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CONTINENTAL OIL CO. v. UNITED STATES

March 25, 1971

CONTINENTAL OIL CO., Plaintiff,
v.
UNITED STATES of America, the Bank of Bermuda, Ltd., Henry Gordon, et al., Defendants


Tyler, District Judge.


The opinion of the court was delivered by: TYLER

TYLER, District Judge.

In response to a notice of levy served by the government on February 27, 1969, the Continental Oil Co. (hereinafter "Continental") instituted this interpleader action, pursuant to 28 U.S.C. § 1335, in March, 1969, depositing in the Registry of the Court at that time and thereafter such sums as accrue to the interest of Mr. Edgar Fain. *fn1" The United States and the Bank of Bermuda, Ltd. (the "Bank") remain the sole contenders for these funds. *fn2" The United States' claim stems from a jeopardy assessment against the taxpayer Fain in the amount of $1,107,207.14, plus statutory additions of $7,339.34; the Bank lays claim to these funds as assignee and/or vendee of Fain's rights to future payments from Continental.

 In December, 1969, defendant Henry Gordon moved for summary judgment with respect to his recently settled claim. *fn3" In March, 1970, the motion was denied without prejudice because the United States lacked sufficient information upon which to oppose it. Counsel were instructed to commence discovery and submit thereafter memoranda of law setting forth their respective theories for lien priority, to be discussed hereinafter.

 On the basis of the memoranda of law submitted by counsel, the following facts appear uncontested:

 In consideration of a sale, consummated September 18, 1964, of certain property owned jointly by the taxpayer Fain and his two brothers, Continental as purchaser promised to amortize slightly over 2/3 of the purchase price in seven (7) equal annual instalments payable each September 18 with interest at 4 1/2%. Fain's proportionate interest in the instalments was 16.3686396% or $498,887. The amount of the 1969 and 1970 annual instalment was subject to some fluctuation by reason of the amount of insurance proceeds received by Continental in each year. Additional consideration for the Fain property consisted of a contingent payment due March 1, 1969, computed on the basis of the cash earnings of the purchased properties, but not to exceed $6,000,000, plus 4% interest from September 18, 1964, which amount was to be shared in an unspecified proportion by the Fain brothers. Continental further agreed to make the payments negotiable as collateral security for borrowings by the Fains by giving its guarantee to future lenders.

 On May 29, 1967, Fain made the so-called "assignment" of his rights to the contingent payment from Continental and to the contingent increases in 1969 and 1970 instalment payments to the Bank of Bermuda. In exchange for the transfer of these rights, Fain received $100,000 cash, plus 95 1/2% of all payments received by the Bank in excess of $100,000. Thus, the Bank was guaranteed return of the $100,000, plus 4 1/2% of any excess. Given the expected size of the contingent payment, it is clear that Fain retained the right to the bulk (approximately 95%) of payments due him. In addition, to secure returns of the $100,000, Fain deposited $100,000 in his Bank of Bermuda account (or, more precisely, the $100,000 received was deposited in his account). The Bank of Bermuda issued to Continental two guarantees totaling $500,000 to cover liabilities to First National City Bank incurred by Henry Gordon on Fain's behalf and for which Fain also promised to pay a.5% fee and to indemnify the Bank. All these transactions were executed by August, 1967.

 As of November, 1970, these additional transactions had occurred: (1) upon receiving the insurance proceeds contemplated by the sales agreement in February 1968, Continental relieved the Bank of Bermuda of $400,000 of its guaranty; and (2) on February 3, 1969, the Bank apparently acquired Fain's 95% interest in the March, 1969 contingent payment by paying to Fain $1,040,000. According to the Bank, Fain's contingent interest was then valued at $1,150,000. *fn4"

 On September 6, 1966, Fain renounced his United States citizenship and became a citizen of Nicaragua with a residence in Bermuda. Because of his expatriation, the Internal Revenue Service disallowed instalment basis treatment for the Continental payments received in 1966. In December, 1968, the first jeopardy assessment for 1966, in the amount of $1,120,680.30, was made against Fain and his wife jointly. A revised assessment in the sum of $1,107,207.14 was made on January 17, 1969. Notice of the revised assessment was served upon Fain on January 20, 1969, but not recorded in accordance with 26 U.S.C. § 6323 (f) until February 12, 1969, nine (9) days subsequent to the purported acquisition by the Bank of Fain's interest in the allegedly assigned payments. Apparently, notice of lien in accordance with 26 U.S.C. § 6323 (f) was never filed respecting the 1968 assessment, a fact which, if controverted, would significantly alter the tentative conclusions set forth below.

