Opinion · Ohlaw Ohio
BANK TRUST CO. v. BOLCE, 165 Ohio St. 201 (1956)
S. Ohio Sav. BANK Tr. CO., APPELLANT v. BOLCE ET AL.,APPELLEES.RENNER, TREAS., APPELLEE v. MERRIWEATHER ET AL., APPELLEES; LOCKLANDBUILDING LOAN ASSN. CO., APPELLANT., 135 N.E.2d 382 (Ohio 1956)
- Type
- Opinion
- Court
- Ohlaw Ohio
- Jurisdiction
- Ohlaw
- Date
- 1956-05-09
- Topic
- general
BANK TRUST CO. v. BOLCE, 165 Ohio St. 201 (1956) 135 N.E.2d 382 THE SOUTHERN OHIO SAVINGS BANK TRUST CO., APPELLANT v. BOLCE ET AL.,APPELLEES.RENNER, TREAS., APPELLEE v. MERRIWEATHER ET AL., APPELLEES; LOCKLANDBUILDING LOAN ASSN. CO., APPELLANT.
Citator
UpLaw has not yet analyzed BANK TRUST CO. v. BOLCE, 165 Ohio St. 201 (1956). The absence of a flag is not a finding that it is good law.
BANK TRUST CO. v. BOLCE,165 Ohio St. 201(1956)
135 N.E.2d 382
THE SOUTHERN OHIO SAVINGS BANK TRUST CO., APPELLANT v. BOLCE ET AL.,
APPELLEES.
RENNER, TREAS., APPELLEE v. MERRIWEATHER ET AL., APPELLEES; LOCKLAND
BUILDING LOAN ASSN. CO., APPELLANT.
No. 34570
Supreme Court of Ohio.
Decided May 9, 1956.
1. Section 5671, General Code (Section5719.01, Revised Code), provides that the lien of the state for taxes levied for all purposes in each year shall attach to all real property, subject to such taxes, on the day preceding the second Monday of April (now the first day of January), annually, and shall continue until such taxes accruing thereon are paid, and Section 5692, General Code (Section5719.25, Revised Code), provides that, where real estate is sold at judicial sale, the taxes, penalties and assessments then due which are liens on such land or real estate at the time of the sale shall be discharged from the proceeds of such sale; whereas Section 3670 of the United States Internal Revenue Code provides that, 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, and Section 3672 of the United States Internal Revenue Code provides that such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector under state or territorial laws.
2. Under such statutes, as construed by the federal courts, even in the absence of a showing that the debtor owner of real estate is insolvent (see Section 3466, U.S. Revided Statutes), priority, as between federal tax liens and specific and perfected state statutory tax liens on such real estate, is determined by the principle that "the first in time is the first in right," and under such principle a federal tax lien once filed has priority over state and local tax liens thereafter accruing.
3. Where, in a judicial sale of land incumbered by a state tax lien, a federal tax lien and other creditor liens, which latter liens are preferred by federal statute over the federal tax lien, the proceeds of the sale are insufficient to pay all such lien incumbrances in full, there shall be set aside from the proceeds of the sale a fund equal to the amount of the creditor liens so preferred over the federal tax lien to the extent that the proceeds of sale are sufficient, out of which fund the state taxes shall first be paid, and the remainder of such fund shall be paid to creditor lienholders, whose liens are soPage 202preferred over the federal tax lien, according to their lien priority, and the remainder of the proceeds of sale, if any, shall be paid to the United States on its tax lien.
This case is before this court on an appeal as of right and by the allowance of a motion to certify the record.
The statement of facts as set out in appellants' brief will be closely restated herein for the reason that all parties agree that the facts so stated are substantially correct.
The questions involved arose in two separate cases in the Common Pleas Court of Hamilton County, but such cases were consolidated in the Court of Appeals and are so presented here.
