Ralph N. HIGHSMITH and John C. Allen, Plaintiffs, v. Max LAIR, Morton D. Goldberg, Katherine Goldberg, H. Markus, United States Treasury Department, et al., Defendants.
Morton D. GOLDBERG and Katherine Goldberg, Cross-Complainants and Respondents, v. Max LAIR, Lawrence M. Price, State of California Department of Employment, and United States Treasury Department, Cross-Defendants, United States of America, Cross-Defendant and Appellant.
On August 15, 1949, Morton Goldberg and his wife entered into an agreement with Max Lair, a building contractor, whereby Lair agreed to build a house for them. On March 26, 1951, Lair, in an action against Goldbergs to foreclose a mechanic's lien, obtained judgment for $4,144.22, including attorneys' fees. Certain persons obtained four judgments against Lair (in the municipal court) for a total amount of $4,211.14. In response to writs of execution issued upon those judgments, the Goldbergs deposited $4,211.14 with the marshal of the municipal court. Details as to the circumstances under which the deposit was made will be stated later herein. In compliance with a warrant issued by the State of California Department of Employment, reciting that certain amounts were due from Lair to the state under the Unemployment Insurance Act, Goldbergs deposited $691.70 with the marshal of the municipal court. The total amount deposited with the marshal was $4,902.84.
Mr. Highsmith and Mr. Allen, the attorneys who represented Lair in his action against Goldbergs, commenced this action (in which this appeal is taken) for declaratory relief—to obtain a declaration that they have a lien for attorneys' fees on the money deposited with the marshal. Defendants in this action were Lair, the Goldbergs, and the United States of America. The Goldbergs filed a cross-complaint herein for declaratory relief, naming Lair, Lawrence Price (the marshal), State of California Department of Employment, and the United States of America as cross-defendants. The Goldbergs asserted, in their cross-complaint, that they were entitled to all the money on deposit. The United States, in its answer to the cross-complaint, asserted that it had a lien upon the money to the extent of $3,369.20 and interest thereon for taxes due from Lair. The United States also filed a cross-complaint against the Goldbergs for a personal judgment against them for said amount by reason of their failure to pay said money to the United States. Judgment was in favor of the Goldbergs and the Department of Employment—that the Goldbergs recover all the money except $691.70, and that the department recover $691.70. The United States appeals from the judgment.
The circumstances with reference to depositing the $4,211.14 with the marshal were as follows: One Bernstein obtained a judgment against Lair for $555.37 in the Municipal Court of Los Angeles. The attorney for Bernstein caused a writ of execution, which had been issued on said judgment, to be served upon Goldberg as a debtor of Lair. Goldberg ascertained that there were other judgments in the municipal court against Lair. Through negotiations with the attorney for Bernstein, Goldberg bought the Bernstein judgment for $271.59, and assigned it to one Markus, who was the secretary of Bernstein's attorney. One McKanna had a judgment against Lair for $1,931.61. Goldberg bought that judgment, through said attorney, for $485.50, and assigned it to Markus. R. and N. DeCrescenzo had a judgment against Lair for $1,701.13. Goldberg bought that judgment, through said attorney, for $635, and assigned it to Markus. Lounsberry and Harris, a corporation, commenced an action against Lair and the Goldbergs to foreclose a mechanic's lien for material furnished in building the Goldberg house. Goldberg purchased that cause of action, through said attorney, for $119.21. The cause of action was assigned to Markus, and the action was dismissed as to Goldbergs. Judgment in said action was entered against Lair for $120.21. On June 4, 1951, Markus, as assignee of the four judgments and as agent and trustee for Goldbergs, and acting through said attorney, caused writs of execution to be issued on said judgments and caused Goldberg, as an alleged judgment-debtor of Lair, to be examined before a referee of the municipal court regarding his alleged indebtedness to Lair. At that examination said attorney told the referee that Goldberg was in fact the party in interest and he was paying the money (total amount of the four judgments) into court to satisfy those four judgments which he had purchased through an assignment to the nominal party, Markus. On said June 4, the referee made an order that Goldberg pay the amounts of said judgments to the marshal of the municipal court. On said day Goldberg paid $4,807.24 to the marshal to be applied as follows: $4,115.54 on said judgments; and $691.70 on the Department of Employment claim. On June 11, 1951, Goldberg paid $95.60 additional to the marshal to be applied on the judgments. The total amount paid to the marshal was $4,902.84.
