This proceeding originated in the filing of a mortgage foreclosure complaint. After judgment of foreclosure and sheriff's sale various liens were satisfied, leaving a surplus of $126,471.99 which is presently held by the clerk of the court.
Out of the welter of many claims, four motions are here pertinent. Each movant seeks payment in full of his claim (the claim of the United States of America, if accorded first priority, would exhaust the surplus fund). The following are the four claims:
(1) Cardinal Bag & Envelope Co. (Cardinal) -- unpaid balance of a judgment entered against Roto American Corporation ("Roto") on September 11, 1967, with interest at 6% from September 11, 1971 -- $6,091.50.
(2) United Convention Decorators (Decorators) -- judgment with interest in the amount of $1,986.05, with interest to be computed from November 17, 1971.
(3) United States of America (U.S.) -- tax lien, with interest from November 5, 1971 -- $48,524.86.
(4) United States of America -- tax lien, with interest computed from November 5, 1971 in the amount of $36,566.69.
(5) United States of America -- tax lien, with interest computed from November 5, 1971 in the amount of $93,762.19.
(6) United States of America -- tax lien, with interest computed from November 5, 1971 in the amount of $9,283.87.
(7) United States of America -- tax lien with interest computed from November 5, 1971 in the amount of $14,014.64.
(8) United States of America -- tax lien, with interest computed from November 5, 1971 in the amount of $1,713.32.
(9) Holobeam Securities Systems, Inc. (Holobeam) -- on the basis of an equitable mortgage, with interest from February 19, 1969 in the amount of $40,000.00.
Basic relevant facts which the court finds are as follows:
(1) 25% of Cardinal's claim was paid to it on June 19, 1968 by virtue of an order of a referee in a chapter XI petition filed in the Federal District Court of New Jersey, made on November 29, 1967.
(2) On October 7, 1968 certain deeds executed by Roto to Leeds Department Stores were assigned to Holobeam. They form the basis of Holobeam's contentions that they hold an equitable mortgage. Said deeds were recorded on October 10, 1968.
(3) On February 19, 1969 the parties to the so-called "equitable mortgage" agreed that the amount of the mortgage was to be $40,000 instead of $50,000.
(4) The foreclosure complaint in the present case was filed on December 10, 1969.
(5) On March 16, 1970 Roto was adjudicated a bankrupt in the Federal District Court of the Southern District of New York.
(6) Final judgment of foreclosure was entered on June 26, 1970.
(7) On November 16, 1970 the Sheriff of Bergen County conducted a sale in accordance with said mortgage foreclosure.
(8) Bankruptcy proceedings are still pending in the Federal District Court for the Southern District of New York.
Briefs and affidavits have been filed in support of the foregoing motions. After considerations of the briefs, affidavits and oral argument, the court renders the following decision:
I. Claim of the United States of America
The claim of the U.S. is based upon federal tax liens filed against the subject property. The dates of recordation and the amounts of the several liens are as follows:
All of the above amounts include accrued interest to November 5, 1971.
In its answer to the complaint in foreclosure, the U.S. claimed priority under the Federal Tax Lien Act of 1966. Subsequent to the filing of its answer, and for purposes of this motion, the U.S. asserted its priority under R.S. 3466, 31 U.S.C.A. , § 191. Its lien is established under 26 U.S.C.A. , § 6321 et seq. , but its priority, it contends, is afforded by R.S. 3466, 31 U.S.C.A. § 191, which priority, it alleges, is absolute. This court disagrees.
The absolute priority statute R.S. 3466, 31 U.S.C.A. 191, § reads as follows:
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 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.
A grave question of the survival of this Insolvency Statute after the enactment of the Federal Tax Lien Act of 1966, Pub. Law 89-719, 80 Stat. 1125, confronts this court. The very same question was considered in H.B. Agsten & Sons, Inc. v. Huntington Trust & Savings Bank , 388 F.2d 156 (4 Cir. 1967), cert. den. 390 U.S. 1025, 88 S. Ct. 1413, 20 L. Ed. 2d 282 (1968). There Chief Judge Haynsworth, in his concurring opinion, stated:
It is most unfortunate that the Congress, when considering the Federal Tax Lien Act of 1966, did not focus its attention specifically upon the Insolvency Statute. Had it done so, I am confident the Insolvency Statute would have been repealed or substantially amended, for all of the time, attention and effort expended in drafting, considering and passing the Federal Tax Lien Act of 1966 will be fruitless, except in bankruptcy cases, if the Insolvency Statute is applied to preserve the super-priorities which the Federal Tax Lien Act of 1966 undertook to withdraw from tax claims. The question of priorities is wholly or largely academic, unless the debtor is insolvent, and the clearly stated purpose of the Federal Tax Lien Act of 1966 was to regulate the priority of federal tax claims when competing for payment out of the assets of an insolvent taxpayer with secured claims which would enjoy priority under state law.
