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February 3, 1972

UNITED STATES of America, Plaintiff,

Weinstein, District Judge.

The opinion of the court was delivered by: WEINSTEIN


WEINSTEIN, District Judge.

 This is an action to foreclose a mortgage held by the Secretary of Housing and Urban Development on real property located in Hempstead, New York. 28 U.S.C. § 1345. Plaintiff's motion for summary judgment presents a dispositive legal issue of some importance to financially pressed municipalities: are liens for local taxes arising and accruing subsequent to the recording of a federally-held mortgage superior to the mortgage lien? For the reasons stated below, the answer is yes.



 The relevant facts are uncontested. General Douglas MacArthur Senior Village, Inc. (the mortgagor) is a membership corporation chartered by the State of New York to provide non-profit rental housing and related facilities and services for elderly persons. In April 1966, pursuant to the authority of section 202 of the Federal Housing Act of 1959 (12 U.S.C. § 1701q), the Secretary of Housing and Urban Development loaned the mortgagor $1,774,000 for use in the construction of facilities for senior citizens. As security, a first mortgage on the property was taken and duly recorded.

 Local taxes assessed by the County of Nassau, the Town of Hempstead, and the Village of Hempstead were not paid by the mortgagor. Treating this failure as a default, the government foreclosed. Over $1,500,000.00 is owed on the federal mortgage. Unpaid real property taxes aggregate approximately $200,000.


 Particularly awkward issues are raised when competing creditors are governmental bodies. One group seeks protection for its power to tax in order to provide essential services for the local community. The other one demands protection for funds it has expended for the general welfare of the nation.

 Were the mortgage held by a private party, the mortgage lien would be inferior, under New York law, to that for local taxes. N. Y. Real Property Actions and Proceedings Law, § 1354, McKinney's Consol.Laws c. 81. Because federal property and taxing rights are involved, the superior constitutional sovereignty of the United States compels application of federal law. Cf. Aquilino v. United States, 363 U.S. 509, 514-515, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960).

 While federal law is not clear, we conclude that, like New York law, it affords the local tax liens priority. This conclusion is based on two separate grounds. An independent common law basis in public policy as revealed by statutory enactments is discussed in Part III. A second reason for decision, contained in Part IV, is premised on interpretation of certain provisions of chapter 13 of title 12 of the United States Code designed to waive any federal priority in situations such as the one before us. A statutory hiatus and sparse legislative history requires an extensive analysis to explain this conclusion. The statutory interpretation argument in Part IV is divided into two sections -- section A deals with the specific language of chapter 13 of Title 12 of the United States Code, and section B with treatment of related situations.


 The United States argues that the priority of federal liens as against liens created under state law is governed by the choate lien test; i. e., the rule that "the first in time is the first in right." United States v. City of New Britain, 347 U.S. 81, 85, 74 S. Ct. 367, 370, 98 L. Ed. 520 (1954); City of New Brunswick v. United States, 276 U.S. 547, 48 S. Ct. 371, 72 L. Ed. 693 (1928) (mortgage interest held by United States). If that rule were enforced, the federal government's mortgage lien, arising as it did prior to the assessment of any of the relevant local taxes, would have priority.

 The vitality of the "first in time" rule in connection with local tax liens has been sufficiently eroded by legislative action subsequent to its judicial origin to obviate the necessity for applying it here. Congress has specifically waived any priority the federal government might otherwise have in relation to state and local taxes in numerous instances. See, e. g., 12 U.S.C. §§ 1706b, 1714, 1741, 1747j and 1750e; 15 U.S.C. § 646. It has been recognized that there has been a consistent tendency "to waive tax exemption on real property owned by government corporations whose functions were primarily financial in nature." Rohr Aircraft Corp. v. County of San Diego, 362 U.S. 628, 630-631, 80 S. Ct. 1050, 1052, 4 L. Ed. 2d 1002 (1960). Most significantly, Congress has enacted a sweeping reform of the law of federal liens in the form of the Federal Tax Lien Act of 1966, the effect of which must be recognized even in areas not expressly covered by its terms.