In the Bolce case the petition was filed by the plaintiff on October 30, 1953, to foreclose its mortgage on the real estate of the defendants, Edward L. Bolce and Frederica M. Bolce, and the property was sold pursuant thereto.
In the Merriweather case the petition was filed by the treasurer of Hamilton County on August 12, 1948, to foreclose real estate tax liens, but the property was sold pursuant to the cross-petition of defendant the Lockland Building Loan Association Company to foreclose its mortgage.
In both causes the proceeds of the sales were insufficient to pay in full costs, state real estate taxes, mortgage liens, and federal tax liens. In both causes the mortgages became liens prior to the federal tax liens, and it is conceded that the mortgages are entitled to priority of payment over the federal tax liens, in accordance with the federal statute. In the Merriweather cause, some of the state taxes became accrued or perfected liens subsequent to some of the federal tax liens; and as to accruing state taxes the federal government claims priority of payment, and the state claims priority for the payment of all its real estate taxes accrued and accruing at time of sale over all other liens in accordance with Section 5671, Ohio General Code (Section5719.01, Ohio Revised Code). In both causes the federal taxes are in the nature of creditor claims against thePage 203principal mortgagors for federal taxes and became liens after the mortgages were in default. The accruing state taxes involved ripened into perfected or accrued liens during the pendency of the litigation. The mortgagees sought merely to foreclose the mortgagors' equity of redemption in the subject properties, but the state claims it is entitled to have its perfected or accrued tax claims at the time of distribution paid out of the proceeds of all judicial sales in accordance with Section 5692, Ohio General Code (now Section5719.25, Ohio Revised Code). The properties were ordered sold free of the claims of all the parties to the actions. In both causes the mortgagors were obligated to the mortgagees under their contracts to keep real estate taxes paid and the mortgagees had the right, but not the obligation, to pay such taxes and have them when so paid secured by the mortgages.
There are some factual differences in the two causes. The Merriweather cause involves only the rights of the state, the federal government and the mortgagee; the Bolce cause involves also the rights of a judgment creditor whose lien is subsequent to the mortgage but prior to the federal liens. In the Bolce cause the federal liens for which priority is claimed over state taxes would be so large in amount as to absorb the entire fund were it not for the fact that the mortgage and judgment had priority over the federal liens. In the same cause the wife of the mortgagor had a dower interest in the real estate which was released in favor of the mortgagee but which was not subject to either the federal liens or the judgment lien.
In both causes the Court of Common Pleas held that state real estate taxes accrued at the time of sales must be first paid out of the entire proceeds of the sales, and that the other liens should then be paid in the order of their priority in time. The United States appealed both causes to the Court of Appeals, which court held that the federal government liens are entitled to priority of payment over state taxes to the extent that federal liens attached prior in time to the accrual of state tax liens. The Court of Appeals held further that to the extent the state could not collect its taxes out of the funds because of the priority of federal liens there should first be set aside amounts necessary to pay the mortgages and other liens which do enjoy priorityPage 204over the federal liens and that the unpaid state taxes should then be deducted and paid from these funds so set aside. In the Bolce cause the court held that this deduction should be made on a pro rata basis from the fund so set aside and otherwise payable on the prior mortgage and on the judgment.
In both causes the United States was a defendant in the Court of Common Pleas and the appellant in the Court of Appeals.
In the Bolce cause the trial court found as follows:
"* * * the United States of America on January 16, 1952, filed with the recorder of Hamilton County, Ohio, a notice of tax lien under internal revenue laws against said real property described in the petition herein of said defendant, Edward L. Bolce, in the amount of $15,705.01, setting forth in part that the nature of said lien is `income,' and that the tax assessment list was received by the Director of Internal Revenue on or about January 14, 1952. Said lien is recorded in mortgage book 2444, page 195, of the Hamilton County, Ohio, recorder's office, and constitutes a valid and subsisting lien upon the real property described in the petition herein as of the date aforesaid, and that there is now due said United States of America the sum of $15,705.01 with interest thereon from January 14, 1952."
