1. In the circumstance of this case, an "assignment" made by a
subcontractor to his performance bond surety of all sums to become
due for performance of the subcontract, as security for any
indebtedness or liability thereafter incurred by the subcontractor
to the surety, did not constitute the surety a "mortgagee" of those
sums within the meaning of § 3672(a) of the Internal Revenue Code
of 1939, as amended, providing that a federal tax lien shall not be
valid as against any "mortgagee" until notice thereof has been
filed by the collector.
2. In the circumstances of this case, an allowance of attorney's
fees to an interpleader, who was the debtor of the
taxpayer-assignor, was not entitled to priority in the interpleaded
fund as against a federal tax lien which had previously attached to
the fund.
239 F.2d 384, reversed.
PER CURIAM.
The judgment is reversed. The instrument involved being inchoate
and unperfected, the provisions of § 3672(a), Revenue Act of 1939,
53 Stat. 449, as amended, 53 Stat. 882, 56 Stat. 957, do not apply.
See United States v. Security Trust & Savings Bank,
340 U. S. 47;
United
Page 355 U. S. 588
States v. City of New Britain, 347 U. S.
81,
347 U. S. 86-87.
The claim of the interpleader for its costs is controlled by
United States v. Liverpool & London & Globe Ins.
Co., 348 U. S. 215.
MR. JUSTICE WHITTAKER, with whom MR. JUSTICE DOUGLAS, MR.
JUSTICE BURTON and MR. JUSTICE HARLAN join, dissenting.
The question presented is whether an "assignment" made by a
subcontractor to his performance bond surety of all sums to become
due for performance of the subcontract, as security for any
indebtedness or liability thereafter incurred by the subcontractor
to the surety, constituted the surety a "mortgagee" of those sums
within the meaning of § 3672(a) of the Internal Revenue Code of
1939, as amended.
Ball Construction Company had contracted to construct a housing
project in San Antonio, Texas. On July 17, 1951, it entered into a
subcontract with Jacobs under which the latter agreed to do the
necessary painting and decorating of the buildings, and to furnish
the labor and materials required, for a stipulated price. The terms
of the subcontract required Jacobs to furnish to Ball a corporate
surety bond, in the amount of $229,029, guaranteeing performance of
the subcontract. On July 21, 1951, Jacobs, to induce respondent,
United Pacific Insurance Company, to sign the bond as surety,
assigned to the surety all sums due or to become due under the
subcontract as collateral security to the surety for any liability
it might sustain under its bond through nonperformance of the
subcontract, and for
"the payment of any other indebtedness or liability of the
[subcontractor to the surety] whether [t]heretofore or [t]hereafter
incurred,"
not exceeding the penalty of the bond. On April 30, 1953, a
balance of $13,228.55 became due from
Page 355 U. S. 589
Ball under the subcontract, but, because of outstanding claims
of materialmen against Jacobs, Ball did not pay the debt. In May,
June, and September, 1953, the District Director of Internal
Revenue filed, in the proper state office, federal tax liens
against Jacobs, aggregating $17,010.85. Between December, 1953, and
March, 1954 -- thus, during the coexistent period of the bond and
the assignment -- Jacobs incurred indebtedness, independent of the
subcontract, to the surety in the amount of $12,971.88.
The surety, contending that its assignment of July 21, 1951,
constituted it a "mortgagee" within the meaning of § 3672(a),
claimed priority of right to the $13,228.55 fund over the
subsequently filed federal tax liens. The Government disputed the
claim and asserted a superior right to the fund under its tax
liens. Several creditors of Jacobs, holding unpaid claims for
materials furnished for and used in performing the subcontract,
asserted priority to a portion of the fund over the claims of both
the surety and the Government. Because of these rival claims, Ball
instituted this interpleader action, under which he impleaded the
surety, the Government, and the materialmen, and paid the fund into
the registry of the court to abide the judgment. Before conclusion
of the trial, the materialmen's claims were satisfied. The District
Court held that, by the terms of the "assignment" and on its date
of July 21, 1951, the surety became a mortgagee of the fund, and
that its right thereto was superior, under § 3672(a), to the
subsequently filed federal tax liens.
R. F. Ball Const. Co. v.
Jacobs, 140 F. Supp.
60. The Court of Appeals, adopting that opinion, affirmed. 239
F.2d 384.
This Court now reverses summarily, citing
United States v.