The failure of Congress to deal specifically with the Insolvency Statute when amending the Federal tax lien statute leaves a lurking question arising out of United States v. Vermont, supra , [377 U.S. 351, 84 S. Ct. 1267, 12 L. Ed. 2d 370] which suggests a definite independence between the two statutes and differences in their meaning and application. In Vermont , the opinion of the Supreme Court states that the taxpayer was solvent, though from the opinion in the Court of Appeals, it would appear that there was simply an absence of proof of insolvency, such proof being wholly unnecessary under the Federal tax lien statute, but its decision suggests that, when the tax payer is insolvent, the only probable occasion for litigation about
the matter, the Insolvency Statute should be applied without regard to the amended tax lien statute. * * **fn1
Without specific Congressional consideration of the Insolvency Statute or a fresh reconsideration of it by the Supreme Court, it remains an anachronism under which Federal claims are accorded greater priority when the distribution of the assets of an insolvent debtor is being effected under the Bankruptcy Act, under which Federal tax claims may be agreeably entitled to priorities which the Federal Tax Lien Act of 1966 would deny them, and under which other government claims, deferred to tax claims in bankruptcy, may be entitled to greater priority under a state regulated distribution of the insolvent's assets. [388 F.2d at 161-162]
The court is faced with the task of probing the murky depths of a complex conundrum; to drag out and make manifest what if anything is left of the Insolvency Statute after enactment of the Federal Tax Lien Act of 1966. In approaching this problem this court is mindful of the liberal construction to be accorded R.S. 3466, 31 U.S.C.A. , § 191. As the Supreme Court stated in United States v. Key , 397 U.S. 322, 90 S. Ct. 1049, 25 L. Ed. 2d 340 (1970):
In approaching a claim of an implied exception to § 3466, we start with the principle, noted above, that the statute must be given a liberal construction consonant within the public policy underlying it. Applying that principle to an earlier claim that a statutory scheme implicitly excluded § 3466, this Court held that "(o)nly the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of § 3466." United States v. Emory , 314 U.S. 423, 433; 62 S. Ct. 317, 322-323; 86 L. Ed. 315 (1941). [at 324-325, 90 S. Ct. at 1051]
However, this court believes, after reading and considering thoroughly the language and intent of R.S. 3466, 31 U.S.C.A. § 191, and the Federal Tax Lien Act of 1966, especially 26 U.S.C.A. , § 6323(a), that there exists a "plain inconsistency" between the two, which inconsistency warrants, in the court's opinion, the finding that 26 U.S.C.A. , § 6323, is an implied exception to the operation of R.S. 3466, 31 U.S.C.A. § 191. To hold otherwise would render nugatory, using Judge Haynsworth's words, "all the time, attention and effort expended in drafting, considering and passing the Federal Tax Lien Act of 1966" one of the purposes of which was to remove the super-priorities accorded tax claims. This court agrees with the decision reached by Chief Judge Nichol, in City of Vermillion v. Stan Houston Equipment Co. , 341 F. Supp. 707 (S.D.S.D. 1972). There Judge Nichol unequivocally stated:
26 U.S.C.A. sec. 6323(a) was enacted long after 31 U.S.C.A. sec. 191 and is plainly inconsistent with it. Congress could not have intended any other purpose for 26 U.S.C.A. sec. 6323(a) than to give certain creditors priority over unfiled claims of the United States. Therefore, 31 U.S.C.A. sec. 191 does not . . . defeat the claim of the trustee in bankruptcy under 26 U.S.C.A. 6323(a). See In re Tennessee Central Ry. , 316 F. Supp. 1103, 1106-1108 (M.D. Tenn. 1970).
Therefore, having found a "plain inconsistency" between R.S. 3466, 31 U.S.C.A. § 191, and 26 U.S.C.A. 6323, and having decided that such inconsistency warrants a finding that 26 U.S.C.A. § 6323, is an implied exception to R.S. 3466, 31 U.S.C.A. § 191, it remains to determine the priorities of the claims of the respective movants under 26 U.S.C.A. , § 6321 et seq. Consistent with this holding, this court finds it unnecessary to make a fact finding as to the insolvency of Roto American Corporation, defendant-mortgagor in this foreclosure action.
PRIORITIES UNDER 26 U.S.C.A. , § 6321 et seq.
The Federal Tax Lien Act, 26 U.S.C.A. , § 6321, 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, addition 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.
The lien imposed by section 6321 arises at the time of the assessment. 26 U.S.C.A. , § 6322. However, the priority of the federal tax lien is governed by 26 ...