Federal tax liens are entitled to priority over the claim of a
mortgagee for a "reasonable attorney's fee" in prosecuting a
foreclosure suit where notice of the federal tax liens was recorded
after recordation of the mortgage, after default thereon, and after
the institution of the foreclosure suit, but prior to the entry of
the judicial decree which allowed and determined the amount of the
attorney's fee. Pp.
374 U. S.
84-92.
235 Ark. 267, 357 S.W.2d 653, reversed.
MR. JUSTICE WHITE delivered the opinion of the Court.
The United States has sought review of a decision of the Supreme
Court of Arkansas subordinating the federal tax lien (26 U.S.C. §
6321) to a lien for attorney's fees included in an antecedent
mortgage contract. 235 Ark. 267, 357 S.W.2d 653. Because of
conflict between the Arkansas decision and
United States v.
Bond, 279 F.2d 837 (C.A.4th Cir.);
In re New Haven Clock
& Watch Co., 253 F.2d 577 (C.A.2d Cir.), we granted
certiorari, 371 U.S. 909.
Page 374 U. S. 85
When the taxpayers, in 1958, acquired their interest in the
parcel of real estate involved here, they assumed liability on a
note and the deed of trust (first mortgage) securing it, which were
held by respondent Pioneer American Insurance Company. The note
obligated taxpayers,
"in the event of default herein and of the placing of this note
in the hands of an attorney for collection, or this note is
collected through any court proceedings, to pay a reasonable
attorney's fee. [
Footnote
1]"
The taxpayers at the same time executed a note and second
mortgage to their vendor, respondent The Development Company, and
subsequently, in April, 1960, the real estate became burdened again
with a mechanic's lien in favor of Alfred J. Anderson.
In October of 1960, taxpayers defaulted on the first mortgage
monthly installment and failed thereafter to
Page 374 U. S. 86
meet payments as they fell due. On March 24, 1961, Pioneer
American filed a suit to foreclose its mortgage and sought, in
addition to the principal and interest, a reasonable attorney's
fee. The United States was named a party defendant because of two
outstanding federal tax liens against the taxpayers which were
filed on November 29, 1960, and January 30, 1961. The United States
admitted its liens were subordinate to the principal and interest
on the first and second mortgages, but claimed that the liens were
superior to the claim for the attorney's fee. Three additional
federal tax liens subsequently were filed on April 14, July 17, and
October 3, 1961. [
Footnote
2]
On November 15, 1961, the Chancery Court entered its decree of
foreclosure which fixed the attorney's fee at $1,250 and determined
the priority of the various claimants. After satisfaction of court
and foreclosure sale costs, Pioneer American was accorded first
priority for principal, interest, and the attorney's fee; the
Development Company took next on principal and interest under the
second mortgage; Alfred J. Anderson shared thereafter on his
mechanic's lien, and the United States took last. The property was
sold, and proceeds were received which satisfied all claims except
$3,615.28 of the federal tax liens. [
Footnote 3] The United States appealed to the Supreme
Court of Arkansas, asserting that it was entitled to priority
Page 374 U. S. 87
over the attorney's fees, [
Footnote 4] and that $1,250 more should have been applied
to reduce the unpaid federal taxes. [
Footnote 5] With one judge dissenting, the Arkansas court
rejected that contention and sustained the superiority of the claim
for the attorney's fee.
It goes unchallenged that the claim for the attorney's fee,
arising out of the obligations assumed by the taxpayer in 1958,
became enforceable under Arkansas law as a contract of indemnity at
the time of default in October, 1960, before the filing of the
first federal tax liens. Furthermore, it is evidence that the suit
in which this attorney's fee was earned was commenced on March 24,
1961, prior to the filing of the unpaid federal tax liens crucial
to this suit,
i.e., the liens of April 14, July 17, and
October 3, 1961. Nevertheless, because this fee had not been
incurred and paid and could not be finally fixed in amount until
November 15, 1961, after all the federal liens had been filed, we
hold that the claim for attorney's fees remained inchoate at least
until that date, and that the federal tax liens are entitled to
priority.
The priority of the federal tax lien provided by 26 U.S.C. §
6321 as against liens created under state law is governed by the
common-law rule -- "the first in time is the first in right."
