Brief for the United Statesm — United States v. City of New Britain

INDEX

Opinions below

Jurisdiction

Questions presented

Statutes involved

Statement

Specification of errors to be urged

Summary of argument

TOT:

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CITATIONS

Cases:

Baltimore Shipbwilding Co. ©. Baltimore, 195 US. a5

Board of Supervisors ©. Hert, 10 La Ts

Burfiend ©. Hamilton, 0 Mow. 43

Burnes ¥. Harmel, 7 US 108

California Loan Ete. Co. ©. Wels, 118 Cal. a8

Conard ¥, Atlantic Ineurance Co. 1 Pea, 206

Raton’s Appeal, 33 Pa. St. 10

Ferris v, Chic-Mint Gum Co, 14 Del. Ch. SD

Glass City Bank ©. United States, 28 US. O88

Hefner . Northwestern Life tes. Co, 128 UR. THT

Heteering ©. Steart, MT UR U4

Hibernia Mortgage Co. ©. Geers, 1 La. GA

Hoag v. Sayre, 33 N. J, Bq. 9

Hopkins +. Burcha Coal Co, (1944 CO, Pederel Tox

|

;

i

e

:

#

f

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:

;

Fe

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Michigan ©. United 317 U. &, ae 7°

oo Threch, Mark Co. ©. Bebewts County, BA

S.D, 408

& OSBSENS SEsecseeesesce

(4)

Cases—Continued Page

Mitchell's Restaurant, Inc., In re, 31 Del. Ch. 121... ' 12

New York v. Maclay, 288 U.S, 290 25

N.Y. Terminal Co. v. Gaus, 204 N.Y. 512 24

Osterberg v. Union Trust Co., 93 U.S, 424 23

Samms v. Chicago Title & Trust Co., 111 N.E, 2d 172 (111.

App.) 12, 15, 17,18

Spokane County v. United States, 279 U.S. 80 7, 12, 17, 25

State of Minnesota v. Central Trust Co., 94 Fed, 244, cer-

tiorari denied, 174 U.S. 803 24

Sunlight Metal Products v. McClure, et al., C.A. No. 3497,

D. Colo., March 24, 1952 (unreported) cave a 12

Union Cent, Life Ins. Co. v. Black, 67 Utah 268 ry 24

United States v. Gilbert Associates, 345 U.S. 361,

7, 8, 13, 15, 25, 27-28

United States vy. Pelzer, 312 U.S. 399 ;' 15

United States v. Rosenfield, 26 F. Supp. 433 14

United States vy. Security Trust & Savings Bank, 340 US.

v7 7, 8, 12, 13, 15, 18, 19, 21, 22, 24, 25, 27

United States ¥. Snyder, 149 U.S, 210 ... 7,12, 13, 23

United States v. Teras, 314 US. “480 4 25

United States v. Waddill Co., 323 U.S. 353 .... 227

Winther v. Morrison, 93 Cal. App. 2d 608 20-21

Constitution and Statutes:

Constitution of the United States:

Art. 1, See. 8 12

Art. VI 12

Act of March 4, 1913, as amended, ¢. 166, 37 Stat. 1016,

See, 3186 ... 13,14

Act of July 13, 1866, ¢. 184, 14 Stat. 98, 107, See. 9 13

Revenue Act of 1939, ¢. 247, 53 Stat. 862 14

Internal Revenue Code:

Section 3670 6, 9, 12, 13, 24, 30

Section 3671 6, 9, 13, 30

Section 3672 4, 6, 8, 9, 13, 15, 16, 17, 18, 30

R.S, 4466 8, 25

General Statutes of Connecticut (1949 Rev.) :

See. 758 9, 27, 31

See, 1853 9, 23, 26, 27, 32

Mis cilancous:

3 Glenn, Mortgages, § 375, pp. 1553-54 16,18

H. Rep. No. 1018, 62d Cong. 2d Sess. l4

S. Rep. No. 1315, 62d Cong., 3d Sess, 14

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Inthe Supreme Gourt of the United States

OcToBER TERM, 1953

No. 92

Unirep STaTES OF AMERICA, PETITIONER

v.

City or New Britain, CONNFCTICUT, ET AL.

ON WRIT OF CERTIORARI TO THE SUPREME COURT OF

ERRORS OF THE STATE OF CONNECTICUT

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The memorandum opinion of the Superior Court

of Connecticut for Hartford County (R. 8) is not

reported. The opinion of the Supreme Court of

Errors of Connecticut (R. 17-23) is reported at 139

Conn. 363.

JURISDICTION

The judgment of the Supreme Court of Errors

of Connecticut was entered on December 30, 1952.

(R. 23.) On Mareh 11, 1953, Mr. Justice Jackson |

extended the time for filing a petition for a writ

(1)

ii i aa inicieaceenl

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E ii.

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of certiorari to and including May 29, 1953. (R.

24.) The petition for a writ of certiorari was filed

on May 26, 1953, and was granted on October 12,

1953. (R. 25.) The jurisdiction of this Court is ;

conferred by 28 U.S.C. Section 1257(3).

QUESTIONS PRESENTED

1. Whether tax liens accorded the United States

by the federal tax lien statute (Sections 3670-3672

of the Internal Revenue Code) are rendered sub-

ordinate to those accorded a municipality by a

state statute, merely because the state statute places

the municipal liens ahead of those which the federal

statute excepts from the validity of the federal lien.

2. Whether those of the municipal liens which

by state statute arose before the federal liens are,

solely by reason of that fact, paramount to the fed-

eral liens.

STATUTES INVOLVED

The pertinent statutory provisions are set forth

in the Appendix, infra, pp. 30-33.

