In connection with filing the final accounting of the custodial receivership for Samuel K. Yucht ("Yucht"), Frank A. Carlet ("receiver"), who had been appointed custodial receiver to succeed the original custodial receiver, who was relieved upon his own application, the receiver also filed a petition for instructions as to the disposition of certain claims, all but three of which have been resolved.
The accounting in summary showed that, from the date of the receiver's appointment on December 15, 1982, the receiver was chargeable with receipts of $26,624.31, sought allowance for disbursements of $10,759.73 and had a balance of $15,864.58. The accounting was approved by order dated June 23, 1988 and distribution held subject to the resolution of the three possible claims.
On October 14, 1982, the original order appointing a custodial receiver upon application of the Trustees of the Client Security Fund of the Bar of New Jersey ("CSF") pursuant to R. 1:28-8 provided in part in paragraphs (f) and (g):
(f) that on notice to the Receiver, all persons with claims against Samuel K. Yucht may take such steps in prosecution of their claims as they deem reasonably necessary to protect their interests up to but not inclusive of the attainment of a judgment and that any entry of any judgment against Samuel K. Yucht or against any of the assets in which Samuel K. Yucht has an interest shall be on application to the court on ten (10) days notice to Receiver, or with the consent of the Receiver.
(g) that such Receiver shall publish notice of his receivership in two (2) newspapers of general circulation in the Passaic County area, and that one of the newspapers shall be a Spanish language newspaper.
In the petition for instructions, the receiver stated that in October 1984, the receiver published notice of the order limiting claims of those filed within three months of the order dated October 5, 1984. The claims were to be verified under oath or affirmation.
The receiver reported that he had received only one claim duly verified under oath. That claim was from the United States Internal Revenue Service ("IRS") dated September 26,
1983 in the amount of $3,743.77, plus interest, based on seven deficiency assessments. This claim stated in relevant part:
This debt has priority and must be paid in full in advance of distribution to creditors to the extent provided by Law: See Section 3466 of the Revised Statutes (31 U.S.C. 191). Any Executor, Administrator or other person who fails to pay the claims of the United States in accordance with its priority, may become personally liable for this debt under Section 3467 (31 U.S.C. 192).
The receiver also stated that he had been served with a copy of a notice of federal tax lien under internal revenue law dated, and signed by a revenue officer, August 9, 1983. The notice had been filed with the Register of Deeds of Passaic County. There were two claims:
Tax Period Date of Assessment Date for Refiling
12/31/78 11/05/79 12/05/85 $1,035.79
12/31/81 8/09/82 9/09/88 64.75
The receiver further stated that he had received copies of statements from the State of New Jersey, Unemployment and Disability Insurance, Employment Security Agency reflecting unpaid contributions, unpaid interest, and unpaid penalties. The copy of the statement attached to the petition indicates that the claims during the period from July 1974 through July 1977 were amounts owed for unpaid interest and penalties. The same was true for January and February 1978. For the periods March 1978 through July 1983 amounts owed were for unpaid contributions, interest and penalties. The totals were:
The receiver stated that neither the claim based on the federal notice of lien nor the state claim was verified under oath or affirmation.
The receiver further stated that he knew that the CSF had expended substantial funds in the Yucht matter but no proof of
claim was filed. The receiver further stated that he understood that CSF intended to seek reimbursement from the estate.
The receiver sought instructions determining the persons to whom the balance of the funds should be distributed.
Thereafter the CSF filed a motion on notice to the Internal Revenue Service and the New Jersey Employment Security Agency in which CSF requested approval of the accounting and an order directing that all funds, after administration expenses, be paid to the CSF.
Kenneth J. Bossong ("Bossong"), director of, and counsel to, CSF, filed a verified proof of claim. In it Bossong stated that CSF had paid 60 claims aggregating $166,563.82.
He further stated that with respect to claims paid by CSF from its general funds raised by annual payments on those holding plenary licenses to practice law in New Jersey, R. 1:28-2, it had taken assignments and subrogation agreements from the claimants, see R. 1:28-3(e), and pursued others. In most instances Yucht had forged his clients names to settlement checks or drafts and pocketed the money. CSF had recovered $146,477.47.*fn1
CSF had thereby suffered a shortfall of $20,086.35 which was more than the $15,864.58 for distribution.
In the Yucht case, counsel for the IRS urges, in a letter brief, that the priority for its lien is based both on the provisions of 31 U.S.C.A. § 3713 (person indebted to the government is insolvent and (i) debtor is unable to pay all debt makes a voluntary assignment . . . or (iii) an act of bankruptcy is committed) and, also, under 26 U.S.C.A. §§ 6321 and 6322. Section 6321 provides in relevant part:
If any person liable to pay any tax neglects or refuses to pay the same after demand, . . . the amount 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.