In the Merriweather cause the trial court found as follows:
"* * * the defendant, the United States of America, on April 11, 1949, filed with the recorder of Hamilton County, Ohio, a notice of a tax lien under internal revenue laws in the amount of $457.10, which notice sets forth the nature of said lien, the date the assessments were received by the Director of Internal Revenue, and the amounts of said taxes * * * [in the sum of $457.10].
"That notice was given to the said James Merriweather of each of the above items making up said lien and that demand has been made upon him for payment for those taxes.
"That on June 6, 1951, defendant, United States of America, filed with the recorder of Hamilton County, Ohio, a notice of a tax lien under internal revenue laws in the amount of $1,215.53, for income taxes for the year 1947, and that the assessment list was received on February 5, 1951, by the Director ofPage 205Internal Revenue; that notice was given to the said James Merriweather and that demand was made upon him for the payment of said taxes.
"That the balance remaining unpaid on said taxes for withholding taxes and accrued interest to February 1, 1954, is $317.91, plus interest at 6 per cent per annum from February 1, 1954, and the balance unpaid on the income taxes, together with accrued interest to February 1, 1954, is $571.64, plus interest at 6 per cent per annum thereafter. That the effective dates of these federal tax liens are the dates they were received for assessment as set forth above."
In both causes, a question of law is presented as to the order in which the proceeds of the judicial sales should be distributed among the various claimants, the state of Ohio for real estate taxes, the United States for taxes assessed and made liens on the property, and other creditor lienholders, where the total funds are insufficient to pay all such claims.
More specifically, the questions presented may be stated as follows:
1. Are real estate taxes due the state of Ohio under Section 5671, Ohio General Code (now Section5719.01, Ohio Revised Code), of such a nature and character that they attach to the real estate itself, underlying the rights of ownership therein?
2. Do federal liens arising out of claims against the owner of real estate and independent of such real estate attach only to the estate or interest of such owner in such real estate or to the real estate itself?
3. Should accrued real estate taxes due the state of Ohio at the time of judicial sale be first paid out of the proceeds of the sale, or are federal tax liens arising pursuant to claims against the owner of such real estate which antecede the accrual of state taxes entitled to priority of payment?
Section2, ArticleXIIof the Constitution of Ohio, provides for taxation of lands and improvements thereon by uniform rule according to value. Section 5328, Ohio General Code (now Section5709.01, Ohio Revised Code), provides for the taxation ofallreal estate.Section 5671, Ohio General Code (now Section5719.01, Ohio Revised Code), provides as follows:
"The lien of the state for taxes levied for all purposes, in each year,shall attach to all real property subject to suchtaxeson the day preceding the second Monday of April, annually, andcontinue until such taxes, with any penalties * * * accruingthereon, are paid * * *.All personal property subject to taxation shall be liable to be seized and sold for taxes. The personal property of a deceased person shall be liable, in the hands of an executor or administrator, for any tax due on it from the testator or intestate.
"Taxes charged on any tax duplicate,other than those upon realestate specifically as such, shall be a lien on real property of the person charged therewith from the date of the filing of a notice of such lien, as provided by law." (Italics supplied.)
Section 5692, Ohio General Code (now Section5719.25, Ohio Revised Code), provides:
"When land so held by tenants in common is sold upon proceedings in partition, or taken by the election of any of the parties to such proceedings,or real estate is sold at judicialsale, or by administrators, executors, guardians, or trustees, the court shall order thetaxes, penalties, assessments then due,Page 207and interest thereon, which are a lien on such land or realestate at the time of the sale, to be discharged out of theproceeds of such saleor election." (Italics supplied.)
The judgments of the Common Pleas Court in the instant causes were that the real estate taxes accrued at the time of sale should be paid out of the proceeds of the judicial sales of the properties in question before the payment of any other liens. Clearly, this is required if full force of the statutes above quoted is applied, and under the provisions of these statutes the courts of this state have for many years uniformly ordered the payment of such taxes before the payment of other liens.