On June 13, 1951, Goldbergs made a motion in the superior court in the action entitled ‘Lair v. Goldberg,’ to satisfy Lair's judgment against Goldbergs. Said motion was made upon the ground that Goldbergs had paid said four municipal court judgments which were against Lair. The motion was granted on June 19, 1951.
The circumstances with reference to the claim of the United States were as follows: Lair withheld tax payments from his employees during the time the Goldberg house was being built, and he failed to remit the payments to the United States. On February 27, 1950, the Commissioner of Internal Revenue assessed withholding taxes against Lair in the amount of $1,370.12. Notice of said tax lien was filed in the office of the county recorder on April 13, 1950. On June 1, 1950, the commissioner assessed other withholding taxes, and taxes under the Federal Insurance Contributions Act, 26 U.S.C.A. § 1400 et seq., against Lair in the amount of $1,708.79. Notice of said tax lien was filed in the office of the county recorder on July 26, 1950. Notices of said assessments were given to Lair and demands for payment were made upon him, and warrants of distraint were issued. On May 29, 1951, the Goldbergs were served with notice of the levy of assessments which notice was to the effect that there was due from Lair to the United States the amount of $3,435.06 for internal revenue taxes, and that all property, rights to property, moneys, credits, or bank deposits that were in possession of the Goldbergs and belonging to Lair were seized and levied upon for the payments of said taxes, with penalties and interest.
The said three judgments and the cause of action, above referred to, were purchased by Goldbergs in April and May, 1951, prior to May 29, 1951 (the date when notice of the levy of assessments was served on Goldbergs).
The court found, in part, as follows: On May 29, 1951, after said writs of execution on the four judgments had been levied against property of Lair, and while the same were in force and effect, the Collector of Internal Revenue served upon Goldbergs said notice of levy of assessments. Goldbergs bought said three judgments and said cause of action with the intent and for the purpose of setting the total amount of same off against their indebtedness under the judgment which Lair had obtained against them, and they did so without any actual knowledge or intimation of Lair's indebtedness to the United States. On May 29, 1951, when said collector served the notice of levy on Goldbergs neither of the Goldbergs then had, or at any time since has had, in his or her possession any property or rights to property, moneys, credits or bank deposits belonging to Lair. The Goldbergs, having acquired the four judgments against Lair for the purpose of setting the same off against Lair's judgment against them, proceeded to record satisfaction of said judgments and to that end they deposited (on June 4 and 11, 1951) with the marshal of the municipal court to the credit of Markus, as their agent and trustee, the total amount of said four judgments, which was $4,211.14; and in addition to that amount they also deposited with the marshal (on June 4) $691.70 to the credit of the California Department of Employment. Goldbergs deposited said $4,211.14 to the credit of Markus under an arrangement between them whereby Markus agreed to collect said funds from the marshal, less execution fees, as agent and trustee and for the benefit of the Goldbergs. On June 19, 1951, the superior court entered its order directing the satisfaction of Lair's judgment against Goldbergs, and on said ay, pursuant to said order the said judgment was endorsed by the clerk of said court as having been satisfied. All said funds so deposited by Goldbergs were the property of Goldbergs. They did not deposit any part of said funds to the credit of Lair. That, except as to $691.70 which was deposited to the credit of the California Department of Employment, and except $16.74 which was chargeable as marshal's fee and county auditor's taxes, the Goldbergs intended that said funds should remain their sole and exclusive property to be refunded to them through their agent and trustee Markus.
The court made conclusions of law, in part, as follows: Goldbergs had the right to purchase the four judgments against Lair for the purpose of off setting same against Lair's judgment; they had the right to off set the four judgments Lair's judgment; and by effecting said setoff in an amount in excess of Lair's judgment, the Goldbergs fully satisfied their indebtedness to Lair. The United States did not acquire any lien or valid claim to any part of the $4,211.14 or the $691.70 deposited by Goldbergs with the marshal. All the $4,902.84 so deposited to Goldbergs, except the $691.70 and the $16.74, was at all times the sole and exclusive property of Goldbergs free and clear of any right or lien on the part of Lair or the United States or anyone claiming through Lair as creditor, obligee, or otherwise. Goldbergs are entitled to recover $4,194.40 from the marshal; and California Department of Employment is entitled to recover $691.70 from the marshal.