Section 6322 states that, unless a different period is fixed by another law, the lien shall be good until paid or judgment thereon satisfied unless barred by lapse of time.
26 U.S.C.A. § 6323 specifies the place for filing notice.
The test for perfected liens was outlined by the trial court In re Holly Knitwear, Inc., supra, as:
The question of whether a state-created lien has the necessary requisites to be exempt from the terms of 31 U.S.C.A. Sec. 191 is a matter wholly within the aegis of federal law. United States v. Waddill, Holland & Flinn, Inc., 323 U.S. 353, 65 S. Ct. 304, 306, 89 L. Ed. 294 (1944).
It is now well settled that this governmental priority based on the above statute can only be defeated by "choate," perfected security interests in existence prior to the time of the obligees' indebtedness to the United States. United States v. Guaranty Trust, 33 F.2d 533, 537 (8 Cir.1929), aff'd. 280 U.S. 478, 50 S. Ct. 212, 74 L. Ed. 556 (1930), and Exchange Bank and Trust Co. v. Tubbs Mfg., 246 F.2d 141, 143 (5 Cir.1957), cert. den. City of Dallas, Tx. v. Tubbs Mfg. Co., 355 U.S. 868, 78 S. Ct. 118, 2 L. Ed. 2d 75 (1957).
Further elucidation of the general standards set forth in Guaranty Trust is provided in the cases of United States v. Bond, 279 F.2d 837 (4 Cir.1960), and Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 67 S. Ct. 340, 91 L. Ed. 348 (1946). In Bond the court stated that under the "choate lien" test it is required that state-created liens be specific to the point that nothing further need be done to make the lien enforceable. In Illinois ex rel. Gordon v. Campbell the court, by use of a tripartite formula calling for the identity of the subject asset, the lienor and the amount of the encumbrance, added a further embellishment to the general language employed in Guaranty Trust. See also United States v. City of New Britain, 347 U.S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954).
Thus, it is incumbent upon the landlord to prove to this court that his claim asserted under the provisions of the Loft Act constitutes a lien, which under federal law, will render such claim superior to that of the Federal Government. [ Id. 115 N.J. Super. at 575-576, 280 A.2d 504].
Here, the facts disclose that the landlord did avail himself of the distress proceedings provided by New Jersey statutory law, N.J.S.A. 2A:33-1 et seq., in an effort to enforce the lien authorized under N.J.S.A. 2A:44-166. Hence, at
first impression, assuming arguendo that the restraint was proper, it would appear that in accord with Saidman the requisites of title and possession of the assets found on the premises of the debtor were retained by the landlord. Yet the terms of the distress statute do not so provide. N.J.S.A. 2A:33-9 grants the debtor tenant a grace period of ten days, within which time he can commence an action to regain the goods. Since the alleged distraint occurred on December 15, 1970, nine days remained before the lien reached full fruition. Thus, in no way can the landlord be considered to have had at the date of the assignment for the benefit of creditors, a claim of the quality sufficient to defeat the federal priority.
The Supreme Court of the United States decided in this fashion in a case strikingly similar in its facts to the one at bar. U.S. v. Scovil, 348 U.S. 218, 75 S. Ct. 244, 99 L. Ed. 271 (1955), and our Appellate Division did likewise in an unpublished opinion. There being ample authority to support this result, the Federal Government's claim for taxes due shall be considered superior to the landlord's lien for rents owing. For similar reasons the claims of wage earners and the State of New Jersey shall also be subordinate to the rights of the Federal Government. [115 N.J. Super. at 577, 280 A.2d 504]
On appeal, the Appellate Division affirmed that there was a claim ahead of the United States, but held that the landlord's claim under the Loft Act, N.J.S.A. 2A:44-166, had priority over that claim; hence, from the prior claim the amount of the landlord's claim should be paid. This did not change the priority of the United States claim.
Although no brief was submitted on behalf of the State in the Yucht case, one was submitted in the companion Miller case. The State's position in the Miller case is based on the fact that a certificate of debt ("COD") was filed with the Clerk of the Superior Court on January 2, 1984 pursuant to N.J.S.A. 54:49-1 and 12, hence, it operates as a lien on all the property of the taxpayer. In Yucht, no COD was filed.
In said brief, counsel for the State also cited Clients' Sec. Fund of the Bar of New Jersey v. Beckmann, 143 N.J. Super. 548, 364 A.2d 15 (Ch.Div.1976) and In re Harry Kampelman, 165 N.J. Super. 352, 398 A.2d 152 (Ch.Div.1979). The latter decision held that an advancement to pay administration expenses should be treated as administration expenses and accorded priority.
