Whether the priority under Section 3466 of the Revised

Statutes for “the debts due to the United States” from an

insolvent person defeats the lien of a judgment creditor

under 26 U.S.C. 6323(a), as amended by the Federal Tax

Lien Act of 1966, where the judgment lien was filed prior to

the federal tax lien and the insolvency of the debtor, but the

judgment creditor failed to enforce her lien by execution.

(1)

os

TABLE OF CONTENTS

Page

Opinions Below ...... ccc meccccceseeeccsecccvcees |

eer re Terre rr rrr rr rere Teer tT

Statute and regulations involved ........+.0+eeeeee: I

SIRO og nnn v cree a sstk savages spessveseweres 2

err ere rer ee ee 3

eee ree rer ee Pr rrr rT rere res ee 8

TABLE OF AUTHORITIES

Cases:

H.B. Agsten & Sons, Inc. v. Huntington Trust &

Savings Bank, 388 F. 2d 156 ......-- eee eeee 7

Commonwealth v. Covil, 474 Pa. 375,

a ee 2 Arr rerrT Ss ery cries 8

Commonwealth v. Davenport, 462 Pa. 543.

EE Fee OF ok cc ch eae canes kde ee Ane ees 8

Commonwealth v. Rightnour, 469 Pa. 107,

6! or rE hen rr rrr? Se ere re a &

Commonwealth of Kentucky, Department of

Revenue v. United States, 383 F. 2d 13. .....-. 7

Decker’s Estate, In re, 355 Pa. 331.

49 A.2d 714. cert. denied. 331 U.S. 807 ..... 7-8

Estate of Adolph P. Berretta, In re,

Nos. 11, 12:¢Pa. Mar. (3, 1960) 2.006 cc ccnvees &

Exchange Bank & Trust Co. v. Tubbs

Mfe. Co., 246 F. 2d 141. cert. denied,

ROP Se Shs occa e ae eae as reese eras &

National Surety Corp. v. Sharpe,

i oe eee oe 8 Breer err ye 7

I]

~ PREVIOUS PAGE WAS BLANK

as

lV

Page

Cases—(Continued):

New York v. Maclay, 288 U.S. 290 ........... 4.8

Sapero v. O'Connell, No. 799

(Md. Ct. Spec. App. Mar. 13, 1981) .......... 7

Thelusson v. Smith, 15 U.S. (2 Wheat.)

NACE BES A RR Ne, Ae i BAS AR > Ne ED 4

United States v. Emory, 314 U.S. 423 ........... 4

United States v. Gilbert Associates.

SINR ge ee ee 4

United States v. Kimbell Foods. Ine..

MEE ESE ee Be ee 5

United States v. Moore, 423 U.S.77 .......... 3-4

United States v. New Britain, 347 U.S.81 ....... s

United States v. South Carolina.

Bat Oe. WOT, OT SUSI on cnccccccccceces 7

United States v. Vermont, 377 U.S. 351 ....... 35

Statutes:

Act of Mar. 3, 1797. ch. 20. Section §.

DR MIRE eal ee eS ee ie eo ee 3

Act of Mar. 4, 1913. ch. 166.

REE aS ee eee 6

Federal Tax Lien Act of 1966. Pub. |

No. 89-719. Section lOl(a). 80 Stat. L128 2... .. a

Page

Statutes— (Continued):

Internal Revenue Code of 1954 (26 U.S.C.):

So : ar a ner eer: A. NY |

re ee a kn ce ea hes © oe 2 eS 07

SL I A a ae ee © ee 6

Rev. Stat. 3466, 31 U.S.C.

8 Laser a: See, Ale eae re Vea Se ee

Miscellaneous:

ABA, Final Report of the Committee on Federal

Oa) Bee re ae ee 6

105 Cong. Rec. (Index) (1959):

Lee A re aces ee oe 6

ONE Eon ah es an Caer yr a ie a ae 6

117 Cong. Rec. 1650 (Index) (1971) ............ 7

H.R. Rep. No. 1018, 62d Cong..

et ee ERE ys Fe a Tle a ee ae ae 6

H.R. Rep. No. 1884, 89th Cong..

ee ee a he ee ie ee ON ware OO 6

Priority of Federal Tax Liens and Levies:

Hearings on H.R. 11256 and H.R. 11290 Before

the House Comm. on Ways and Means, 89th

Cong... 20 SONS. (1900) occ ci ee ccc sins 6.7

S. 2497, 920 Cone... 1st Rees. (U9 1) csc cee res: 7

S. Rep. No. 1708. 89th Cong..

BSS | ae ae ere eee ea ee 6

In the Supreme Court of the Mnited States

OCTOBER TERM, 1980

No. 80-1256

MARIE D. NESBITT, PETITIONER

v.