Appellant (United States) contends that upon filing the notices of assessments against Lair, in the recorder's office in April and July, 1951, liens arose against a certain chose in action owned by Lair, namely, the debt of Goldbergs to Lair which was represented by Lair's lawsuit to foreclose a mechanic's lien on Goldbergs' property; and that thereafter nothing that Lair or the Goldbergs did could destroy those liens.
Section 3670 of the Internal Revenue Code, 26 U.S.C., provides, in part: ‘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.’
Section 3671 of the Internal Revenue Code, 26 U.S.C., provides: ‘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 of the Internal Revenue Code, 26 U.S.C., provides, in part: ‘(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 * * * in which the property subject to the lien is situated, whenever the State * * * has by law authorized the filing of such notice in an office within the State * * *.
‘(b) (1) Even though notice of a lien provided in section 3670 has been filed in the manner prescribed in subsection (a) of this section, * * * the lien shall not be valid with respect to a security, as defined in paragraph (2) of this subsection, as against any mortgagee, pledgee, or purchaser, of such security, for an adequate and full consideration in money or money's worth, if at the time of such mortgage, pledge, or purchase such mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of such lien.
‘(2) As used in this subsection the term ‘security’ means any bond, debenture, note, or certificate, or other evidence of indebtedness, issued by any corporation * * * share of stock, voting trust certificate * * *; negotiable instrument; or money.'
Section 3690 of the Internal Revenue Code, 26 U.S.C., provides, in part: ‘If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector * * * to collect the said taxes * * * by distraint and sale, * * * of the goods, chattels, or effects, including stocks, securities, bank accounts, and evidences of debt, of the person delinquent as aforesaid.’
Section 3692 of the Internal Revenue Code, 26 U.S.C., provides, in part: ‘In case of neglect or refusal under section 3690, the collector may levy * * * upon all property and rights to property * * * belonging to such person * * * for the payment of the sum due * * *.’
Section 27330 of the Government Code of California provides: ‘Notices of liens for internal revenue taxes payable to the United States * * * may be filed in the office of the county recorder of the county within which the property subject to the lien is situated.’
The action of Lair against Goldbergs was commenced February 8, 1950.
A lien in favor of the United States, upon property of a taxpayer for failure to pay an internal revenue tax, arises when an assessment list issued by the Internal Revenue Commissioner showing an assessment against the taxpayer, is received by the Internal Revenue Collector.
The lien, however, is not valid as against a mortgage, pledgee, purchaser, or judgment creditor until notice of the lien has been filed in the office in which the filing of such notice is authorized by the state in which the property subject to the tax is situated (or is filed in other offices not material here). In California the office so authorized is the office of the county recorder. The assessment lists were received by the collector on March 6, and June 6, 1950. Notices of such assessments against Lair were recorded in the County of Los Angeles in April and July, 1950.
Goldbergs' indebtedness of Lair was a chose in action, which was property that was subject to such a tax lien within the meaning of the Internal Revenue laws. In Citizens State Bank of Barstow, Texas v. Vidal, 10 Cir., 114 F.2d 380, it was held (p. 383) that indebtedness for labor and materials furnished was property within the meaning of the Internal Revenue laws and that (p. 384) such indebtedness was subject to a lien in favor of the United States. In the present case, liens in favor of the United States upon the indebtedness of Goldbergs to Lair arose in March and June, 1950, when the assessment lists were received by the collector, and the liens were valid as against mortgagees, pledgees, purchasers, and judgment creditors in April and July, 1950, when notices of assessments were filed in the office of the county recorder. There was no lien for Lair's taxes upon the money or other property of the Goldbergs. The three judgments and the cause of action against Lair were bought by Goldbergs about a year after the United States had acquired liens upon Goldbergs' indebtedness to Lair. The $1,510.80 which Goldbergs paid for those judgments and the cause of action (later reduced to judgment) was the money of the Goldbergs. Also, the $4,211.14 which Goldbergs paid to the marshal to be applied in satisfaction of the four judgment was the money of the Goldbergs. Also, the $691.70 which Goldbergs paid to the marshal to be applied on the claim of the California Department of Employment was the money of the Goldbergs. There was no lien of the United States upon the money of the Goldbergs at the time they used it to buy the judgments and the cause of action or to make the deposits with the marshal. The trial court found, upon sufficient evidence, that the Goldbergs purchased the judgments and the cause of action for the purpose of setting them off against their indebtedness to Lair, and that they did so without actual knowledge of Lair's indebtedness to the United States. Counsel for appellant (United States) assert that the finding that the Goldbergs made such purchases without actual knowledge of the federal liens was immaterial and was based upon the trial judge's misconception of the effect of the federal tax lien. They argue further that after the notices of liens were filed in the office of the recorder the intangible property involved here, namely, the indebtedness of Goldbergs to Lair, had two owners, the taxpayer and the United States; that nothing that the Goldbergs did after such filing could destroy the liens; and that the trial court erred in not ordering judgment foreclosing the liens against the money on deposit with the marshal. In