STATEMENT

This case involves the relative superiority of tax

liens of the United States and those of the City of

New Britain, Connecticut, upon property of a delin-

quent taxpayer, General Laundry Service, Inc. The |

property was sold in connection with the foreclos-

ure of two mortgages, and the proceeds of the sale

after satisfaction of the mortgages and other prior

claims were insufficient to satisfy both the munici-

pal and the federal tax liens.

hnssitoneeiesiiidiaiiiscaaal

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The foreclosure action was instituted in the Su-

perior Court for Hartford County, Connecticut,

by Louis Brown, as mortgagee, against General

Laundry Service, Inc., the taxpayer-mortgagor,

and others, including the United States and the

City of New Britain, Connecticut, who claimed an

interest in the mortgaged property. (R.1-4.) The

action resulted in a judgment of foreclosure and

sale of the property. (R. 5-6.) The proceeds of

the sale plus rents collected by a receiver of rents

amounted to $28,071.24, and the expenses of the sale

amounted to $1,761.09. By supplemental judgment

ratifying the sale, the Superior Court found that

the property and the net proceeds of the sale were

subject to tax liens of the City totaling $3,587.71 ;

mortgage liens in the amount of $15,319.35 ; a judg-

ment lien in the amount of $2,017.18; and tax liens

of the United States totaling $8,475.13. (R. 9-11.)

The tax liens of the United States are for with-

holding taxes for periods from 1947 to 1950, the

assessment lists of which had been received by the

Collector on various dates between April 26, 1948,

and September 21, 1950; federal insurance con-

tributions for periods from 1949 to 1950, the assess-

ment lists of which had been received by the Col-

lector on various dates between June 20, 1949, and

September 21, 1950; and federal unemployment

tax for the year 1948, the assessment list of which

had been received by the Collector on July 26,

1950. The United States demanded payment of

these taxes, totaling $8,475.13, but payment was not

made. Notice of federal tax liens in that amount

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EET EE PL LIE EMSS

Nd ae TE eh Tia tel at

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was then filed in the office of the Town Clerk of

New Britain and in the office of the Clerk of the

United States District Court in New Haven, on

March 19, 1951. (R. 15-16.)

The tax liens of the City are for real estate taxes

for 1947 to 1951 which became due at various dates

between October 1, 1947, and 1951; and for water

rents which became due at various dates between

December 1, 1947, and June 1, 1951. (R. 14-15.)

The United States conceded that its liens were

subordinate to the mortgages and the claim of the

judgment creditor,’ but contended that they were

paramount to the liens of the City. The Superior

Court of Connecticut ruled that the net proceeds of

the sale were distributable to the respective lienors

in the following order: The City, the mortgagee,

the judgment creditor, and the United States. This

left a balance of only $5,385.91 available for pay-

ment to the United States on account of its tax

liens totaling $8,475.13. (R. 10-11, 16.) The court

held that the City’s liens took precedence over the

United States tax liens on the ground that they

were ‘‘created by the State of Connecticut and rep-

resent an attribute of sovereignty,’’ and that Con-

gress had not provided for priority of federal tax

liens. (R. 8.) On appeal by the United States,

+

1The mortgagee and judgment creditor fall within the

provisions of Section 3672 of the Internal Revenue Code, which

excepts from the validity of the federal tax lien a “mortgagee,

pledgee, purchaser, or judgment creditor” whose interest is

acquired before notice of the federal lien is filed. Thus, the

controversy concerns solely the relative superiority of the fed-

eral and municipal tax liens in relation to the surplus proceeds

of the foreclosure sale. (R. 14.)

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the Supreme Court of Errors affirmed, holding that

the liens accorded the United States for its taxes

by the federal lien statute (Sections 3670-3672 of

the Internal Revenue Code) were inferior to those

accorded the City for its taxes by the Connecticut

statute. (R. 17-23.)

SPECIFICATION OF ERRORS TO BE URGED

The court below erred:

1. In holding that the liens of the City, including

those which arose after the federal tax liens had

arisen, fell within the exception to the validity of

the federal lien enacted by Congress in Section

3672 of the Internal Revenue Code in favor of

mortgage and judgment liens, merely because the

Connecticut statute grants the municipal liens su-

periority over mortgage and judgment liens. ;

2. In holding that each of the City’s liens was

paramount to each of the tax liens of the United

States. .

3. In holding that under Section 3670 of the In-

ternal Revenue Code the relative superiority of

tax liens of the United States and liens of the

City depends upon the time when the respective

liens arose. :

4. In holding that those liens of the City which

arose before the federal tax liens came into exist-

ence were sufficiently perfected to divest the tax- j

payer of property to which the federal liens, when

they arose, would otherwise have attached.

5. In affirming the judgment of the Superior

Court.

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SUMMARY OF ARGUMENT

Sections 3670 and 3671 of the Internal Revenue

Code vest in the United States a lien for unpaid

taxes upon ‘‘all property * * * belonging to”’ a

delinquent taxpayer, arising when the assessment

list is received by the Collector. Section 3672 pro-

vides that the lien ‘‘shall not be valid as against

any mortgagee, pledgee, purchaser, or judgment

creditor until notice thereof has been filed * * *.’’

The court below held that, since the municipal liens

involved here are made superior under Connecticut

law to mortgages and judgment liens—which the

federal statute excepts from the validity of an un-

recorded federal tax lien—the municipal liens are

paramount to the federal liens. Alternatively, it

held, on the principle of ‘‘first in time, first in

right,’’ that the municipal liens which arose before

the federal liens were, by virtue of that fact, en-

titled to priority of payment. Both holdings, we

submit, are erroneous.

I

Both logic and authority are violated by the

theory that the municipal liens, simply because

they are superior under Connecticut law to mort-

gages and judgment liens, may displace federal

liens, which, under federal law, are invalid before

recordation as against mortgages and judgment

liens. What is decisive here is that the controlling

federal law accords no such precedence to the

municipal liens over the federal liens.