 The purpose of this interim memorandum is dual: to dispose of certain contentions of the parties with respect to the legal effect of the so-called "assignment" by Fain to the Bank; and to set forth those aspects of this litigation which require clarification and, perhaps, further evidentiary submissions, before the opposing motions for summary judgment, either partial or total, can be decided.

 Summary judgment turns on which contender is, in fact and in law, the prior lienor. The government presents three theories for its lien priority: (1) that the May 29, 1967 "assignment" by Fain to the Bank of his rights in the contingent payment and the contingent increases in the 1969 and 1970 instalments was illusory and void; (2) that the "assignment" created merely a security interest in the Bank, which interest remained imperfected prior to the perfection of the tax lien; and (3) that even if the government is not entitled priority over the Bank's security interest, the Bank should be required to marshall other assets of the taxpayer before recourse to the Continental deposits in this proceeding. The Bank urges its lien priority on the diametrically opposed ground that the May 29, 1967 assignment effected a full, absolute and valid transfer of Fain's interest in the Continental payments. Consideration of the government's fourth theory of recovery -- that the assignment is void, being a fraudulent transfer in violation of the New York Debtor and Creditor Law §§ 276 and 278 McKinney's Consol.Laws, c. 12 -- is deferred until final disposition of those grounds amenable to summary judgment.

 I. The Assignment

 The government's lien for taxes, which arises at time of assessment, 26 U.S.C. § 6322, attaches to "all property and rights to property, whether real or personal," belonging to the delinquent taxpayer. 26 U.S.C. § 6321. To decide what constitutes such "property or rights to property," the court must look in the first instance to state law, conceded here to be the law of New York. Aquilino v. United States, 363 U.S. 509, 513 et seq., 4 L. Ed. 2d 1365, 80 S. Ct. 1277, 363 U.S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960), United States v. Bess, 357 U.S. 51, 55-56, 78 S. Ct. 1054, 2 L. Ed. 2d 1135 (1958). Therefore, since the assignment, executed May 29, 1967, predated the December 1968 assessment and demand upon the taxpayer, the Bank is the prior lienor to the extent that the assignment effectuated a valid transfer of the Continental monies under New York law. See City of New York v. United States, 283 F.2d 829 (2d Cir. 1960), United States v. Lester, 235 F. Supp. 115 (S.D.N.Y.1964). As previously indicated, however, the question of the vulnerability of this assignment under the New York Debtor and Creditor Law is reserved for future decision.

 The Bank correctly argues that under New York law, funds to become due, either definitely or contingently, are assignable. See 3 N.Y. Jurisprudence, Assignments § 9, Stathos v. Murphy, 26 A.D.2d 500, 276 N.Y.S.2d 727, (1st Dept. 1966), aff'd 281 N.Y.S.2d 81, 19 N.Y.2d 883, 227 N.E.2d 880 (1967). Nor does the Bank err in reading the state law to sanction enforcement of written assignments regardless of consideration. N.Y.Gen.Oblig.Law § 5-1107 (McKinney's Consol.Laws, c. 24-A 1964), Davin v. Isman, 228 N.Y. 1, 126 N.E. 257 (1920). Thus, if the agreement of May 29, 1967 did indeed intend and effectuate a complete, irrevocable transfer by Fain to the Bank, then under New York law, Fain would have no interest in the Continental payments as of December, 1968. But therein lies the rub. It is apparent from the face of the assignment agreement that Fain did not thereby transfer dominion and control in respect to at least 95 1/2% of the future payments in excess of $100,000.

 To be enforceable against third parties under New York law, an assignment must be "a complete transfer of the entire interest of the assignor in the particular subject of assignment, whereby the assignor is divested of all control over the thing assigned." 3 N.Y. Juris, Assignments § 28. Fain's right to receive from the Bank approximately 95% of the funds purportedly assigned is as much a contractual right to future proceeds as was the original Continental promise to pay. The transfer of legal title is of no consequence where the assignor retains an absolute right to the proceeds. Awner v. Moscowitz, 12 Misc.2d 221, 176 N.Y.S. 737 (1st Dept. 1919), and see In re Walton's Estate, 20 A.D.2d 386, 247 N.Y.S.2d 21, (1st Dept. 1964). On remand, in Aquilino v. United States, 10 N.Y.2d 271, 219 N.Y.S.2d 254, 176 N.E.2d 826 (1961), the New York Court of Appeals, concerned with the property rights of an assignee, held that bare legal title unaccompanied by beneficial interest is not subject to the government's tax lien. Conversely, I am compelled to conclude ...


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