support of that argument they cite Citizens State Bank of Barstow, Texas v. Vidal, 10 Cir., 114 F.2d 380, supra. In that case the taxpayer company, which had failed to pay taxes, had an unpaid claim against another company for labor and materials furnished. The United States filed notices of liens against the taxpayer, and thereafter the taxpayer assigned some of its claims to the bank for a cash consideration and under an arrangement whereby the bank would finance the taxpayer's payroll and operating expenses. After the assignments were made, the United States served notice of levy of assessments on the company which owed the money for labor and materials. That company filed an interpleader action for a determination as to the rights between the bank and the United States. It was held that the bank took the assignments subject to the liens of the United States. In the present case Lair did not make an assignment to anyone of his claim or cause of action against the Goldbergs. He prosecuted his action (in the superior court) to judgment against the Goldbergs. The Goldbergs, without knowledge of the liens of appellant, bought the three municipal court judgments against Lair, and a municipal court cause of action against him, at substantial discounts (paying about one-third of the total face amounts thereof). The Goldbergs, having acquired judgments of the total face amount of more than the amount of the judgment which Lair had against them, claimed that at that time they were not indebted to Lair. The court found that the Goldbergs, having acquired the judgments for the purpose of setting them off against Lair's judgment, proceeded to record satisfaction of the judgments and to that end they deposited $4,211.14 with the marshal to the credit of Markus, as their agent and trustee. The court also found that they did not deposit the money to the credit of Lair. It is true that about a week before the money was so deposited the collector notified Goldbergs of appellant's claim of lien. At that time, however, Goldbergs were the owners of the four judgments against Lair which exceeded Lair's judgment against them, and they considered that they had no property which belonged to Lair. Even if they were in error in considering that the four judgments were a setoff at that time against Lair's judgment, it cannot be said that, by reason of the error, the money they deposited with the marshal became Lair's money or money that was due to Lair in satisfaction of his judgment against Goldbergs. If there was no setoff at that time, the money remained Goldbergs' money—they had deposited it to obtain a record satisfaction of the four judgments, and they were the owners of the judgments. The court found that the money was the property of Goldbergs. Contrary to the assertion of appellant's counsel, it was material to know whether Goldbergs had actual knowledge of appellant's lien when they bought the judgments and cause of action. Whether they had such actual knowledge was a material factor in determining whether their purchases of the judgments and cause of action were made in good faith as a method of satisfying Lair's judgment for about one-third of its face amount rather than to appeal from the judgment, or whether the Goldbergs were acting in bad faith in an attempt to satisfy Lair's judgment and to avoid appellant's liens. Lair's judgment against Goldbergs was rendered on March 26, 1951, and when said purchases were made the time within which an appeal from Lair's judgment could be taken had not elapsed. Apparently Goldbergs' alleged defense to Lair's action against them (as indicated by their cross-complaint herein) was that in January 1950, Lair had failed to pay his subcontractors for labor and materials furnished in building Goldbergs' house, and theat under an oral modification of the original contract Goldbergs agreed to and did pay to the subcontractors the amounts then due and to become due to them, and as a result thereof Goldbergs overpaid the original contract price to the extent of $3,943.41. It seems to be the position of appellant's counsel, however, that even if Goldbergs made said purchases and deposit in good faith and without actual knowledge of the tax lien, as a method of satisfying Lair's judgment at a substantial reduction rather than to appeal from the judgment, they are nevertheless bound to pay Lair's taxes. Such position is in effect an assertion that if the Goldbergs had paid to Lair the amount of his judgment against them, even though they did not have actual knowledge that there was a tax lien against Lair's property, they would be liable for a repayment of the money to the United States to the extent of its lien. In other words, said counsel assert in effect that a person who is indebted to another upon any account whatsoever cannot pay the indebtedness to that person without assuming the risk of being required to repay the indebtedness to the United States, in the event there is a tax lien against the property of the other person by reason of a notice of lien having been filed with the county recorder or merely by reason of an assessment list having been received in the office of the revenue collector. According to such assertion, a person who intends to pay any bill, even the ordinary commercial or household bill, is required as a precautionary measure, prior to paying the bill, to search the tax lien records of the recorder's office, and also to obtain information as to whether the collector has received an assessment list showing a tax against the creditor. If, as appellant's counsel assert, a debtor is charged with constructive notice of such tax liens against his creditor, then it would seem that a debtor, in order to have protection against being required to make such double payment, would be compelled to pay his bills through escrow, after search of the tax lien records of the recorder's office and the collector's office. It is not necessary, however, to decide herein whether Goldbergs were charged with such constructive knowledge, since the money on deposit belonged to the Goldbergs and never became the property of Lair and was not subject to a lien for Lair's taxes.