The exceptions to the paramount validity of the

federal lien are only those enumerated in Section

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3672 of the Internal Revenue Code, and the list may

not be enlarged by state law. L 'nited States v.

Security Trust & Savings Bank, 340 US. 47;

United States v. Gilbert Associates, 345 U.S. 361.

This conclusion is compelled, not only by the lan-

guage of the federal lien provisions, but by their

history. As first enacted in 1866, they admitted

of no exceptions. United States Vv. Snyder, 149

U.S. 210. The exceptions since created have been

specific and limited. Because the respondent City’s

liens are not among these exceptions, they may not

be read in on the ground that they are superior,

under state law, to others Congress included. Any

other conclusion would leave the federal statute to

be varied by each state, expanding the exceptions to

include those declared by state law to take pre-

cedence over the interests Congress saw fit to pro-

tect in Section 3672. Settled principles, applied in

squarely controlling decisions of this Court, pre-

elude such a result. United States v. Gilbert Asso-

ciates, supra; Michigan V. United States, 317 US.

338, 340.

The State’s order of precedence may be accepted

without improper subordination of the federal lien,

by setting aside funds sufficient to pay the interests

preferred by Section 3672 and allowing the City

to satisfy its liens from that sum. See Spokane I

County v. United States, 279 U.S. 80, 91.

II

The holding below that the federal tax lien must

take its place in line, like any ordinary private

lien (and unlike the City liens involved here),

acetal

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under the ‘‘first in time, first in right’’ formula,

is contrary to United States v. Security Trust &

Savings Bank, 340 U.S. 47. There, an attachment

lien arose prior to the federal lien and was later

‘‘merged’”’ (in terms of the state law) in a judg-

ment obtained after the federal lien was recorded.

This Court held, first, that the judgment could not

‘frelate back’’ to the attachment and thereby bring

the latter within Section 3672, which covers judg-

ment liens. Second, and directly applicable here,

the Court held that, though first in time, the at-

tachment lien was second in right to the federal

tax lien. Assimilating the tax lien statute to the

federal priority provision in R.S. 3466, the Court

held that ‘‘a lien effective to protect the lienor

against others than the Government, but contingent

upon taking subsequent steps for enforcing it’’

(340 U.S. at 51) could not defeat the paramount

federal lien.

There is nothing in the tax lien provisions to

warrant a distinction between the attachment lien

in Security Trust and the municipal liens involved

here. United States v. Gilbert Associates, 345 U.S.

361, dealt with municipal liens like the ones here in

every material respect. Although they were at

least as ‘‘perfected’’ as the respondent’s, those liens

were held insufficiently perfected to defeat the fed-

eral priority under R.S. 3466. Since under the

Security Trust decision, ‘‘a similar rule must pre-

vail here’’ (340 U.S. at 51), the fact that the City’s

liens were declared by Connecticut law to ‘‘arise’’

first cannot justify their supersedure of the fed-

eral liens,

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ARGUMENT

Section 3670 of the Internal Revenue Code (Ap-

pendix, infra, p. 30) provides that unpaid fed-

eral taxes ‘‘shall be a lien in favor of the United

States upon all property * * * belonging to’’ the

delinquent taxpayer. Under Section 3671 (Ap-

pendix, infra, p. 30) the lien ordinarily arises

when the assessment list is received by the Col-

lector, and it continues until the tax liability is

paid or becomes unenforceable by the lapse of time.

Section 3672 (Appendix, infra, pp. 30-31) provides

that the lien ‘‘shall not be valid as against any

mortgagee, pledgee, purchaser, or judgment cred-

itor until notice thereof has been filed by the col-

lector’’ in a designated recording office.

The question in this case is whether liens for

federal taxes arising under the above statutory pro-

visions are paramount to those accorded the City of

New Britain for its taxes and water rates by the

laws of Connecticut.2 The federal liens are four-

teen in number and arose on various dates between

1948 and 1950, while the municipal liens are nine-

teen in number and arose on various dates between

2The municipal liens are created by Sections 758 (water

rates) and 1853 (taxes) of the General Statutes of Connecticut

(1949 Rev.) (Appendix, infra, pp. 31-33). Section 1843pro-

vides that the tax liens “shall take precedence of all transfers

and incumbrances.” Section 758 provides that the water liens

“shall take precedence over all other liens or incumbrances

except taxes”—the word “taxes” referring, under the authori-

tative construction of the court below, only to “those taxes

which may be assessed in favor of the state or some subdivision

thereof and which, under the law, are secured by specific liens

upon real property” (R. 18). Accordingly, both types of liens

are on an equal footing for purposes of the present controversy.

and there is no need to consider them separately.

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1947 and 1951 (R. 15-16). Thus, some of the fed-

eral liens antedated some of the municipal liens,

and vice versa. The property subject to the liens

was sold in connection with the foreclosure of two

mortgages, and the net proceeds of the foreclosure

sale, after satisfaction of the mortgages and a judg-

ment claim,’ were insufficient to satisfy both the fed-

eral and the municipal liens. The United States

and the City each contends that its tax liens are

superior to those of the other.

The court below, affirming the Connecticut Su-

perior Court (R. 10-11), has held that all of the

City’s liens must be paid before any of the federal

liens, including the City liens arising after, as well

as the ones arising before, those of the United

States. This result followed, the court reasoned,

because (1) the federal liens, under Section 3672 of

the Internal Revenue Code, are subordinate to

mortgages and judgment liens arising before notice

of the federal liens is filed; (2) the City’s liens are,

under the Connecticut law, superior to mortgages,

judgments, and other incumbrances, regardless of

when they arise; so that (3) the City’s liens, though

not covered by any exception in the federal statutes,

must be superior to the federal liens which Con-

gress has subordinated to mortgages and judg-

ments. (R. 22.) If correct, this holding, which is

the only one discussed in the brief opposing certi-

3 Notice of the federal tax liens was recorded on March 19,

1951 (R. 15), subsequent to the time the mortgage and judg-

ment claims arose (R. 17), and the United States accordingly

conceded below that those claims fall within the exceptions

contained in Code Section 3672 (R. 14, 18).