UNITED STATES OF AMERICA, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the district court (Pet. App. 4A-34A) ts

reported at 445 F. Supp. 824. The opinion of the court of

appeals (Pet. App. 1A-3A) is reported at 622 F. 2d 433.

JURISDICTION

The judgment of the court of appeals was entered on June

26. 1980 (Pet. App. 35A-36A), and a petition for rehearing

was denied on October 2. 1980 (Pet. App. 37A-38A). By

order dated December 15, 1980. Mr. Justice Rehnquist

extended the period in which to file a petition fora writ of

certiorari to January 23. 198t.and the petition was filed on

that date. The jurisdiction of this Court is invoked under 28

U.S.C. 1254(1).

STATUTE AND REGULATIONS INVOLVED

The pertinent provisions of Rev. Stat. 3466. 31 U.S.C.

I91 and Section 6323(a) of the Internal Revenue Code ot

1954 (26 U.S.C.) are set forth at Pet. App. 39A-66A.

(1)

z

STATEMENT

The question presented in this federal income tax collec-

tion case involves the resolution of the competing claims of

petitioner, a judgment creditor, and the United States,

against the net proceeds of the sale of real property of an

insolvent debtor.

The pertinent facts are undisputed and may be summar-

ized as follows: The United States assessed tax liabilities

against the debtor, Franklyn K. Brann, who died on May

26, 1976, in the amount of $89,160.06 for income taxes for

1974, 1975, and 1976, and for withholding and F.1.C.A.

taxes for the taxable periods ending December 31, 1974,

March 31, 1975, June 30, 1975, September 30, 1975, March

31, 1976, and June 30, 1976 (R. 28-30).! On September 7,

1976, January 17 and 25, 1977, the Internal Revenue Ser-

vice filed notices of tax liens in the aggregate amount of

$55,872.72. Petitioner holds a default judgment against

Brann in the amount of $225,061 which she recorded on

April 28, 1976. However, petitioner never executed on her

judgment (Pet. App. 6A-7A, 27A).

At the time of his death, the debtor Brann and his wife

owned an individual 13% interest in real property. That

interest was sold pursuant to agreement of the parties, and

the proceeds are being held for distribution as determined in

this proceeding. It is agreed that the decedent’s estate is

insolvent, /.e., “insufficient to pay all the debts due from the

deceased” within the meaning of Rev. Stat. 3466, 31 U.S.C.

191 (Pet. App. 6A-9A, IIA).

Petitioner brought this action in the United States Dis-

trict Court forthe Northern District of California seeking a

determination that her claims as a judgment creditor under

26 U.S.C. 6323(a) to certain proceeds from the sale of the

debtor’s real property had priority over the tax claims of the

'“R.” refers to the record in the court of appeals.

3

United States under Rev. Stat. 3466, 31 U.S.C. 191. The

district court upheld the priority of the government’s tax

claim. After reviewing the authorities, it concluded that “a

lien, including a judgment lien, will only be excepted from

the operation of §3466 if it has been reduced to possession,

thereby divesting the judgment debtor of either title or

possession” (Pet. App. 32A). Even on the assumption that

perfected and specific liens are excepted from the rule of

absolute priority established by Section 3466 (a question

the district court declined to address), the court concluded

that “[petitioner’s] lien, not being sufficiently perfected and

specific, does not qualify under such an exception” (Pet.

App. 33A). The court of appeals affirmed for the reasons

stated in the district court’s opinion (Pet. App. 1A-3A).

ARGUMENT

The decision below correctly held that the government’s

tax claim under Section 3466 of the Revised Statutes

against an insolvent estate had priority over petitioner’s

unperfected judgment lien.

1. Section 3466 of the Revised Statutes, 31 U.S.C. 191,

provides in pertinent part that “[w]henever 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 * * *.”

The statute has its roots in the early enactments of the

Republic, /.e., the Act of Congress of Mar. 3, 1797. ch. 20.

Section 5, | Stat. 515. By its broad terms, it admits of no

exceptions in conferring absolute priority for debts due the

United States from an insolvent person or estate. United

States v. Vermont, 377 U.S. 351, 357 (1964). As the Court

recently affirmed, “ ‘Lo]nly the plainest inconsistency would

warrant our finding an implied exception to the operation

of socleara command as that of $3466." ° United States v.

4

Moore, 423 U.S. 77, 82-83 (1975), quoting from United

States v. Emory, 314 U.S. 423, 433 (1941). Accordingly, if

the insolvent debtor is in possession of property, the prior-

ity of Section 3466 defeats unexecuted judgment liens. As

the Court held more than 150 years ago in Thelusson v.