The United States contends, however, that certain federal statutes operate to modify the effect of the Ohio statutes as above quoted and are controlling. We quote in full Sections 3670 and 3671 and pertinent parts of Section 3672 of the United States Internal Revenue Code, as follows:
"Section 3670. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional 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 property, whether real or personal, belonging to such person."
"Section 3671. Unless another date is specifically fixed by law, the lien shall arise at the time the assessment 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."
"Section 3672. (a) 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 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 * * *."
It is to be noted that the above provisions creating liens for federal taxes have been in effect substantially in their present form since 1866. The requirements of notice to subsequent mortgagees, purchasers and judgment creditors were added byPage 208amendment in 1913 for the purpose of protecting such mortgagees, purchasers, and judgment creditors from loss incident to undisclosed federal liens.
The appellants claim that federal liens for delinquent taxes are not specific liens on the real estate but liens only on the interest of the owners thereof in such real estate; that, although the federal statutes create federal liens, they do not in terms give them priority over state liens; and that state real estate taxes are chargeable upon the real estate itself as taxes in rem, and not upon the interest of the owners thereof, as judgment and other attaching liens against them must be.
In the solution of this problem, it will be profitable to consider the relationship of the public-lien claimants, both federal and state, and the character of the liens which each is asserting against the lands in question.
Undoubtedly, when the federal government as the original owner of all public lands sold the same to private owners within the states, it could have sold them subject to direct federal taxes and could have made such taxes prior first liens upon all such lands, but it did not do so. On the contrary, it sold the entire interest in such lands to private owners tax free so far as federal taxes were concerned, and gave the state governments complete governmental control of such lands except as specifically reserved.
Under the taxation scheme of this state, real estate taxes run with the land, attach to the real estate itself, become direct and specific liens thereon, and underlie the owner's interest therein.Clarkv.Lindsey,47 Ohio St. 437,25 N.E. 422, 9 L.R.A., 740. In case of a judicial sale of the real estate, a finding is made by the court as to the amount of taxes due as a charge against the real estate, but no personal judgment is rendered against the owner therefor. In such case, under the provisions of Section 5692, Ohio General Code (Section5719.25, Ohio Revised Code), the real estate taxes which are a lien on the landat the time of the salemust be paid out of the proceeds of the sale; and under the provisions of Section 5671, Ohio General Code (Section5719.01, Ohio Revised Code), if such taxes are not paid out of the proceeds of the sale, they continue to be a charge against the real estate until paid. SeeGraftonv.Mong,Aud.,60 Ohio App. 228,Page 20920 N.E.2d 722, affirmed,134 Ohio St. 416,17 N.E.2d 649.
On the contrary, the liens of creditors, including tax liens of the United States, are personal debts of the owner, and, in the absence of express statutory provision to the contrary, can be chargeable to and made liens alone upon his interest in the property.Mackenziev.United States,109 F.2d 540,541.
The federal statute creating the liens contended for by the United States in these causes, also seems to limit the coverage of the liens to the property and rights of property of the owners of the real estate in question. Section 3670 of the United States Revenue Code, under which the federal liens are imposed, provides:
"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." (Italics supplied.)
We are also of the opinion that it was the intention of Congress in enacting Section 3672, subordinating federal tax liens to mortgage and judgment liens as therein provided, to also subordinate such federal liens to such other incumbrances as have priority over those mortgages and judgment liens. Otherwise, it is impossible to give such state tax liens priority over mortgage and judgment liens on the same property.
The Court of Appeals in its opinion said:
"The law covering this dispute is found in the Constitution of the United States and the acts of Congress, and the statutes of Ohio, and as interpreted in the case ofUnited Statesv.City ofNew Britain,347 U.S. 81,98 L. Ed., 520,74 S. Ct., 367. The net result of this law is that the lien of the state for taxes takes priority over all other liens, while the lien of the federal government for federal liens takes priority over all liens except those of mortgages and judgment creditors."