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orari, would dispose of the entire case. In the first

point of our argument, we propose to show that

this holding is erroneous.

As to those of the City’s liens which antedate the

federal liens, the court below also held that these

were entitled to priority on ‘‘[t]he principle ordi-

narily applicable to the determination of priority

of incumbrances, namely, first in order of time,

first in right’? (R. 21). Our second point demon-

strates that this ruling, opposed to controlling de-

cisions of this Court, is also incorrect.

I

The Municipal Liens Are Not Rendered Superior to the

Federal Liens Merely Because the State Law Places

Them Ahead of Liens to Which the Federal Law Grants

Superiority ;

The very statement of the holding below on this |

issue (supra, p. 10) goes far, in our view, to re-

fute it. It is true, of course, that the federal tax

lien, before recordation, is invalid under federal

law against mortgages and judgment liens. It

is equally undisputed that the City’s liens are su-

perior to the same mortgages and judgment liens

under Connecticut law. But ef. footnote 12, infra,

pp. 26-27. But it does not follow at all that the

City’s liens, whether arising earlier or later than

the federal liens, must be paramount to the latter.

On the contrary, the decisive point is that the fed-

eral law, admittedly controlling, accords no such

paramountcy to the City’s liens. There is nothing

in the federal law to permit these municipal liens to ;

ride the shoulders of private liens which Congress :

ae

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PRI OR SS ESS

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has chosen to protect—and which the State, for

its own purposes, may of course subordinate—and

thereby achieve a superiority which Congress has

not chosen to grant. Settled principles defining

the scope and effect of the federal tax lien preclude

the result reached below.‘

The establishment by Congress of a lien for fed-

eral taxes is an exercise of its constitutional author-

ity to lay and collect taxes, and the laws of Congress

enacted pursuant to that authority are by the Con-

stitution declared to be the supreme law of the

land. Constitution of the United States, Art. I,

Sec. 8; Art. VI; United States v. Snyder, 149 U.S.

210; Michigan v. United States, 317 U.S. 338; ef.

Spokane County v. United States, 279 U.S, 80. In

Section 3670 of the Internal Revenue Code, Con-

gress has vested in the United States a lien for wn-

paid taxes ‘“‘upon all property and rights to prop-

erty, whether real or personal, belonging to’’ the

tax debtor. The purpose of this provision i« “‘to

insure prompt and certain collection of taxes due

the United States from tax delinquents * * *.”

‘Directly contrary to the decision below are Somme ©

Chicago Title & Trust Co, 111 N.E. 24 172 (TL App)

Hopkins v. Eureka Coal Co, (1944 C.C.H. Fed. Tax Reporter

Par, 9320, Cire. Ct. W. Va., Feb. 25, 1944); Sunlight Metal

Products v. McClure, et al., CA. No. 497, D. Colo., March 24,

1952 (unreported). On the other hand, Ferrie v, Chac-Miat

Gum Co., 14 Del. Ch. 232, upon which the court below relied

(R. 22), was enid at the time to be limited to ite peculiar farts

(14 Del. Ch. at 240) and has been «o limited and in effect die-

carded by the court which rendered it. Jn re Mitchell's Ree-

taurant, Inc. 31 Del. Ch. 121. Board of Superrisors ¥. Hart

210 La. 78, aleo cited below (R. 22). wae relied upon byw the

California court which was reversed in United States ©. ¢

rity Trust & Savings Bank, 340 US. 47, and & contrary to

the latter decision.

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Or ——

United States ¥. Security Trast & Savings Bank,

30 U.S. 47,51. “Stronger language could hardly

have been selected to reveal” that purpose, (Ghew

City Bank ¥. United States, 326 U.S, 255, 287.

Except as Congress has provided ofttherwiee, the

tax lien accorded the United States by Sevtiom 4670

is paramount to state-created lew Nive tihee conde

cxeoptions Congress has seen Gt to allow are thew

explicitly set forth in Section 3672, which prowides

that the federal lien ic invalid “ae aguieet aay

mortgagee, pledgre, purchaser, of jodigmmeet cred.

tor until notice thereof has been Ged ™ im am appre

Uwited States §. Security Trast & Savings Bowk,

M0 US. 47, 53 (concurring opinion of Mr, Justive

cisions of thie Court, ie settied beyond dowtt

4, 1972, «. 166, ST Stat, 1096; Sertion E86 te tere

was derived from the Act of July TA, EG,» Bea,

14 Stat. GA 107, Ser, & As origizallly coated &

TAK it conytaitaed tte potters Geter fost pare Oty of entre

interest over the federal tat Thee, Acwemedinngty

United States ©, Sayder, 149 TS, 200, wae bets

that the lem prevailed etwm ae aqgaimed o Meme Sie

14

purchaser for value without notice or knowledge of

the existence of the lien, despite state rules pro-

tecting purchasers from such secret, unrecorded in-

terests. Thereafter, the amendment of March 4,

1913, supra, provided that the federal lien should

“not be valid as against any mortgagee, purchaser,

or judgment creditor until notice of such lien shall

be filed by the collector’’.* Again, after a decision

in 1938, United States vy. Rosenfield, 26 F. Supp.