City of New Britain, 347 U. S. 81, and
United States v. Security Trust & Savings Bank,
340 U. S. 47. We
believe those cases are not in point, nor in any way controlling.
Neither of them even involve either the question
Page 355 U. S. 590
here presented or the statute here conceded by the parties to be
controlling. Rather, they involved entirely different facts,
presented very different questions, and were controlled by and
decided upon other statutes. They were controlled by and decided
upon §§ 3670 and 3671 of the Internal Revenue Code of 1939,
[
Footnote 1] which, in
pertinent part, provided:
"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 . . .
belonging to such person"
(§ 3670) from the time " . . . the assessment list was received
by the collector. . . ." (§ 3671.) Whereas the statute governing
this case, as the parties concede, is § 3672(a) of the Internal
Revenue Code of 1939, as amended, [
Footnote 2] which, in pertinent part, provided:
"Such lien shall not be valid as against any mortgagee, pledgee,
purchaser, or judgment creditor until notice thereof has been filed
by the collector -- (1) . . . in the office in which the filing of
such notice is authorized by the law of the State . . . in which
the property subject to the lien is situated. . . ."
The controversy in New Britain was over that portion of the
proceeds of a real estate mortgage foreclosure sale which exceeded
the amount of the mortgage. The City of New Britain, in virtue of
its unpaid annual
ad valorem tax liens which attached to
the real estate on October 1 in each of the years 1947 through
1951, and its water-rent liens which had accrued from December 1,
1947, to June 1, 1951, claimed priority of right to the fund over
general federal tax liens against the mortgagor which had been
effected under §§ 3670 and 3671 by deposit of assessment
Page 355 U. S. 591
lists in the Collector's office on various dates between April
26, 1948, and September 21, 1950. Thus, some of the City's liens
had attached to the real estate prior to receipt by the Collector
of the assessment lists, and some had not.
This Court was not there dealing with any mortgage, pledge or
other contractual lien, but was only dealing, as it said, with
"statutory liens" (
id. at
347 U. S. 84),
and, in deciding the issue of their priority, it observed that,
although §§ 3670 and 3671 created a lien in favor of the United
States upon all property of the taxpayer as of the time the
assessment list was received by the Collector, "Congress [had]
failed to expressly provide for federal priority . . ."
(
id. at
347 U. S. 85)
under those sections, and the Court held " . . . that priority of
these statutory liens is [to be] determined by [the] principle of
law [that]
the first in time is the first in right.'"
Ibid. The Court then vacated the judgment of the state
court and remanded the case for determination of the order of
priority of the various liens asserted, in accordance with the
opinion.
We think it is not only apparent that § 3672(a) had no
application to that case, but also that the Court expressly so
declared. It noted that the City of New Britain contended that,
because applicable state statutes provided that real estate tax and
water-rent liens should take precedence over all other liens and
encumbrances and § 3672(a) subordinated federal tax liens to
antecedent mortgages, the Court should hold that the City's tax and
water-rent liens -- having priority over mortgages -- were prior in
rank to the federal tax liens; but the Court disagreed, saying:
"There is nothing in the language of § 3672[(a)] to show that
Congress intended antecedent federal tax liens to rank behind
any but the specific categories of interests set out
therein. . . ."
Id. at
347 U. S. 88.
(Emphasis supplied.) As we have observed,
Page 355 U. S. 592
supra, "the specific categories of interests set out"
in § 3672(a) were and are those of "any mortgagee, pledgee,
purchaser, or judgment creditor."
In the
Security Trust case, a creditor instituted a
suit in California against one Styliano on a note and, on October
17, 1946, pursuant to provisions of the California Code of Civil
Procedure, procured an attachment of a parcel of real estate owned
by Styliano. While the attachment suit was pending, the Government,
on December 3, 5, and 10, 1946, filed notices of federal tax liens
against Styliano in the proper state office. Thereafter, on April
24, 1947, judgment was rendered against Styliano in the attachment
suit, thus perfecting the attachment lien on the real estate.
Subsequently, Styliano sold the real estate, subject to these
liens, and the purchaser filed a suit to quiet his title, impleaded
the attachment lienor and the Government, and paid the purchase
price into the registry of the court to abide the judgment. The
California trial court ordered the fund to be applied first in
payment of the attachment lien, and second in payment of the
federal tax liens. The California District Court of Appeal
affirmed.
