Opinion
No. 5438.
Argued February 1, 1966.
Decided March 30, 1966.
1. By virtue of statute (31 U.S.C.A., s. 191) obligations to the United States for federal tax deficiencies have priority over other claims against an insolvent estate except as to specific property of which the debtor has been divested of either title or possession before insolvency.
2. The statute limiting the time within which creditors may bring in and support their claims against an insolvent estate (RSA 557:7) cannot bar claims of the United States for tax deficiencies presented before distribution.
3. In determining the priority of tax claims of the United States over other creditors of an insolvent estate it was held that a creditor bank holding security pledged as collateral prior to the debtor's insolvency and before filing of notice of the tax lien was entitled to retain its security interest (26 U.S.C.A. ss. 6321, 6323).
4. In such case the secured creditor was entitled to have its claim allowed in the insolvency proceedings only to the extent that the debt exceeded the value of the security (RSA 557:15, 16) and such unsecured balance was held to be subject to the claim of the United States.
Certification of questions by the probate court under RSA 547:30. The decedent, George H. Bushway, late of Rye, died testate on April 30, 1963, and on June 19, 1963 Stanley M. Burns was duly appointed executor of his will. On petition of the executor, the estate was decreed on October 16, 1963 to be administered as insolvent, and a commissioner of insolvency was appointed. RSA 557:1. By his report filed on October 30, 1964, the commissioner allowed claims totaling $48,270.37, including a claim of Merchants National Bank of Newburyport, Massachusetts in the sum of $16,100. The report also noted that a substantial claim of the Director of Internal Revenue Service was in litigation.
On April 21, 1965 notices of federal tax liens securing payment of tax deficiencies were filed by the Internal Revenue Service with the town clerk and register of deeds. On May 14, 1965, the Internal Revenue Service submitted to the commissioner proof of a claim of $125,379.09, tax deficiency for 1959, with interest to May 14, 1965 of $49,729.10.
It is not disputed that the obligation to Merchants National Bank arises out of loans evidenced by three notes given by the testator in April 1963, when stock certificates in the name of the testator having an inventory value of $8,951.50 were deposited with the bank as collateral security for the notes. Further facts are stated in the opinion.
Burns, Bryant Hinchey and Paul R. Cox (Mr. Cox orally), for the executor as amicus curiae.
Richard M. Roberts, Acting Assistant United States Attorney General, Lee A. Jackson and Joseph Kovner, Attorneys (all of Washington, D.C.), and Louis M. Janelle, United States Attorney (Mr. Janelle orally), for the United States of America.
Perkins, Holland Donovan (Mr. Robert B. Donovan orally), for Merchants National Bank of Newburyport, Massachusetts.
The certified questions arise out of a petition filed by the executor seeking instructions as to the proper distribution of the assets of the estate in his hands, the same being insufficient to satisfy the outstanding claims against the estate. The parties before us are in substantial agreement concerning their relative rights.
By virtue of 31 U.S.C.A., s. 191 (s. 3466 of Revised Statutes), the obligation to the United States has priority over other claims against the insolvent estate, except as to specific property of which the debtor has been divested of either title or possession before insolvency. Thelusson v. Smith, 2 Wheat. 396, 426; United States v. Gilbert Associates, 345 U.S. 361, 366; United States v. Atlantic Municipal Corp., 212 F.2d 709 (5th Cir. 1954). Cf. United States v. Vermont, 377 U.S. 351. See Annot. 5 L.Ed.2d 929, 933-935; United States v. Boston Berlin Transp. Co., 237 F. Supp. 1004, 1009 (D.N.H. 1964).
The fact that the claim of the United States was presented to the Commissioner more than six months after his appointment (see RSA 557:7 (supp)) is no bar to priority. Timely notice of the tax deficiency was given to the executor on December 12, 1963. 31 U.S.C.A., s. 192; King v. United States, 379 U.S. 329; Viles v. Commissioner, 233 F.2d 376 (6th Cir. 1956). See 26 U.S.C.A., s. 6321. The limitation of the state statute cannot bar the federal claim, presented before distribution. Reconstruction c. Corp. v. Faulkner, 100 N.H. 192; Jones Co. v. Foodco Realty, Inc., 318 F.2d 881, 888 (4th Cir. 1963).
It is not questioned that possession of the collateral held by the bank was transferred to it well before filing of notice of the tax lien, and accordingly the bank's right to retain its security interest is unchallenged. 26 U.S.C.A., ss. 6321, 6323; 9 Merten, Law of Federal Income Taxation, s. 54.44. See Mass. G.L. Anno., Ch., 106, s. 9-305; RSA 382-A:9-305 (Uniform Commercial Code). Beside the collateral standing in the name of the estate the bank holds other security for the same indebtedness. Under the statute, its claim should not be allowed in the insolvency proceedings unless the commissioner estimates the total security to be of less value than the debt. RSA 557:15. If so estimated, only the amount of its claim which exceeds the value of the security should be allowed as unsecured, and the bank may surrender the security to the executor for liquidation if dissatisfied with the commissioner's estimate of value. RSA 557:16.
The certified questions, which need not be set out here, are answered as follows: The claim of the Internal Revenue Service has priority over the claims of other creditors, except as to so much of the claim of Merchants National Bank as is secured by the collateral pledged to it. The funds in the hands of the executor available for distribution, exclusive of the value of proceeds of the securities held by the bank, should be paid to the Internal Revenue Service in satisfaction of the testator's tax indebtedness; and any remaining funds should be distributed pro rata among the unsecured creditors whose claims have been allowed by the commissioner. RSA 557:23, 24.
The question of the jurisdiction of the probate court, raised by the United States Attorney, to certify the question before us and to enter an appropriate decree for distribution is not doubtful. In re Byrne Estate, 98 N.H. 300, 302, and cases cited. In re Peterson Estate, 104 N.H. 508. RSA 547:30, supra.
Remanded.
All concurred.