In Beckmann, supra, the court, in part, held that priorities should be based, so far as possible, on the guidelines of the Bankruptcy Act. Under those guidelines priority should be given to tax claims.
Counsel for CSF did not specifically address the claim of the State in the Yucht case but did oppose the State's claim in the Miller proceeding because the State failed to comply with the provision of paragraph (f) entered in the Miller case. Counsel urged that the State filed the COD without obtaining leave of court; hence, such COD should not even be considered.
For purposes of this opinion, the court assumes that counsel for CSF would urge that the State is barred because the State did not file a claim after publication of the order limiting creditors and did not obtain permission to make assessments.
The court notes that in the Yucht matter, the State has not filed a formal proof of claim but did submit evidence of the claim to the receiver.
Counsel for CSF also urges that the nature of the property in the Yucht case is the product of embezzled funds. Tax liens do not attach to embezzled funds or the product thereof. First National Bank v. Hill, 412 F. Supp. 422 (N.D.Ga.1976); Atlas Inc. v. United States of America, 459 F. Supp. 1000 (N.D.1978).
The embezzler is subject to tax on the amount of the funds embezzled in the year of the embezzlement. James v. United States, 366 U.S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246 (1961). The IRS may impose a lien on the embezzler's property.
Since the embezzler is under a duty to repay to the person from whom the funds were embezzled, such funds or the proceeds are not the embezzler's property to which the IRS lien can attach. See First National Bank v. Hill, supra; Atlas Inc. v. United States, supra.
The law of New Jersey is the same. See Van Blarcom v. Van Blarcom, 123 N.J. Eq. 110, 196 A. 468 (Ch.1938), aff'd o.b.
124 N.J. Eq. 19, 199 A. 383 (E. & A.1938). In Van Blarcom, the beneficiary sued the estate of a deceased trustee who had taken a check signed in blank by a co-trustee for purposes of paying interest to the beneficiary. Instead, the trustee made the check payable to his own order and withdrew principal with which he built a home.
The court held, based on the evidence, that the widow knew that the house had been built with the trust funds. The court said:
It is well settled that persons who deal with trustees in transactions not connected with the trust are put upon inquiry, and accept payments from the trustee of trust funds in his personal transactions at their peril. Prall v. Hamil, 28 N.J. Eq. 66; Goodell v. Monroe, 87 N.J. Eq. 328.
Not only will the court impress a trust upon the property purchased with the misappropriated funds, but it will also give a personal judgment for any deficiency against the wrongdoers. General Motors Acceptance Corp. v. Larson, 110 N.J. Eq. 305 [159 A. 819].
A decree will be advised impressing a trust for the amount of the defalcation against the land and building in question and directing that any deficiency be paid by Irene Van Blarcom personally and the estate of Frank Van Blarcom. [123 N.J. Eq. at 112, 196 A. 468]
In United States v. Pitoscia, 238 F. Supp. 135 (D.N.J.1965), the District Court granted defendant's motion to dismiss an indictment for willfully filing a false income tax return for not including the amount that he had embezzled from his employer. The District Court relied upon a portion of the James opinion, supra, that pointed out there had been considerable confusion as to the meaning of certain of its decisions, and hence, there could not be the requisite criminal intent required for "willfulness" in not reporting embezzled funds while that confusion existed. The District Court then considered the applicable law of New Jersey with respect to the property rights of the embezzler.
The fact that the defendant in the case at bar took goods belonging to his employer, sold them to a third party, and subsequently appropriated the proceeds to his own use does not necessarily constitute an act different in nature from that committed in the Wilcox case or the James case where money or cash was taken in the first instance. As was stated by Judge Kalodner in his dissenting opinion in Kann v. C.I.R., 210 F.2d 247, at page 255 (C.A.3rd Cir., 1953):
The government's contention that despite the fact that the Kanns 'surreptitiously procured for their own use funds from family owned corporations' the funds so taken were not embezzled is, to say the least, ingenious. 'Surreptitiously procured' is undoubtedly more euphonious and less grating on the embezzler's ear; but embezzlement, called by any other name, is still embezzlement.
While the court does not subscribe to the use of State law in determining taxability except where Congress has expressly or implicitly made the operation of the taxing statutes so dependent, it must recognize the reliance placed upon State law in both the Wilcox and James cases in determining whether the funds therein involved constituted embezzled funds. Nor can the Court ignore the plain and unmistakable meaning of the word "embezzlement" and the essential elements of the crime. According to Black's Law Dictionary (Fourteenth Edition) Embezzlement is "the fraudulent appropriation to his own use or benefit of property or money intrusted to him by another, or by a clerk, agent, trustee, public officer, or other person ...