433 (CE. D. Mich.), held the federal lien effective

after filing against a bona fide purchaser of secu-

rities who had no notice or knowledge of the lien,

the statute was amended to protect pledgees gen-

erally against unrecorded liens and to protect

against even a recorded lien “any mortgagee,

pledgee, or purchaser, [of securities], for an ade-

quate and full consideration in money or money's

worth, * * * without notice or knowledge of the

existence of such lien."’ Section 401 of the Reve-

nue Act of 1939, ¢. 247, 53 Stat. 862.

It was this history of specific, sparing, ad hoc

exceptions which led Mr. Justice Jackson to point

=_ See

* See H. Rep. No rte , 2d Seas., p. 1; 8. Rep. No.

1315, Gd Cong., 3d Sees, House report, citing the

Snyder case, stated ip 2) has

the lien is eo comprehensive that it covers all the property

and rights to y of the delinquent situated anywhere

in the United States, and any person taking title to real

estate ie subjected to the impossible task of ascertaining

whether any person, who has at any time owned the real

eetate in question, has been delinquent in the payment of

the taxes referred to while the owner of the real cetate in

question. The business carried on under the internal-

revenue law may be at a tetance from the proper

great dist

affected by thie secret lien ten, but thie will not relieve the

property from the lien.

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15

out that Section 3672 excludes from the paramount

coverage of the federal lien ‘‘those types of in-

terests which it specifically included in the statute

and no others.” Security Trust, supra, at 53 (con-

curring opinion). See, also, l Tnited States v. Gil-

bert Associates, supra; MacKenzie Vv. United

States, 109 F, 2d 540 (C.A. 9) ; Samms v. Chicago

Title & Trust Co., 111 N. E. 2d 172 (Ill. App.).

Against this background, the error of the court

below becomes clear.

As the parties stipulated (R. 12), the contro-

versy here ‘tis between the city of New Britain

and the United States of America as to which is en-

titled to priority in the distribution of the pro-

ceeds.” Looking at these disputants alone, it is

plain that the State, whether by statute or judicial

decision, lacks power to grant to the City’s liens a

priority Congress has withheld. Michigan Vv.

United States, 317 U.S. 338, 340. But this, in a

word, is precisely what the decision below accom-

plishes by indirection. If such a result were per-

mitted, then any interest a state declares superior

to any of those Congress has protected would be

added by state law to the exceptions specified in

Section 3672. The result would, of course, destroy

the uniformity sought in the federal tax scheme,

leaving the scope of the federal statute to vary with

state law.* But the more direct answer to the de-

*“A cardinal principle of Congress in its tax scheme is uni-

formity, as far as may be.” United States v. Gilbert Associates,

supra, at 364, See, also, Burnet v. Harmel, 287 US. 103, 110;

Lyeth v, Hoey, 305 US, 188, 194; United States v. Pelzer, 312

US. 399, 402-403; Helvering v. Stuart, 317 U.S. 154, 161.

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cision below is simply that the municipal liens in-

volved here are nowhere included in Section 3672,

and neither the language nor the history of that

Section supplies the remotest justification for read-

ing them in.

Nor is there justification in the court’s reason-

ing (R. 22) that ‘if priority were accorded to the

Federal liens over those of the municipality, the

result would have to be that either the rank of the

municipal liens would be reduced below that of the

mortgages and judgment lien, which would be in

violation of the State law, or the position of the

Federal liens would be moved up to a place ahead

of the mortgages and judgment lien, in violation of

§ 3672.’ The kind of logically insoluble circularity

the court sought to avoid may arise, of course, even

where various liens governed by the law of a single

jurisdiction compete with each other. See, e.g.,

Hoag v. Sayre, 33 N. J. Eq. 552; 3 Glenn, Mort-

gages, §375."' The controlling point remains that

the problem may not be avoided by misreading the

federal statute to subordinate the federal lien.

Congress has given no indication that in such

circumstances it is the federal lien which is to fall

hehind; on the contrary, the breadth and reach

of the federal lien (supra, pp. 12-15) make it the

dominant interest.

™The example considered in the cited sources involves an

unrecorded mortgage which is superior to a later mortgage

where the later mortgagee has actual notice, but inferior to :n

intervening judgment which is in turn superior to the second

mortgage.

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17

But we note that the simple alternatives posed by

the court below are not in fact exclusive. Full effect

would be given to the federal statute by setting

aside funds sufficient to pay the mortgages and

judgment (covered by Section 3672) before satis-

fying the federal liens. Connecticut could then

satisfy the municipal liens (excluded from Section

3672) from the sum so set apart. This procedure,

suggested by the Government and referred to by

this Court in Spokane County v. United States,

979 U.S. 80, 91—and adopted in Samms Vv. Chicago

Title & Trust Co., 111 N. E. 2d 172 (Ill. App.)—

is the only one by which both the federal and the

state law are given effect to the fullest permissible

extent. If the end result be deemed incongruous

in that the State takes from mortgagee and judg-

ment creditor part or all of what the Federal Gov- i

ernment leaves with them, the ‘‘incongruity arises

by virtue of [the] state law and not by virtue of the

federal enactment.’? Samms v. Chicago Title &

Trust Co., supra, at 176. The State is free, of

course, to subordinate the liens of its municipality

in situations of this kind and rank them last on

the ground that they fall behind the federal liens

which yield in turn to the mortgages and judgment.

The State is not free, however, unless Congress

erants a further exception thus far withheld, to

protect its City’s liens at the expense of the para-

mount federal liens.

We turn, finally, to the suggestion in the opinion

below (R. 22) that, since a mortgagee could have

paid the City’s tax charges and added their amount :

en ;

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18

to his claims, the superiority accorded a mortgage

should be extended to the City’s liens. There is

no ground for the assumption that a municipal tax

lien, because it would have been assignable to a

mortgagee who satisfied it, is therefore trans-

formed into a mortgage lien within Section 3672.