United States v. New Britain, 347 U. S.
81,
347 U. S. 85-86.
It is critical, therefore, to determine when competing liens,
whether federal- or state-created, come into existence or become
valid for the purpose of the rule.
Page 374 U. S. 88
The tax lien arises, according to § 6322, when the tax is
assessed, but, as against the specific interests mentioned in §
6323(a) -- mortgagees, pledgees, purchasers and judgment creditors
-- it is not valid until placed of public record, and, insofar as
the federal lien attaches to securities, mortgagees, pledgees, and
purchasers must have actual notice of the lien. [
Footnote 6] § 6323(c).
As for a lien created by state law, its priority depends "on the
time it attached to the property in question and became choate."
United States v. New Britain, supra, at
347 U. S. 86;
United States v. Security Trust & Savings Bank,
340 U. S. 47.
Choate state-created liens take priority over later federal tax
liens,
United States v. New Britain, supra; Crest Finance Co.
v. United States, 368 U. S. 347,
while inchoate liens do not.
See United States v. Liverpool
& London Ins. Co., 348 U. S. 215;
United States v. Scovil, 348 U. S. 218;
United States v. Colotta, 350 U.S. 808. And it is a matter
of federal law when such a lien has acquired sufficient substance
and has become so perfected as to defeat a later-arising or
later-filed federal tax lien. [
Footnote 7]
"Otherwise,
Page 374 U. S. 89
a State could affect the standing of federal liens, contrary to
the established doctrine, simply by causing an inchoate lien to
attach at some arbitrary time even before the amount of the tax,
assessment, etc., is determined."
United States v. New Britain, supra, at
347 U. S. 86.
The federal rule is that liens are
"perfected in the sense that there is nothing more to be done to
have a choate lien when the identity of the lienor, the property
subject to the lien, and the amount of the lien are
established."
Id. at
347 U. S.
84.
We reject respondents' contention that the choateness rule has
no place when a mortgage under § 6323(a) is involved. The
predecessor to § 6323 was first enacted by Congress in 1912 in
order to protect mortgagees, purchasers and judgment creditors
against a secret lien for assessed taxes and to postpone the
effectiveness of the tax lien as against these interests until the
tax lien was filed. H.R.Rep.No. 1018, 62d Cong., 2d Sess. The
section dealt with the federal lien only, and it did not purport to
affect the time at which local liens were deemed to arise or to
become choate or to subordinate the tax lien to tentative,
conditional or imperfect state liens. Rather, we believe Congress
intended that if, out of the whole spectrum of state-created liens,
certain liens are to enjoy the preferred status granted by § 6323,
they should at least have attained the degree of perfection
required of other liens, and be choate for the purposes of the
federal rule.
The Court has never held that mortgagees face a less demanding
test of perfection than other interests when competing with the
federal lien. Indeed,
United States v. R. F. Ball Constr.
Co., 355 U. S. 587,
stands for just the contrary. There, the state law creditor,
asserting that the
Page 374 U. S. 90
assignment under which he claimed was a mortgage within the
predecessor to § 6323, insisted upon priority over the federal lien
by virtue of the previously executed assignment. A majority of the
Court, although not expressly declaring the assignment to be a
mortgage, held that § 6323(a) afforded the creditor no protection,
since his interest was "inchoate and unperfected." The four
dissenters thought the assignment was a mortgage, and that it was
"completely perfected" and "in all respects choate." While
disagreeing on the choateness of the particular assignment involved
there, the Court was unanimous in applying the choateness test to
those seeking the protection of § 6323(a). We follow that lead
here, and therefore proceed to measure against the rule the
choateness of the mortgagee's lien for reasonable attorney's fees
before us.
Clearly the identity of the lienholder and the property subject
to the lien are definite here, but it is equally apparent that the
amount of the lien for attorney's fees was undetermined and
indefinite when the federal tax liens in question were filed.