The appellant's claim of lien upon the money on deposit with the marshal is based upon Lair's judgment against Goldbergs that his mechanic's lien be foreclosed. Appellant is claiming the benefits of Lair's foreclosure action to the stage therein where the amount due was determined and a sale and foreclosure were ordered, but appellant does not recognize the final order therein that the judgment was satisfied. The final adjudication in that action was that the amount due under that judgment was set off by the four municipal court judgments against Lair which were owned by the Goldbergs. That judgment has become final. By that judgment it was established of record that Goldbergs were not indebted to Lair. Appellant, claiming a lien upon the indebtedness of Goldbergs to Lair, could not have a lien when there was no such indebtedness. Appellant had no greater right against Goldbergs than Lair had against them. Appellant states that the right of setoff did not exist and that the trial court in the present action erred in holding that Goldbergs were entitled to set off the four judgments against Lair's judgment. Appellant asserts that a setoff by a debtor of the taxpayer to reduce or bar a tax lien has been limited to the situation where the right of setoff existed prior to the time the liens of the United States arose. In support thereof, appellant cites United States v. Winnett, 9 Cir., 165 F.2d 149. In that case Mr. Winnett had borrowed money from one Summers, and had also endorsed certain promissory notes of Summers, and they had entered into a written agreement, prior to the time the tax liens arose, that if Winnett paid any of Summer's notes he could off set the amount so paid against his indebtedness to Summers. Summers failed to pay taxes and a notice of tax lien was filed, and a lien was claimed against the indebtedness of Winnett to Summers. It was held that Winnett had the right of setoff because he had the right before the lien arose. It was also said therein that the United States, in seeking to establish a lien for unpaid taxes, acquires no greater right against the taxpayer's debtor than in possessed by the taxpayer. Appellant also cites United States v. Graham, D.C., 96 F.Supp. 318, which was affirmed in State of California v. United States, 9 Cir., 195 F.2d 530. In that case, after tax liens were filed against Graham for unpaid taxes, Graham leased property to the State of California. The United States foreclosed its liens against the rents due from the state to Graham, and the state sought to set off taxes which were due from Graham to the state. It was held that the setoff could not be made. It was said therein at page 321 of 96 F.Supp.: ‘Any money that accrued to the taxpayer under the lease with the state accrued with a lien impressed upon it. There was no period of time in which the State of California's right of set-off could have been asserted against the debt to the taxpayer that the property was not impressed with the tax lien. In United States v. Winnett, supra, the right of set-off accrued before any tax liens arose.’ That case (Graham case) involved the question of priority of tax liens. The state tax lien arose after the United States tax lien arose. The United States lien was given priority. As above stated, the superior court in the case of Lair v. Goldbergs allowed the setoff of the municipal court judgments. It is not necessary to decide herein whether or not the court in that case erred in allowing the setoff. Even if the setoff should not have been allowed, the money on deposit with the marshal, upon which money the appellant is claiming a lien, did not belong to Lair but was the property of Goldbergs and the tax lien did not attach thereto.
By reason of the above conclusions, it is not necessary to discuss other contentions.
The judgment is affirmed.
SHINN, P. J., and VALLÉE, J., concur.