But even assuming the possibility of such a trans-

formation in some circumstances, it could only

occur if and when the tax was paid by the mort-

gagee; and since even a mortgage lien is not pro-

tected against the federal lien under Section 3672

unless it was acquired before the federal lien was

recorded, the mortgagee’s payment of the tax after

the recording of the federal lien could not by ‘‘rela-

tion back’? (United States v. Security Trust &

Savings Bank, supra, at 50) be treated as having

retroactively created an additional mortgage lien

as of a prior date. Cf. 3 Glenn, Mortgages, yp.

1553-54.

It will be time enough to consider the position

of a mortgagee subrogated to a lien prior to his,

under state law, when the facts of a particular case

present the problem. The undisputed fact here is

that neither mortgagee ever paid off any of the

City’s liens. See Samms v. Chicago Title & Trust

Co., supra, at 176. In the hands of the City, at

least, they remain what they are—City liens for

taxes and water charges, nowhere excepted by Sec-

tion 3672 and accordingly subordinate to the fed-

eral liens.

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19

Il

Those of the Municipal Liens Which Arose Before the

Federal Liens Are Not for That Reason Superior

A. The relative superiority of the federal tax lien

and an adverse lien does not depend on when

they respectively arose

The court below held alternatively (R. 21-22)

that those of the respondent City’s liens which

arose before the federal liens are entitled, because

they were earlier in time, to be paid first. The

court pointed out (R. 18-19) that the City’s liens :

‘would take precedence over any other incum-

brance on the property, irrespective of the time at

whieh that incumbrance might have attached.’’ It

concluded, however, that the federal lien, far from

enjoying any comparable precedence, is subject to

{t]he principle ordinarily applicable to the deter-

inination of priority of incumbrances, namely, first

in order of time, first in right’”’ (R. 21). We think

this conclusion is refuted by the recent decision

of this Court in United States V. Security Trust :

& Savings Bank, 340 U.S. 47, as well as by the

nature and incidence of the federal lien.

In the Security Trust case, the contest was be-

tween the United States asserting the type of tax ;

lien involved here, and a party who had procured }

on attachment lien, subsequently merged in a judg- :

ment, against the property in controversy. The 3

attachment lien had arisen before receipt of the

pertinent assessment lists gave rise to the federal :

lien, and, of course, before recordation of the latter.

: )

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7

20

The attaching creditor did not obtain judgment,

however, until after the federal lien notices had

been filed.*

In its decision which was subsequently reversed

by this Court, the California District Court of

Appeal held the federal tax lien subordinate to the

attachment Len. Winther v. Morrison, 93 Cal.

App. 2d 608. The court said, summarizing the ef-

fects of the pertinent California law (p. 611):

* * * Since it is conceded that the attach-

ment herein was properly issued and properly

levied upon the property, it is evident that

Morrison perfected a lien thereon which se-

cured and insured the payment to him of any

judgment that was recovered by him in the

action, insofar as the property attached could

be applied to the judgment. * * * The lien at-

tached immediately upon the levy of the at-

tachment.

Rejecting the Government’s contention (p. 612)

that the attachment lien was ‘‘not sufficiently spe-

cific or perfected to prevent a subsequent federal

tax lien from attaching to the property with pri-

ority,’’ the court declared (p. 613) :

The liens created by sections 3670 and 3671

of the Internal Revenue Code are general and

8 The attachment in question was levied on October 17, 1946.

The federal assessment lists were received in November and

December, 1946, and notices of federal liens were recorded in

December, 1946. The judgment of the attaching creditor was

rendered on April 24, 1947. Transcript of Record, Nos. 10-13,

October Term, 1950, p. 20; and see Winther v. Morrison, 93

Cal. App. 2d 608, 610.

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21

not priority tiens. * * * There is no provision

in either section indicating that the liens for

taxes have a priority over attachment liens

placed on the property prior to the time when

the tax liens arise.

Building upon this premise, the court concluded,

finally, that (p. 615) :

Whatever rights the [taxpayer] had in the

real property involved were subject to the

valid subsisting attachment lien of Morrison

and the tax lien of the United States was not

entitled to priority over it.’

The reasoning and decision of the California

court, precisely duplicated in the holding of the

court below that the principle of ‘‘first in order of 4

time, first in right’’ applies to the federal tax lien,

were rejected by this Court. Holding that the at-

tachment lien was not specific and perfected, and

that it could not become so from its inception by |

relation back of the judgment obtained after the

federal lien was recorded, this Court concluded

(340 U.S. at 51):

In eases involving a kindred matter, 7.¢.,

the federal priority under R. S. § 3466, it

ia Yas 2

®In the course of its decision, the California court distin-

guished MacKenzie v. United States, 109 F. 2d 540 (C.A. 9),

where the federal tax lien was held superior to an attachment :

lien which arose later, but before notice of the federal lien had ;

been filed. The court said (93 Cal. App. 2d at 613): :

Since the tax lien [in MacKenzie] arose prior to the {

issuance of the attachment it was not necessary to the |

decision to pass upon the priorities of tax and attachment

liens where the tax lien, as here, arose after the levy of the

attachment. '

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I a Nis =

, 7

22

has never been held sufficient to defeat the fed-

eral priority merely to show a lien effective

to protect the lienor against others than the

Government, but contingent upon taking sub-

sequent steps for enforcing it. Jllinois vy.

