The opinion of the court was delivered by: CLARY
Harry G. Litt, bankrupt herein, trading as People's Market, conducted a retail food store at premises 7145-47 Germantown Avenue, Philadelphia, Pennsylvania, under the terms of a written lease dated August 1, 1947, providing for a yearly rental of $ 5,500 payable in monthly sums of $ 458.33 in advance on the 1st day of each month. As of April 30, 1951 the bankrupt was in arrears in rent for three full months, being the rent due February 1, 1951, March 1, 1951 and April 1, 1951, in a total amount of $ 1,374.99. On that date, April 30, 1951, the landlord caused a distraint to be made, the Constable distrained and levied upon and seized all of the goods and chattels on the demised premises. On May 5, 1951, following the distraint, the bankrupt paid the landlord, on account, one month's rent, which was credited against the distrained amount and reduced the said amount to $ 916.66. The distraint remained in force and effect until a petition in bankruptcy was filed on May 14, 1951, after which time the goods and chattels came into the possession of the Bankruptcy Court. In the bankruptcy proceedings the landlord claimed a preference for the amount of the distraint and was supported in his claim by the Referee. The United States brought a Certificate of Review challenging the correctness of the award and claimed it was entitled to preference over the landlord's claim on its claim for unpaid taxes, which claim was disallowed by the Referee.
The bankrupt, in the year previous to bankruptcy, fell in arrears in the payment of certain income withholding and Federal insurance contributions due for the third quarter of 1950. When these taxes became delinquent the Commissioner included them in an assessment list which was received at the office of the Collector (now Director) of Internal Revenue for the First Collection District of Pennsylvania on December 26, 1950. The amount assessed was $ 3,286.23, subsequently reduced by payment on account to $ 3,161.23. After receiving the assessment list, the Collector's office sent its first notice (Form 17) to the bankrupt by mail on January 5, 1951; the second notice (Form 21) was mailed to the bankrupt by the Collector on February 9, 1951, and a warrant of distraint (Form 69) was issued on March 7, 1951. The undisputed facts indicate that the last document, the warrant of distraint, was never served. The balance of the fund realized from the public sale of the assets by the Receiver in bankruptcy is not sufficient to pay and discharge both the claim of the landlord and the claim of the Government, the amount available for that purpose being approximately $ 3,000.
The applicable provisions of the Internal Revenue Code under which this case must be decided are Sections 3670, 3671 and 3672(a)
which read as follows:
§ 3670. Property subject to lien.
'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.'
'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.'
§ 3672(a). Invalidity of lien without notice.
'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) Under State or Territorial laws.
'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 in an office within the State or Territory; * * *.'
As stated by the Referee in his opinion, this precise question had, at the time he filed the opinion, never been passed upon in any reported Federal case, either in this district or elsewhere. Giving effect to the general principles of law covering priority of liens, namely, that a specific lien is superior to a general lien, he concluded that the claimed preference of the landlord should be granted. He held, in effect, that since there was a valid distraint outstanding at the time of bankruptcy, the amount due under the distraint never actually came into the legal possession of the trustee in bankruptcy. Another basis of the Referee's decision was that under common law and the landlord and tenant law of Pennsylvania a landlord who distrains on the goods of a tenant and no action is taken by the tenant within five days to replevy the goods is permitted to expose the goods to public sale. Such sale carries good title under Pennsylvania law in the same degree that a sale under judicial process would carry good title. To that extent, at least, since the rights of the landlord approximate the rights of the judgment creditor, the Referee concluded that the landlord could be considered a judgment creditor.
The precise question involved in this case has been settled by the Supreme Court of the United States. The facts of the Scovil case, supra, which are very similar to the facts of the instant case, are reported at 1954, 224 S.C. 233, 78 S.E.2d 277. The case involved a distress under South Carolina law by a landlord on a corporate tenant's assets for arrearages in rent of an insolvent tenant made before the appointment of a receiver because of insolvency. The lower court held that the landlord's lien was perfected under the laws of South Carolina, that the amount specified in the distraint was not available to the receiver to pay other debts of the tenant, and rejected the Government's claim of preference. The chronological sequence in that case was as follows. The assessment lists involving the claimed taxes of the government were received by the Collector on March 19, 1951, May 24, 1951, August 29, 1951, December 3, 1951, February 23, 1952 and February 28, 1952. The landlord's distress was filed on April 7, 1952 in the Courts of Common Pleas, South Carolina. The next day a Receiver was appointed for the business and on April 10, 1952 the Collector filed the aforesaid liens in the proper office for the recording of liens in the State Court of Greenville County, South Carolina, the business situs of the bankrupt. The Supreme Court of South Carolina held that since the lien had been ...