Smith, 15 U.S. (2 Wheat.) 396, 426 (1817), “the general lien

of a judgment upon the lands of an insolvent debtor ts

subordinate to the preference established by the statute

unless seizure by a marshal or some other equivalent act has

made the lien specific and brought about a change of title or

possession.” New York v. Maclay, 288 U.S. 290, 293-294

(1933).

Moreover, Section 3466 applies to all the insolvent’s

debts to the government, whether or not arising from taxes,

and whether or not secured by a lien. In United States v.

Gilbert Associates, 345 U.S. 361, 366 (1953), the Court

accorded priority under the statute to subsequently arising

claims of the United States against an insolvent debtor even

though the identity of a prior existing lienor, the amount of

the lien, and the property subject to the lien were all clearly

established. As the Court observed, “[i]n claims of this type,

‘specificity’ requires that the lien be attached to certain

property by reducing it to possession, onthe theory that the

United States has no claim against property no longer in the

possession of the debtor * * *. The taxpayer has not been

divested by the Town of either title or possession. The

Town, therefore, had only a general, unperfected lien” (/d.

at 366). Here, too, petitioner’s competing lien did not

reduce the debtor’s property to her possession. The court of

appeals therefore correctly concluded that petitioner's lien

was “not sufficiently perfected and specific to come within

any such exception [to Section 3466]" (Pet. App. 3A).

2. Petitioner’s claim to priority for her unperfected

judgment lien rests upon Section 6323(a) of the Internal

Revenue Code of 1954 (26 U.S.C.), as amended by the

5

Federal Tax Lien Act of 1966. That statute provides that

federal tax liens “shall not be valid as against any purchaser,

holder of a security interest, mechanic’s lienor, or judgment

lien creditor until notice thereof which meets the require-

ments of subsection (f) has been filed by the Secretary.”

Since petitioner’s judgment lien was recorded prior to the

filing of the federal tax lien of the United States, she claims

priority under Section 6323. In petitioner’s view, that provi-

sion overrides the rule of absolute priority in favor of the

government provided by Section 3466 of the Revised Sta-

tutes. In support of this argument, petitioner cites this

Court’s decision in United States v. Kimbell Foods, Inc.,

440 U.S. 715 (1979).

sut Section 6323 has no application to a case where, as

here, the debtor is insolvent and the government’s claim

’ derives from Section 3466 of the Revised Statutes. Petition-

er’s claim under Section 6323 would be accorded priority if

the government’s claim derived from an after-arising tax

lien. As this Court stated in United States v. Vermont,

supra, 377 U.S. at 358, it is “quite clear that different

standards apply where the United States’ claim is based ona

tax lien arising under §§6321 and 6322 (footnote omitted).”

See also United States v. New Britain, 347 U.S. 81 (1954).

Nor does United States v. Kimbell Foods, Inc., supra,

require a different result. There, the Court held that in the

absence of a federal statute setting priorities, a uniform

national rule was unnecessary to protect the federal inter-

ests underlying federal loan programs with respect to the

question whether contractual liens arising from the loan

programs take precedence over private liens. The Court

accordingly adopted state law as the appropriate federal

rule for establishing the relative priority of these competing

federal and private liens. Here, on the other hand, Congress

has long evidenced its intention in Section 3466 to establish

a uniform national rule of absolute priority in favor of the

6

federal government for its claims against insolvent debtors.

Kimbell Foods, Inc. therefore has no application to this

case.

There is, moreover, no basis for petitioner’s suggestion

(Pet. 27-30) that Congress intended to modify Section 3466

by the amendments to Section 6323 of the Code contained

in Section 101(a) of the Federal Tax Lien Act of 1966, Pub.

L. No. 89-719, 80 Stat. 1125. Section 3186 of the Revised

Statutes, the antecedent of Section 6323(a), was amended

by the Act of Mar. 4, 1913, ch. 166, 37 Stat. 1016, to accord

a mortgagee, purchaser, or judgment creditor priority over

a federal tax lien. However, nothing in the underlying legis-

lative history of that enactment or of the 1966 legislation

diminishes the Section 3466 priority of the United States in

insolvency. H.R. Rep. No. 1018, 62d Cong., 2d Sess. (1912):

H.R. Rep. No. 1884, 89th Cong., 2d Sess. (1966): S. Rep.

No. 1708, 89th Cong., 2d Sess. (1966).