The interpretation which the Supreme Court gave to the facts and issues in theNew Britain caseabove referred to, which are strikingly similar to those involved in the instant causes, seems to confirm the position taken by the Court of Appeals in the causes here under consideration.
In theNew Britain case, the major part of the taxes involvedPage 210were real estate taxes assessed by the municipality of New Britain under authority of the general laws of the state of Connecticut, and the question there was the priority between such taxes and a federal lien, as in these causes.
In the course of the opinion in that case, the Supreme Court said:
"On the other hand, the federal statutes do not attempt to give priority in all cases to liens created under the paramount authority of the United States. The statute creating the federal lien here involved, I.R.C., Section 3670, does not in terms confer priority upon them.
"When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing the United States, whether secured by liens or otherwise, by Section 3466 of the Revised Statutes. * * * In that circumstance, where all the property of the debtor is involved, Congress has protected the federal revenues by imposing an absolute priority. Where the debtor is not insolvent, Congress has failed to expressly provide for federal priority, with certain exceptions not relevant here, although the United States is free to pursue the whole of the debtors' property wherever situated. * * *
"It does not follow, however, that the city's liens must receive priority as a whole. We believe that priority of these statutory liens is determined by another principle of law, namely, `the first in time is first in right.' * * * We think that Congress had this cardinal rule in mind when it enacted Section 3670, a schedule of priority not being set forth therein. Thus the priority of each statutory lien contested here must depend on the time it attached to the property in question and became choate.
"* * * The United States is not interested in whether the state receives its taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien. There is nothing in the language of Section 3672 to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein, and the legislative history lends support to this impression."Page 211
In the case ofExchange National Bank of Spokanev.UnitedStates,147 Wn. 176,265 P. 722, 62 A.L.R., 139, there was involved the question whether a lien under a federal statute which provides that, where the funds of an insolvent debtor are insufficient to pay all the debts due from him, "the debts due to the United States shall be first satisfied," has priority over state tax liens. The court held that the grant by the states to the federal government of the power to levy taxes confers upon Congress the power to declare the priority of taxes levied by the United States over those assessed by the states.
In an annotation to that case (see 62 A.L.R., 147), it is said:
"From the few cases which seem to have arisen on this subject [rule of priority between federal and state taxes], it appears to be the general rule that a claim for taxes due the federal government has priority over a claim for taxes due the state government, or any political subdivision thereof * * *."
In the case ofDetroit Bankv.United States,317 U.S. 329,87 L. Ed., 304,63 S. Ct., 297, the Detroit Court for the Southern District of Michigan held that a federal estate-tax lien, although unrecorded, was superior to a mortgage lien and to local, state and county liens for taxes, which had accrued after the death of the decedent. The Circuit Court of Appeals affirmed the judgment (127 F. [2d], 64), and the judgment of that court was affirmed by the United States Supreme Court. In that case Chief Justice Stone said:
"The lien attaches at the date of the decedent's death, since the gross estate is determined as of that date and the estate tax itself becomes an obligation of the estate at that time without assessment. SeeHartzv.Woodman,218 U.S. 205;Ithaca TrustCo.v.United States,279 U.S. 151,155;United Statesv.Ayer,12 F.2d 194;Rosenbergv.McLaughlin,66 F.2d 271."
In the case ofMichiganv.United States,317 U.S. 338,87 L. Ed., 312,63 S. Ct., 302, the state of Michigan claimed priority for state tax liens over other unrecorded liens, including an estate-tax lien of the federal government. In that case, Chief Justice Stone said:
"The establishment of a tax lien by Congress is an exercisePage 212of its constitutional power `to lay and collect taxes.' Article I, Section 8 of the Constitution.United Statesv.Snyder,149 U.S. 210. And laws of Congress enacted pursuant to the Constitution are by Article VI of the Constitution declared to be the supreme law of the land; and the judges in every state shall be bound thereby anything in the Constitution or laws of any state to the contrary notwithstanding.
