The opinion of the court was delivered by: MURPHY
This is an action to quiet title to a property against which the United States has a recorded income tax lien.
Act of 1931, as amended, 28 U.S.C.A. (1940 ed.) §§ 901-906, now 28 U.S.C.A. § 2410(a-d). The government challenges plaintiffs' right and by counterclaim seeks to foreclose its own lien. Internal Revenue Code, 26 U.S.C.A. §§ 3678, 3744 [now 28 U.S.C.A. § 1396], 3800, and the Act of 1931.
The problem arose in this fashion: Plaintiff bank in 1921 loaned John and Thomas Kehoe
$ 30,500, receiving a one year note, a mortgage forthwith duly recorded and an accompanying bond as collateral security. The debt being reduced by payments the note in 1935 was surrendered
and replaced by a demand note for $ 28,700 with 5000 bonds E. Prussian 6/53, 100 sh. Pelzer Mfg. Co. v. t.c., as additional security.
The Collector of Internal Revenue in 1936 duly recorded in Luzerne County a lien for $ 442,186.57 income taxes against John Kehoe.
Under warrant of attorney in the bond accompanying the mortgage the bank on January 26, 1943, entered judgment of record for $ 30,500 against the mortgagors. Next day for a consideration the bank in writing agreed with Thomas Kehoe to limit the lien and collection of the mortgage, accompanying bond, judgment thereon, and the debt represented thereby to the property in question, and otherwise to release John and Thomas Kehoe from any further liability thereunder,
the demand note to Thomas Kehoe's counsel.
Meanwhile the government filed suit on its tax claim in the United States District Court and an exemplified copy of a judgment for $ 549,983 obtained thereon was on March 11, 1943, duly recorded in Luzerne County. From other property of the taxpayer $ 9,000 was collected thereon; the balance remains due and unpaid.
In 1945 the bank filed an affidavit of default for $ 22,704.22, obtained judgment and foreclosed on the mortgage in state court proceedings. It did not make the government a party or give it any particular notice thereof.
At the sheriff's sale
the bank, as the highest and best bidder, purchased the property for $ 61.10. The deed was duly acknowledged, delivered and recorded and the bank took possession.
The bank placed the property on the open market and entered into an agreement of sale with Monk for $ 9,500 payable in installments. Monk took possession.
As legal title holder and vendee in possession, respectively, plaintiffs contend the mortgage was a prior lien,
the value of the property was less than the amount due on the debt,
and that the bank took title free and discharged of the tax liens and, if not, that they are apparent liens only constituting a cloud upon title affecting its marketability. In the latter event they ask us to decree that by virtue of the present proceedings the tax liens are divested and discharged, and directing that the records in the state court be marked accordingly.
We consider first the government's claim to affirmative relief. They contend the debt was fully paid before entry of the default judgment; that the mortgage and lien thereof were thereby discharged and could not be kept alive against a subsequent tax lien; there being nothing for the bank to foreclose title did not pass from Kehoe. They therefore seek to foreclose their lien, to sell the taxpayer's interest in the property and to have the proceeds, after payment of the costs, applied to the reduction of their indebtedness.
To show prior payment they point (a) to the surrender of the original note and its replacement by a demand note in a lesser amount; (b) to the 1943 agreement, surrender of the note, and the remarks at the hearing hereon of the witness Battisti, Mr. Aston, counsel for the bank, and Mr. White, counsel for Thomas Kehoe.
" * * * A change of securities does not necessarily work an extinguishment of the debt, * * * extinguishment or satisfaction depends upon the agreement and intention of the parties * * *." Fleming v. Parry, 24 Pa. 47 at page 51. " * * If a note secured by a mortgage be renewed or otherwise changed, the lien continues until the debt is paid." See Appeal of Kimberly, 7 A. 75, at page 79, 3 Sadler, Pa., 528; Cover v. Black, 1 Pa. 493; Jones v. Guaranty & Indemnity Co., 101 U.S. 622, at page 630, 25 L. Ed. 1030. "A promissory note given for an antecedent debt does not discharge it, unless given and received in absolute payment." Appeal of Kimberly, Id., supra, 7 A. at page 75, footnote 2.
Alternatively they argue that the circumstances shown in (b) indicate the debt was then actually paid but the mortgage, accompanying bond and judgment thereon were ...