No. 11 January Term, 1979, Appeal of the United States of America from the Decree of the Court of Common Pleas of Luzerne County, Orphans' Court Division, at No. 360 of 1974, entered on December 11, 1978. No. 22 January Term, 1979, Cross-Appeal of the Wyoming National Bank of Wilkes-Barre from the Decree of the Court of Common Pleas of Luzerne County, Orphans' Court Division at No. 360 of 1974, entered on December 11, 1978.
S. John Cottone, U.S. Atty., Joseph F. Cimini, Asst. U.S. Atty., Lackawanna Co., for appellant at No. 11 and appellee at No. 22.
Stephen E. Sokolic, M. Carr Ferguson, Gilbert E. Andrews, Francis J. Gould, Thomas M. Lawler, Washington, D.C., Charles A. Shea, III, Wilkes-Barre, for appellee at No. 11 and appellant at No. 22.
O'Brien, C. J., and Roberts, Nix, Larsen, Flaherty and Kauffman, JJ. Mr. Justice Flaherty filed an Opinion in Support of Affirmance in which Mr. Justice Larsen and Mr. Justice Kauffman join. Mr. Justice Roberts filed an Opinion in Support of Reversal in which Mr. Chief Justice O'Brien and Mr. Justice Nix join.
The Court being equally divided, the decree of the orphans' court is affirmed. Each party pay own costs.
Opinion IN SUPPORT OF AFFIRMANCE
This appeal involves a determination of the relative priority of the claim of the Wyoming National Bank of Wilkes-Barre (hereinafter referred to as the bank) and the United States to certain proceeds remaining from the sale of two
parcels of real property included in the insolvent estate of the taxpayer, Adolph P. Berretta.
In its initial adjudication and decree, entered on July 6, 1978, the Court of Common Pleas of Luzerne County Orphans' Court Division directed that the proceeds be paid in partial satisfaction of the claim of the United States. The bank, on July 14, 1978, filed exceptions to this original adjudication. Thereafter, on December 11, 1978, the court reversed its prior decision and, in another decree and adjudication, ordered that the proceeds from the sales of Berretta's real properties be paid to the bank to satisfy its claim against the estate. On January 10, 1979, the United States filed a timely notice of appeal. The bank, on January 17, 1979, filed a cross-appeal.
The facts pertinent to this appeal are as follows:
Berretta died testate on February 11, 1974. The bank was appointed administrator of his estate. The estate does not have sufficient assets to pay all valid claims of indebtedness and is thus insolvent. However, among the assets of the estate were two parcels of real property located in Luzerne County.
The bank had claims against Berretta's estate by virtue of two outstanding mortgages and bonds, which encumbered the two parcels of real property included in the estate. The bank also held a judgment note for $10,000, which was executed on August 31, 1971. It is the judgment lien arising from this note that is in competition with the federal tax claim. The note was entered as a judgment in the Prothonotary's Office of Luzerne County on January 24, 1974. By virtue of the filing and indexing of this judgment, the bank attained the status of a judgment lien creditor.*fn1 The debt on the note has an outstanding balance of $7,408.02.
The decedent was the sole proprietor of Berretta Construction Company and had established a commercial line of credit with the bank. The security for the line of credit was a series of three mortgages, the first of which was the March 1, 1961 mortgage to The First National Bank of Exeter, which was acquired through merger by The Wyoming National Bank of Wilkes-Barre. Pursuant to the approved line of credit, the bank made various advances to the decedent on the basis of demand judgment notes, which were periodically consolidated and refinanced with subsequent mortgages; the first of the refinancing mortgages being dated December 3, 1964; the second, April 11, 1972.
The three mortgages reflected loans in face amounts of sixteen thousand eight hundred dollars ($16,800.00) in 1961, thirty thousand dollars ($30,000.00) in 1964, and sixty thousand dollars ($60,000.00) in 1972. When the government's tax liens were entered, both the 1961 mortgage and the 1972 mortgage were unsatisfied as of record.
The United States filed a proof of claim with the bank, as administrator of the insolvent estate, on June 10, 1974. The claim of the United States is for federal employment taxes, interest and penalties assessed against Berretta, in the total amount of $63,291.54, for the quarterly periods from January 1, 1973, through March 3, 1974. Notice of federal tax liens were filed with the Prothonotary's Office, Luzerne County, on January 28, 1974, with respect to the taxes for the first three quarters of 1973, and on April 26, 1974, with respect to the taxes due for the fourth quarter of 1973 and the first quarter of 1974. It is under the authority of the Federal Tax Lien Act of 1966, 26 U.S.C. §§ 6322, 6323, that the United States filed such notice. This filing serves as notice to four named classes of creditors that a federal tax lien exists, and the tax lien is not effective against these four classes until such notice is filed. Judgment lien creditors are among the four protected classes. As to other creditors, not specifically protected by the statute, the tax lien is effective upon mere assessment without the necessity of filing.