Indeed, Congress has refused to enact proposals which

would have explicitly narrowed the sweep of Section 3466

in the circumstances of this case. For example, in 1959, the

American Bar Association proposed a modification of Sec-

tion 3466 to protect the validity of a “lien or security interest

which would have been entitled to priority over the claim of

the United States immediately preceding such divestment

[of title or possession] (ABA, Final Report of the Commit-

tee on Federal Liens 122 (1959) reprinted in Priority of

Federal Tax Liens and Levies: Hearings on H.R. 11256 and

H.R. 11290 Before the House Comm. on Ways and Means,

89th Cong., 2d Sess. 197 (1966) (hereinafter cited as “ House

Hearings”)). Although a bill to this effect was introduced in

the 86th Congress, it was not reported out of committee.

See 105 Cong. Rec. 1030, 1258 (Index) (1959). Moreover,

this proposal was again presented to Congress during its

consideration of the Federal Tax Lien Act of 1966 (see

5

House Hearings, supra, at 75-88, 196-201). Neither Section

3466 nor Section 6323 of the Code was so altered.” In light

of the statement in the American Bar Association’s Report

that the proposed provision “would assure, contrary to the

suggestions made in some decisions, that any lien which

would qualify for priority in the absence of insolvency

would continue to enjoy such priority” (see House Hear-

ings, supra, at 199), Congress’ refusal to adopt the ABA

proposal lends further support to the correctness of the

decision below.

3. Contrary to petitioner’s final argument (Pet. 17-20).

there is no present conflict of decisions with respect to the

question presented requiring resolution by this Court. In

Sapero v. O'Connell, No. 799 (Mar. 13, 1981), the Mary-

land Court of Special Appeals recently concluded, in con-

formity with the decision below, that the priority in favor of

the United States under Section 3466 was unaffected by

those provisions governing unexecuted judgment lien credi-

tors under Section 6323(a), as amended by the Federal Tax

Lien Act of 1966. Accord: H.B. Agsten & Sons, Inc. v.

Huntington Trust & Savings Bank, 388 F. 2d 156, 160 (4th

Cir. 1967) (Haynsworth, J., concurring). Although the deci-

sions are not uniform under the pre-1966 law.’ no appellate

7A revised version of the American Bar Association's insolvency

priority recommendation was before the Senate Judiciary Committee

in 1971 as S. 2197, 92d Cong.. Ist Sess. This bill likewise was not

reported out of committee. See 117 Cong. Rec. 1650 (Index) (1971).

‘See Commonwealth of Kentucky, Department of Revenue v. Uni-

ted States, 383 F. 2d 13 (6th Cir. 1967) (government's priority under

Section 3466 defeats judgment lien creditor). Contra: National Suret\

Corp. Vv. Sharpe, 236 N.C. 35, 72 S.E.2d 109 (1952); United States v.

South Carolina, 227 S.C. 187, 87 S.E.2d 577 (1955).

Despite some language at odds with the analysis of the court below in

this case, the other cases upon which petitioner relies (Pet. 19-20) are

distinguishable. In /n re Decker’s Estate, 355 Pa. 331. 49 A.2d 714

8

court has upheld petitioner’s contention that an unper-

fected prior judgment lien arising under the Federal Tax

Lien Act of 1966 defeats the absolute priority of the United

States under Section 3466 of the Revised Statutes.4

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

WADE H. McCRrEE, Jr.

Solicitor General

JOHN F. MURRAY

Acting Assistant Attorney General

WILLIAM S. ESTABROOK

JOAN I. OPPENHEIMER

Attorneys

APRIL 198]

(1946), cert. denied, 331 U.S. 807 (1947), the competing claimants were

pledgees who, prior to the insolvency, possessed the stock which was the

subject of the controversy. Exchange Bank & Trust Co. v. Tubbs Mfg.

Co., 246 F. 2d 141 (Sth Cir.), cert. denied, 355 U.S. 868 (1957). con-

cerned the competing interests of the government and mortgagees. In

both Decker’s Estate and Exchange Bank the competing claimants

arguably had attained the requisite “title or possession.” See New York

V. Maclay, supra, 288 U.S. at 293-294.

‘In In re Estate of Adolph P. Berretta, Nos. 11,22. (Mar. 13. 1981).

the Supreme Court of Pennsylvania affirmed by an equally divided

court a decision in favor of a prior judgment lienor over a claim of the

United States under Section 3466. This decision, however. has no

binding precedential value as a ruling on the merits. See Common-

wealth v. Rightnour, 469 Pa. 107, 364 A.2d 927 (1976): Commion-

wealth v. Covil, 474 Pa. 375, 378 A.2d 84] (1977): Commonwealth vy.

Davenport, 462 Pa. 543, 559 n.3, 342 A.2d 67. 75 n.3 (1975).

DOJ-1981-04