"* * * Hence it is not debatable that a tax lien imposed by a law of Congress, as we have held the present lien is imposed, cannot, without the consent of Congress, be displaced by later liens imposed by authority of any state law or judicial decision.United Statesv.Snyder, supra; United Statesv.Greenville,118 F.2d 963."
In the case ofUnited Statesv.Security Trust Savings Bank,Exr.,340 U.S. 47,95 L. Ed., 53,71 S. Ct., 111, it was held that a tax lien of the United States is prior to an attachment lien, where the federal tax lien is recorded subsequent to the date of the attachment lien but prior to the date the attaching creditor obtains judgment. See annotation,95 L. Ed., 59. In that case Justice Minton said:
"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 re-examination by this court."
An analogous situation arose in the case ofUnited Statesv.White Bear Brewing Co., Inc.(April 9, 1956), ___ U.S. ___. There was involved in that case the question whether a federal tax lien had priority over a previously filed and recorded mechanic's lien for a definite sum arising out of a performed contract to furnish labor and materials for the improvement of real estate.
The United States Circuit Court of Appeals for the Seventh Circuit in the same case (227 F.2d 359) held that, where a contractor had performed work for a corporation, upon completion thereof had recorded his mechanic's lien pursuant to an Illinois statute and had commenced a foreclosure proceeding to enforce such lien before the Collector of Internal Revenue's receipt of tax assessments against a corporation made underPage 213Section 3670 of the Internal Revenue Code of 1939, the mechanic's lien which was subsequently foreclosed had priority over the federal tax lien, in the absence of any showing that the corporation was insolvent. The court applied the doctrine "the first in time, the first in right," citingUnited Statesv.Cityof New Britain, supra.
The Supreme Court, by a seven-to-two decision, without written opinion, reversed the judgment of the Circuit Court of Appeals. Justice Douglas dissented, with Justice Harlan concurring in the dissent. In his dissenting opinion, Justice Douglas lucidly explained the reason for his dissent as follows:
"I dissent. The court holds that a federal tax lien has priority over a statutory mechanic's lien, even though the mechanic's lien was specific, prior in time, perfected in the sense that everything possible under state law had been done to make it choate, and was being enforced before the federal tax lien arose. The mechanic's lien arose out of a contract to furnish labor and materials for the improvement of the real estate. The contract had been performed, the mechanic's lien recorded for a specific amount, and suit instituted to enforce the lien — all before the federal taxes were assessed and the tax liens recorded. Moreover, by the time the United States filed the present action to foreclose its tax liens, the mechanic's lien had been reduced to judgment, and the real estate sold at public auction and transferred by the purchaser to others. InUnitedStatesv.City of New Britain,347 U.S. 81,84, we said that liens under state law were `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.' Accordingly, we held that the principle that `the first in time is the first in right' (id., at 85) should be applied. I would apply the same principle here.
"* * *
"Here the lien is not general and inchoate. It is specific and choate. The lienor had an immediate right to `enforce his lien' against the property. Ill. Rev. Stat. 1953, c. 82, Section 9. This is clearly more than `merely alis pendensnotice that a right to perfect a lien exists.'340 U.S., at 50. Indeed, the mechanic's lienor had instituted suit to enforce the lien beforePage 214the federal tax lien arose and had completed enforcement of the lien by the time the United States instituted the present action.
"The court apparently holds that under 26 U.S.C. § 3670, a lien that is specific and choate under state law, no matter how diligently enforced, can never prevail against a subsequent federal tax lien, short of reducing the lien to final judgment. That is new doctrine, not warranted by our decisions, and supportable only if theNew Britain casewere overruled."