By decree of the court, dated October 22, 1974, the two real properties included in Berretta's estate were sold free and clear of all liens. The liens of the claimants against the estate were to attach to the proceeds of these two sales in the same order of priority as such liens had previously attached to the real properties.*fn2 The proceeds of the sale were, accordingly, first used to satisfy the outstanding mortgages on the properties held by the bank and also to satisfy a mortgage on one of the properties which was held by the Small Business Administration. After the payments of these mortgages, which are not in issue in this case, $7,633.35 in sales proceeds remained in the estate for distribution to other creditors. The United States did not contest the payment of these mortgages.
Both the bank and the United States claimed entitlement to these sales proceeds. The bank's claim was to satisfy the balance due on the judgment note of August 31, 1971. The United States made claim to all proceeds remaining in the estate, under Revised Statutes, Section 3466, The Federal Insolvency Statute, because the estate was insolvent. The Insolvency Statute, 31 U.S.C. § 191, provides:
Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.
On June 10, 1976, the bank, as administrator, filed its First and Final Account and Petition for Adjudication, requesting the court to determine the conflicting claims of it
and the United States to the sale proceeds which remained in the estate. Since the estate was insolvent, the United States asserted its statutory right to first payment under the Federal Insolvency Statute.
The bank, on the other hand, argued it had priority to payment of the sales proceeds under two alternative theories. First, the bank contended its claim constituted a "specific lien" and thus came within a narrow case law exception to the Federal Insolvency Statute. Thelusson v. Smith, 2 Wheat. 396, 426, 4 L.Ed. 271 (1817), held that a lien was sufficiently specific and perfected to be excepted from the operation of the Federal Insolvency Statute if the debtor mortgaged the property to secure the debt, or otherwise divested himself of title to or possession of the property before the insolvency. The bank alleged that it came within this "specific lien" exception to the Federal Insolvency Statute because the debt secured by the note of August 31, 1971, was also secured by the bank's mortgages on the two parcels of Berretta's real properties. Thus, the funds due under the note, according to the bank, were also due under the mortgages because of the "collateral security" or "dragnet" clauses contained in those mortgages.
The bank's alternative position was that, even if it did not have a "specific lien" which was excepted from the priority of the United States under the Federal Insolvency Statute, Section 6323 of the Internal Revenue Code of 1954 (26 U.S.C. § 6323) impliedly repealed the insolvency statute as to tax debts. Section 6323 provides in pertinent part:
(a) Purchases, holders of security interests, mechanic's lienors and judgment lien creditors. -- The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.
The bank urged that its judgment lien was superior to any tax claim of the United States because, under Section 6323, the holder of a properly entered judgment lien has priority
over a subsequently filed tax lien, and the bank's judgment note was entered on January 24, 1974, before the United States filed either of its tax liens.
In its initial adjudication of July 6, 1978, the court determined that the note of August 31, 1971, was not secured by the terms of any of Berretta's mortgages which were held by the bank and that the bank's claim to the sales proceeds rested solely upon the note reduced to judgment. The court held that this judgment provided the only basis for the bank's claim, and that the bank did not have a "specific lien" since Berretta had not conveyed to the bank prior to his death, by mortgage or otherwise, any property thereby secured. Therefore, the court found that the bank's claim did not come within the exception to the statutory priority afforded claims of the United States under the Federal Insolvency Statute. Therefore, a decree was entered, awarding all the proceeds remaining in the estate to the United States under the Federal Insolvency Statute.
On July 14, 1978, the bank filed exceptions to this adjudication arguing that (1) the court erred in concluding that the judgment entered on the note of August 21, 1971, was not secured by Berretta's mortgages which were held by the bank, and (2) that Section 6323 of the Internal Revenue Code of 1954 impliedly repeals the Federal Insolvency Statute, 31 U.S.C. § 191 as to tax debts owing to the United States.
In ruling on the bank's exceptions to the original adjudication, the court, in its subsequent adjudication of December 11, 1978, dismissed the bank's assertion that Berretta's mortgages to the bank brought within their security the August 31, 1971, judgment note and again held that without such security the judgment entered on the note does not come within the "specific lien" exception afforded by Thelusson v. Smith, supra, to the general priority of federal claims established by the Federal Insolvency Statute, 31 U.S.C. § 191.
However, in the December 11, 1978 adjudication, the court went on to reverse its first adjudication by sustaining the bank's exception that the absolute federal priority of Revised
Statute 3466 was impliedly repealed by Section 6323 of the Internal Revenue Code as to tax debts owing to the United States. This portion of the second adjudication was based entirely on the precedent of the Superior Court decision in Meyer Estate, 159 Pa. Super. 296, 300, 48 A.2d 210, 213 (1946), wherein it was held:
In its second adjudication, the court stated that it was bound by the Meyer decision. Therefore, since the bank reduced its note to judgment before the United States filed either of its tax liens, under Section 6323 of the Internal Revenue Code the bank's claim was entitled to priority over the claim of the United States. The court entered its decree on December 11, 1978, and ordered that $7,503 of the total sales proceeds of $7,633.35 be paid over to the bank. The balance was awarded to the United States.*fn3 From this decree, the United States appeals.
For the reasons that follow, we would affirm the Court of Common Pleas of Luzerne County, Orphans' Court Division.
The initial question in this case is whether the Federal Tax Lien Statute, § 6323 of the Internal Revenue Code, limits the operation of the Federal Insolvency Statute, Revised Statutes § 3466, 31 U.S.C. § 191, where the ...