Campbell, [329 U.S. 362,] 374. If the purpose

of the federal tax lien statute to insure prompt

and certain collection of taxes due the United

States from tax delinquents is to be fulfilled, a

similar rule must prevail here. Accordingly,

we hold that the tax liens of the United States

are superior to the inchoate attachment of

Morrison * * *,

That holding is squarely applicable here. Like

the California attachment lien, the City liens in-

volved here, lacking the perfection which alone

might make a difference (see infra, pp. 25-28),

are subordinate to the federal tax lien. For the

Security Trust case leaves no doubt that Section

3670, when it extends the federal lien to all prop-

erty and rights to property ‘‘belonging to”’ the tax-

payer, means what it says. It makes clear that,

since the mere existence of an earlier lien in no

way divests the taxpayer of his property (Conard

vy. Atlantic Insurance Co., 1 Pet. 386, 444), such

a lien cannot prevent the effective attachment of

the federal lien to property which ‘‘belongs’’ to

the taxpayer.

There is, in short, nothing in the federal statute

to warrant subjection of the federal lien to the

‘“‘first in time, first in right’’ doctrine. Before

Congress wrote an express exception to cover them,

even innocent purchasers for value, universally

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23

protected by the states against secret liens on real

property, could claim no superiority over an un-

recorded federal lien. United States v. Snyder,

149 U. S. 210. The general doctrine applied by

the states against private lienors, conferring pri-

ority on a lien according to when it arises, is no

more effective against the federal lien, unless Con-

gress says so, than are the states’ rules regarding

notice. Nor do the exceptions Congress has al-

lowed, conceding superiority to specified interests

without regard to when they arise, provide any

basis for application of state law priorities based

on time. The City liens involved here are no dif- j

ferent in this respect from the attachment lien in

Security Trust. Insofar as their claimed supe-

riority rests upon the bare fact that state law cre-

ated them before the federal liens, the claim is

identical with that in Security Trust—and equally

vroundless under the controlling federal law.

Indeed, this conclusion applies with special

propriety to the kind of tax lien the respondent

City asserts. Unlike the attachment lien in Secu-

rity Trust, which presumably competed on an equal

‘first in time’’ basis with other private liens, the

City’s liens are placed ahead of all other liens re-

gardless of when they arise. Section 1853, Gen- ;

eral Statutes of Connecticut (1949 Rev.), Appen-

dix, infra, pp. 32-33. This rule of superiority for

state tax liens is commonly found in state statutes.” :

10 See Osterberg v. Union Trust Co., 93 U.S. 424; Hefner v. :

Northwestern Life Ins. Co., 123 U.S. 747, 751; Baltimore Ship-

building Co. v. Baltimore, 195 U. S. 375, 381; Burfiend v. Ham-

ilton, 20 Mont. 343; California Loan Etc. Co. v. Weis, 118 Cal.

=

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24

Moreover, a similar precedence has been accorded

state tax liens even where the state statute con-

tains no explicit command to this effect. Thus,

in N. Y. Terminal Co. v. Gaus, 204 N. Y. 512, the

state statute, similar to Section 3670, provided

merely that the state franchise tax should be a lien

on all real and personal property until paid in full.

Yet the lien was held paramount to that of a prior

mortgage. See, also, State of Minnesota v. Central

Trust Co., 94 Fed. 244 (C.A. 8), certiorari denied,

174 U.S. 803; Eaton’s Appeal, 83 Pa. St. 152, 154.

The lien Congress fashioned, apart from the ex-

press exceptions which are inapplicable here, is

no less effective. The states may, as Connecticut

has, impose liens on their taxpayers, superior to

earlier private liens, even before any taxes are

owing. They may not, however, as the Security

Trust decision establishes, subordinate the federal

lien to their own by a mere showing that theirs is

prior in time. Congress wrote no such rule. It is

as relevant here as in our earlier argument (see

pp. 13-15, supra) that the exceptions to the para-

mountcy of the federal lien are those Congress al-

lowed ‘‘and no others,’’ and that, these exceptions

aside, the federal lien covers ‘‘all property * * *

belonging to”’ the taxpayer.

489; Minneapolis Thresh. Mach. Co. v. Roberts County, 34

S. D. 498; Union Cent. Life Ins. Co. v. Black, 67 Utah 268;

Hibernia Mortgage Co. v. Greco, 191 La. 658; Licking v. Hays

Lumber Co., 146 Neb. 240.

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25

B. None of the City’s liens was perfected before

the federal liens arose

Definitively assimilating the federal tax lien

statute to the federal priority statute (R. 8. 3466)

in determining the effect of an adverse lien (cf.

Michigan v. United States, 317 U. 8. 338, 340-341),

the Security Trust decision leaves open only the

possibility that a specific and perfected state-

created lien which is prior in time might take pre-

cedence over the federal lien.’ But this possibility

is of no help to the respondent because, as we shall

show, its liens are not ‘‘specific and perfected.”” It

bears mention in this connection that the court

below, in applying to the federal lien the “‘first in

time, first in right’? formula, proceeded on the

erroneous assumption that ‘‘§ 3466 is fundamen- '

tally different from §§ 3670-3672” in this respect

(R. 21). It found in Sections 3670-3672 ‘no pro-

vision for the priority of Federal liens over an-

tedating liens in favor of others even though the :

latter may be inchoate and general.’’ Ibid. So

reasoning, the court had no need to determine

11 The Court has repeatedly posed, but found it unnecessary

to decide, the question whether a specific and fully perfected

adverse lien ean defeat the Government’s priority under R. 8.

3466. United States v. Gilbert Associates, 345 U. 8. 361, 365;

Illinois v. Campbell, 329 U. 8. 362, 370; United States v. Wad-

dill Co., 323 U. 8. 358, 355-356 ; New York v. Maclay, 288 U. 5.