[
Footnote 8] The mortgage held
by respondents secured a promissory note which obligated the
mortgagor maker to pay a "reasonable attorney's fee" "in the event
of default" and "of the placing of this note in the hands of an
attorney for collection." By the time the federal liens
subordinated by the Arkansas courts were placed of public record,
default has occurred, the mortgagee had elected to declare the note
due and payable, an attorney had been engaged, and a suit to
foreclose the mortgage had been filed. But the "reasonable
attorney's fee" -- reasonable in relation to the service to be
performed by the
Page 374 U. S. 91
attorney -- had not been reduced to a liquidated amount. The
final amount was to be established by court decree, and the
Chancery Court set the fee considerably below the sum requested.
Moreover, there is no showing in this record that the mortgagee had
become obligated to pay and had paid any sum of money for services
performed prior to the filing of the federal tax lien.
Ball once again provides a parallel. Sums due the
contractor taxpayer under a particular construction contract were
assigned to the surety as security for any future indebtedness of
the contractor to the surety arising under that contract or any
other. After the filing of the federal tax lien against the
contractor, the surety made advances to complete another contract
of the taxpayer, as the surety was obligated to do under its bond
issued on that contract, and the taxpayer thereby became indebted
to the surety. The majority held the surety's interest "inchoate
and unperfected" at the time of the filing of the federal tax
liens. [
Footnote 9]
Ball therefore rejects as inchoate an assignee's or
mortgagee's lien to secure future indebtedness of the taxpayer
debtor. The creditor holds merely "a caveat of a more perfect lien
to come."
New York v. Maclay, 288 U.
S. 290,
288 U. S. 294.
Likewise, when a mortgagee has a lien for an attorney's fee which
is uncertain in amount and yet to be incurred and paid, such a lien
is inchoate, and is subordinate to the intervening federal tax lien
filed before the mortgagee's lien for the attorney's fee matures.
[
Footnote 10]
Page 374 U. S. 92
But, it is said, the principal and interest of the mortgage were
definite in amount, the attorney's fee later became certain by
court order, [
Footnote 11]
and, if the tax lien were to prevail, the preference of the
mortgagee given by § 6323 will be frustrated, since payment of the
attorney's fee will reduce the net amount realized from the
mortgage. Aside from the fact that the mortgagee here will
experience no such reduction, [
Footnote 12] this argument would subordinate federal tax
liens to inchoate liens, and, in both
United States v. New
Britain, supra, and
United States v. Buffalo Savings
Bank, 371 U. S. 228, the
Court denied priority to local tax liens which were imperfect when
the federal tax lien was filed even though the former had priority
over the mortgage and would reduce the recovery of the mortgagee.
[
Footnote 13]
The court below was in error, and its judgment is reversed, and
the cause remanded for further proceedings not inconsistent with
this opinion.
Reversed and remanded.
MR. JUSTICE DOUGLAS dissents.
[
Footnote 1]
The deed of trust provided, in addition:
"That if either the party of the second part [trustee] or the
party of the first part [mortgagor] shall become a party to any
suit or proceeding at law or in equity in reference to its interest
in the premises herein conveyed, the reasonable costs, charges and
attorney's fees in such suit or proceeding shall be added to the
principal sum then owing by the party of the first part and shall
be secured by this instrument, and the note secured hereby shall at
the option of the holder, become due and collectible."
"
* * * *"
"The proceeds of any sale under this deed of trust shall be
applied . . . as follows:"
"First: to pay the costs and expenses of executing this trust,
and any and all sums expended on account of costs of litigation,
attorney's fees, ground rents, taxes, insurance premiums, or any
advances made or expenses incurred on account of the property sold,
with interest thereon."
"Second: to retain as compensation, a commission as set forth by
the laws of the State of Arkansas."
"Third: to pay off the debt secured hereby, including accrued
interest thereon, as well as any other sums owing . . . pursuant to
this instrument."
[
Footnote 2]
The federal tax liens, as of the date of the order of
distribution, November 15, 1961, were as follows:
Lien of November 29, 1960. . . . $ 659.67
Lien of January 30, 1961 . . . . 1,661.03
Lien of April 14, 1961 . . . . . 1,344.69
Lien of July 17, 1961. . . . . . 1,653.23
Lien of October 3, 1961. . . . . 1,164.04
[
Footnote 3]
The first two liens, November 29, 1960, and January 30, 1961,
were satisfied in full. $546.68 was available for partial payment
of the April 14, 1961, lien. The balance of the April lien and the
full amounts of the July 17 and October 3, 1961, liens remained
unsatisfied.