Winther v. Morrison, 93 Cal. App. 2d
608, 209 P.2d 657. On certiorari, this Court reversed, pointing
out that, under the law of California as declared in
Puissegur
v. Yarbrough, 29 Cal. 2d
409, 412, 175 P.2d 830, 831-832, an attaching creditor obtains
"only a potential right or a contingent lien" until a judgment
perfecting the lien is rendered, and that, meanwhile, the lien "is
contingent or inchoate -- merely a
lis pendens notice that
a right to perfect a lien exists."
United States v. Security
Trust & Savings Bank, id. at
340 U. S. 50.
Naturally, in those circumstances, the tax liens which became
perfected in December, 1946, were superior to the attachment lien
which did not become perfected until May, 1947. There, as in
New Britain, this Court was not dealing with any mortgage,
pledge or other contractual lien, or with any question of priority
of an antecedent mortgage over subsequently filed tax liens.
Page 355 U. S. 593
It thus seems quite clear to us that the
New Britain
and
Security Trust cases did not involve the question here
presented, nor deal with the statute here conceded to be
controlling, and therefore they do not in any way support the
Court's decision here.
We also think that, under the law and the facts in this record,
the "assignment" was, in legal effect, a "mortgage," and inasmuch
as it antedated the filing of the federal tax liens it was superior
to them under the expressed terms of § 3672(a). That section does
not define the term "mortgagee," and hence we must assume that it
was there used in its ordinary and common law sense.
United
States v. Gilbert Associates, Inc., 345 U.
S. 361,
345 U. S. 364;
United States v. Security Trust & Savings Bank, supra,
at
340 U. S. 52
(concurring opinion). Substance, not form or labels, controls the
nature and effect of legal instruments. "State law creates legal
interests and rights."
Morgan v. Commissioner,
309 U. S. 78,
309 U. S. 80.
The law of Texas, where the questioned assignment was made and was
to be performed, makes such an "assignment" a valid mortgage.
Southern Surety Co. v. Bering Mfg. Co., 295 S.W. 337, 341;
Williams v. Silliman, 74 Tex. 626, 12 S.W. 534. Although
the relation of a state-created right to federal laws for the
collection of federal credits is a federal question, the State's
classification of state-created rights must be given weight.
United States v. Security Trust & Savings Bank, supra,
at
340 U. S. 49-50.
Here, the State's determination that such assignments are mortgages
in legal effect, and its classification of them accordingly, is not
met by anything of countervailing weight. The period of the
assignment was coextensive with the bond. The bond remained
effective throughout the period here involved, and hence so did the
assignment. The fact that the assignment was of property to be
afterwards acquired did not affect its validity as a "mortgage,"
Conard v. Atlantic Ins.
Co., 1 Pet. 386,
26 U. S. 448,
nor did uncertainty
Page 355 U. S. 594
in the amount (not exceeding the fixed maximum) of the generally
identified obligation, so secured, do so.
Ibid. Neither
does the fact that the instrument was not recorded under the
State's fraudulent conveyance statutes -- thus to impart
constructive notice to subsequent purchasers, mortgagees and the
like -- make any difference here, for the instrument was valid
between the parties to it, and Congress, by § 3672(a), expressly
subordinated federal tax liens to antecedent mortgages. The
questioned assignment conveyed to the surety all sums then due and
thereafter to become due under, and for performance of, the then
existing subcontract -- performance of which was guaranteed by the
surety's bond -- as security for the payment of sufficiently
identified but contingent and unliquidated obligations which the
subcontractor might incur to the surety during the coextensive
period of the bond and the assignment. In these circumstances, I
think it is clear that the assignment was, in legal effect, a
mortgage, completely perfected on its date, in all respects choate,
and valid between the parties; and, inasmuch as it antedated the
filing of the federal tax liens, it was expressly made superior to
those liens by the terms of § 3672(a).
For these reasons, I dissent, and would affirm the decision and
judgment of the Court of Appeals.
[
Footnote 1]
53 Stat. 448 and 449, 26 U.S.C. (1952 ed.) §§ 3670 and 3671.
[
Footnote 2]
53 Stat. 449, as amended by § 401 of the Revenue Act of 1939, c.
247, 53 Stat. 882, and § 505 of the Revenue Act of 1942, c. 619, 56
Stat. 957, 26 U.S.C. § 3672(a).