290, 294; United States v. Texas, 314 U. S. 480, 485-486;

Spokane County v. United States, 279 U. S. 80, 95. Since, as

we show below, the City’s liens in this case were plainly not

“perfected” within the meaning that term acquires from the

foregoing decisions, there is no occasion to reach in the present

context the still open question. Compare the Brief for the

United States in Gilbert Associates, pp. 45-47.

eS ee ee

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i us te

28

every material respect, then, the City liens here

are the same as the Town lien which was held in-

sufficient in the Gilbert Associates case. The state-

ment of this Court’s holding there, substituting

the word ‘‘City’’ for ‘‘Town,’’ is precisely ap-

plicable here (345 U.S. at 366):

* &

99

There is no ground for the conten-

tion here that the [City] had perfected its lien

by reducing the property to possession. The

record reveals no such action. The mere at-

tachment of the [City’s] lien before the re-

cording of the federal lien does not * * * give

the [City] priority over the United States.

The taxpayer had not been divested by the

[City] of either title or possession. The

[City], therefore, had only a general, unper-

fected lien.

It may be noted, in fact, that the Town in the

(Gilbert Associates case had, at least superficially,

a stronger claim that its lien was perfected than

that of the City here. For there, the Town had

twice exercised its power to sell the property

in question at a tax sale whereas the City in this

case has taken no comparable action. What is

decisive, however, in both cases is that the property

remained ‘‘property * * * belonging to’’ the tax-

payer to which the federal liens attached when

they arose. Because this is so, the municipal liens

in both cases are insufficient to supersede the para-

mount claims of the United States.

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sk

Saipan -

29

CONCLUSION

For the foregoing reasons, the judgment below

should be reversed.

Respectfully submitted.

, Ropert L. STERN,

Acting Solicitor General.

_ H. Brian Houianp,

Assistant Attorney General.

Marvin E. FRANKEL,

~ Evuis N. SLACK,

A. F. Prescort,

Harry Baum,

. Special Assistants

to the Attorney General.

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30

APPENDIX

Internal Revenue Code:

Src. 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, addi-

tional 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 prop-

erty, whether real or personal, belonging to

such person.

(26 U.S. C. 1946 ed., See. 3670.)

Src. 3671. PERIOD OF LIEN.

Unless another date is specifically fixed by

law, the lien shall arise at the time the assess-

ment list was received by the collector and shall

continue until the liability for such amount is

satisfied or becomes unenforceable by reason

of lapse of time.

(26 U.S. C. 1946 ed., Sec. 3671.)

Sec. 3672 [As amended by Section 401,

Revenue Act of 1939, ¢. 247, 53 Stat. 862, and

Section 505, Revenue Act of 1942, ¢. 619, 56

Stat. 798]. VALIDITY AGAINST MORTGAGEES,

PLEDGEES, PURCHASERS, AND JUDGMENT CREDI-

TORS

(a) Invalidity of Lien Without Notice.—

Such lien shall not be valid as against any

mortgagee, pledgee, purchaser, or judgment

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31

creditor until notice thereof has been filed by

the collector—

(1) Under State or Territorial Laws.—In

the office in which the filing of such notice is

authorized by the law of the State or Territory

in which the property subject to the lien is

situated, whenever the State or Territory has

by law authorized the filing of such notice in an

office within the State or Territory; or

(2) With Clerk of District Court.—In the

office of the clerk of the United States district

court for the judicial district in which the

property subject to the lien is situated, when-

ever the State or Territory has not by law au-

thorized the filing of such notice in an oijice

within the State or Territory; or

(3) With Clerk of District Court of the

United States for the District of Columbia.—

In the office of the clerk of the District Court

of the United States for the District of Col-

umbia, if the property subject to the lien is

situated in the District of Columbia.

nae * * * *

(26 U.S. C. 1946 ed., Sec. 3672.)

General Statutes of Connecticut (1949 Rev.) :

Sec. 758. Rates for use.—The legislative

body shall establish just and equitable rates or

charges for the use of the waterworks system

authorized herein, to be paid by the owner of

each lot or building which is connected with

and uses such system and may change such

rates or charges from time +o time. * * *

i a ne eee

pers Ok Bt oa

Se iitesceeneenneentsicnnitienereimenmenssiamtenntile

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ats

. . : Britis i ll

a ea ee es ee ee ow

32

Such rates or charges, if not paid when due,

shali constitute a lien upon the premises served

and a charge against the owners thereof, which

lien and charge shall bear interest at the same

rate as would unpaid taxes. Such lien shall

take precedence over all other liens or incum-

brances except taxes and may be foreclosed

against the lot or building served in the same

manner as a lien for taxes. The amount of any

such rate or charge which remains due and

unpaid for thirty days may, with reasonable

at or>ovs’ fees, be recovered by the legislative

boc. ua civil action in the name of the munici-

pality against such owners. * * *

Sec. 1853. Tax liens; precedence; enforce-

ment.—The interest of each person in each

item of real estate, which shall have been

legally set in his assessment list, shall be sub-

ject to a lien for that part of his taxes laid upon

the valuation of such interest, as found in such

list when finally completed, as such part may

be inereased by interest, fees and charges.

Such lien, unless otherwise specially provided

by law, shall exist from the first day of October

or other assessment date of the municipality

in the year previous to that in which such tax,

or the first installment thereof, shall have be-

come due until one year after such tax or first

installment thereof shall have become due, and,

during its existence, shall take precedence of

all transfers and incumbrances, in any manner

affecting such interest in such item, or any

part of it. Such lien, during its existence, may

be enforced by levy and sale of such real estate

in the event that such person shall have com-

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33

plete title thereto or of his interest in such real

estate in the event that he shall not have com-

plete title thereto. No sale of real estate for

taxes or foreclosure of any tax lien shall divest

the estate sold of any existing lien for other

taxes.

WY U. S. GOVERNMENT PRINTING OFFICE: 1953 279537 559

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