The position of the Supreme Court in theNew Britain caseand other cases above cited is contrary to the rule which this court believes should be applied in the instant causes. The effect of the federal rule is to render unstable real estate titles and to impair and perhaps destroy local government by sapping away its very life blood by pre-empting the funds arising from the comparatively light tax levies for local governmental purposes and thus destroying the value of the very property which is intended to return tax revenues, both state and federal. For instance, in the Bolce cause, the total sale price of the property in question was $15,900. The court costs were $311.07, leaving a balance of $15,588.93 for distribution. The federal lien was found to be $15,705.01 which exceeds the amount left for distribution and leaves nothing for state taxes unless, by some legerdemain, they are taken out of the mortgage and judgment lien funds arising from the sale, which liens are conceded to have priority over the federal tax lien. If there was no mortgage or judgment, there would be no payment of state taxes.
Recognizing, however, the position which the federal Supreme Court has taken on the issues involved from expressions of the court above quoted from theNew Britain caseand other cases, we are obliged to recognize the federal tax liens as having priority over local and state tax liens, as found by the Court of Appeals.
The problem of the distribution of the funds in the instant causes remains to be considered. It is conceded that the mortgages and judgments are superior to the federal tax liens; that the federal tax liens are by this decision found to be superiorPage 215to the local or state tax liens; and that the local or state tax liens are superior to the mortgage and judgment liens.
In this revolving circle, some courts have preferred the mortgage, and with it the local tax lien, over the federal lien which is remitted to any proceeds of sale remaining. SeeFerrisv.Chic-Mint Gum Co.,14 Del. Ch. 232,124 A. 577;Brownv.General Laundry Services, Inc., 53-1 U.S.T.C., paragraph 9272.
But this plan of distribution fails to give the federal tax lien the priority of distribution to which, under the federal authorities, it is entitled. Another scheme of distribution, which was substantially adopted by the Court of Appeals in the instant causes, and which has sanction under some authorities as the best possible solution under the circumstances, calls for a setting aside of a fund equal to the total amount due to the mortgagees and judgment creditors under their liens which by federal statute have priority over the federal tax lien.
This court is of the opinion that where, in a judicial sale of land incumbered by a state tax lien, a federal tax lien and other creditor liens, which latter liens are preferred by federal statute over the federal tax lien, the proceeds of the sale are insufficient to pay all such lien incumbrances in full, there shall be set aside from the proceeds of the sale a fund equal to the amount of the creditor liens so preferred over the federal tax lien to the extent that the proceeds of sale are sufficient, out of which fund the state taxes shall first be paid, and the remainder of such fund shall be paid to creditor lienholders, whose liens are so preferred over the federal tax lien, according to their lien priority, and the remainder of the proceeds of sale, if any, shall be paid to the United States on its tax lien.
This solution is subject to criticism because it gives the federal tax lien an unwarranted advantage at the expense of the prior mortgage and judgment liens, to the extent that such liens have been subordinated to the state tax lien, but it seems to be the most equitable solution under the impasse presented.
In the Merriweather cause, distribution of the proceeds of sale shall be made first to the mortgagee to the extent of the mortgage except that out of such sum the state taxes shall be paid and the remainder of the proceeds of sale shall be paid to the United States on its tax lien.Page 216
In the Bolce cause, distribution of the proceeds of sale shall be made first to the mortgagee to the extent of the mortgage; second, to the judgment creditor to the extent of his judgment, except that out of such latter sum the state taxes shall be paid; and third, the balance of such proceeds of sale shall be paid to the United States on its tax lien.
The judgment of the Court of Appeals is modified with reference to the distribution of the sale in each of these causes as above set forth and otherwise the judgment of the Court of Appeals is affirmed.Judgment modified and, as modified, affirmed.
MATTHIAS, ZIMMERMAN, STEWART and TAFT, JJ., concur.
WEYGANDT, C.J., and BELL, J., dissent.
WEYGANDT, C.J., concurs in the foregoing dissenting opinion.Page 217