[
Footnote 4]
The United States did not challenge the priority of the
mechanic's lien or of any other distribution fixed by the
decree.
[
Footnote 5]
Once the attorney's fee is subordinated to the federal tax
liens, the $1,250 would be borne by the other claimants in order of
seniority among themselves under state law. On the basis of the
present decree, the share of the mechanic's lienor Anderson would
be eliminated, and that of the second mortgagee, The Development
Company, reduced by half.
[
Footnote 6]
"While it is true that the filing of the notice of the tax lien
may constitute notice in the case of real property, it is
inequitable for the statute to provide that it constitutes notice
as regards securities. For example, when a broker purchases a
security for his customer on the exchange, it is obviously
impossible for him to check all the offices in which a notice of
the tax lien may be duly filed to determine whether the security is
subject to such lien. A like situation exists with respect to 'over
the counter' and direct transactions in securities. An attempt to
enforce such liens on recorded notice would, in many cases, impair
the negotiability of securities and seriously interfere with
business transactions. The adoption of the amendment will remove an
existing hardship without causing any undue loss of revenue."
H.R.Rep. No. 855, 76th Cong., 1st Sess. 26 (1939).
[
Footnote 7]
"The effect of a lien in relation to a provision of federal law
for the collection of debts owing the United States is always a
federal question. Hence, although a state court's classification of
a lien as specific and perfected is entitled to weight, it is
subject to reexamination by this Court."
United States v. Security Trust & Sav. Bank,
340 U. S. 47,
340 U. S. 49-50;
see also United States v. Acri, 348 U.
S. 211;
United States v. Vorreiter,
355 U. S. 15. Thus,
the fact that, under Arkansas law, the claim for attorney's fees
becomes enforceable upon default as a contract of indemnity does
not foreclose inquiry by this Court into the degree the claim is
choate at that time.
[
Footnote 8]
There is nothing in
Security Mortgage Co. v. Powers,
278 U. S. 149,
which compels us to hold the lien choate, since the issue there was
the status of an attorney's fee clause, fixed in amount, in
bankruptcy proceedings where the rigorous federal lien choateness
test was not necessarily applicable.
[
Footnote 9]
Contrast Crest Finance Co. v. United States,
368 U. S. 347,
where the assignment and the loans were consummated prior to the
accrual and filing of the federal tax liens.
[
Footnote 10]
See in accord with respect to attorney's fees,
United States v. Bond, 279 F.2d 837 (C.A.4th Cir.);
In
re New Haven Clock & Watch Co., 253 F.2d 577 (C.A.2d
Cir.);
Bank of America National Trust & Savings Ass'n v.
Embry, 188 Cal. App.
2d 425, 10 Cal. Rptr. 602; with respect to payments of
subsequently attaching local taxes,
United States v. Bond,
supra; United States v. Christensen, 269 F.2d 624 (C.A.9th
Cir.); and with respect to future advance clause transactions,
American Surety Co. v. Sundberg, 58 Wash. 2d
337,
363 P.2d
99; Rev.Rule 56-41, 1956-1 Cum.Bull. 562;
cf. United States
v. Peoples Bank, 197 F.2d 898 (C.A.5th Cir.);
Hoare v.
United States, 294 F.2d 823 (C.A.9th Cir.).
[
Footnote 11]
This argument would require us to revitalize the long since
rejected relation-back doctrine.
See United States v. Security
Trust & Sav. Bank, 340 U. S. 47,
340 U. S.
50.
[
Footnote 12]
See note 5
supra.
[
Footnote 13]
By the same token, respondents' contention that the rules
against "unjust enrichment" are violated by preferring the tax lien
to the claim for attorney's fees is without merit. Both
New
Britain and
Buffalo Savings Bank prefer the federal
lien even though the mortgagee's interest in the proceeds will be
reduced by later-arising local taxes having priority under state
law over the mortgagee. The attorney's services, moreover, were
rendered for the benefit of the mortgagee to protect his interest
in the property, and the United States, holding an adverse
interest, received no such benefit from them that its interest is
to be charged therefor.