 Federal tax liens were in 1966 declared to be inferior to liens for local taxes "of general application levied by any taxing authority based upon the value of [real] property." 26 U.S.C. § 6323 (b) (6) (A). Plaintiff contends that the fact that Congress has expressly waived federal priority in the area of its taxing power -- where its claim to sovereign priority is certainly of the highest order -- is immaterial to the question of whether there has been an implied waiver in areas where the federal government's claim arises from its activities of a more private nature.

 The financial position of local governments has steadily deteriorated in recent years. They are squeezed between a proportionally diminishing tax base and rising disbursements. See, e. g., R. W. Bahl, State Taxes, Expenditures, and the Fiscal Plight of the Cities, in The American Assembly, Columbia University, The States and the Urban Crisis, 85 (A. K. Campbell, ed. 1970); A. Pecker, Property Tax Problems Confronting State and Local Governments, in H. Johnson, State and Local Tax Problems 39 (1969); J. Maxwell, Financing State and Local Governments, Brookings Institution Studies of Government Finance No. 10 (1965); Meyers, Tax-Exempt Property: Crushing Burden for the Cities, Fortune, May 1, 1967, at 76. An appreciable complication has been the increase in tax-exempt property attributable to the entry of the federal government into traditionally private areas of commercial activity. In 1880 only 4.16% of all real property was exempt from taxation. The figure has risen to 32.6% by 1968, with an even higher percentage in many urban areas. Meyers, supra, at 79. At the same time, total state and local government expenditures for such essential services as education, roads, welfare, public health, hospitals, police, recreation and sanitation exceed twice the federal government's budget for civilian services and grow by exponential rates. Maxwell, supra, at 1.

 Some 80,000 local governmental bodies depend upon property taxes to supply, on the average, seven-eighths of their revenues. U. S. Advisory Commission on Intergovernmental Relations, The Role of the States in Strengthening the Property Tax iii (1963). As has been observed at the highest levels of federal government, the consequence has been that real property taxes paid by the average citizen have doubled over the last decade and become "one of the most oppressive and discriminatory of all taxes, hitting most cruelly at the elderly and the retired." President's Address on the State of the Union to a Joint Session of Congress, N. Y. Times, Jan. 21, 1972, at 18.

 In recognition of the financial plight of local governments, the American Bar Association Special Committee on Federal Liens concluded that federal tax claims should be inferior to state and local tax liens on real property. Report of the Special Committee on Federal Liens, 84 A.B.A.Rep. 645, 661 (1959). The recommendation was adopted by Congress in the Federal Tax Lien Act of 1966. 26 U.S.C. § 6323 (b) (6) (A).

 Although the Special Committee on Federal Liens, because of limited time and resources, confined its studies to federal tax matters, the reports of the United States Advisory Commission on Intergovernmental Relations indicate that federal exemption from local property taxes would be even less appropriate where the federal government has engaged in commercial operations. The Commission has repeatedly advised state and local governments that their solvency depends in part on their effective enforcement of property taxes on a uniform basis. See, e. g., U. S. Advisory Commission on Intergovernmental Relations, State and Local Finances 3 (1969); U. S. Advisory Commission on Intergovernmental Relations, Fiscal Balance in the American Federal System 20 (1967). It has specifically cautioned local governments to avoid "frittering away the tax base" through exemptions which instead could be made direct and visible subsidies. U. S. Advisory Commission on Intergovernmental Relations, The Role of the States in Strengthening the Property Tax 87 (1963). An exemption for the federal government as mortgagee in this instance would be wholly inconsistent with this policy.

 Responsible commentators and judges, dissatisfied with the "first in time" rule, have uniformly indicated that federal priority is not merited where federal non-tax claims are involved:

"[If] the 'imperious need' for raising tax revenue is no longer thought to demand maintenance of unconscionable rules of priority, a fortiori should not those rules be abandoned when the Government '[steps] down from that place of sovereignty to enter the domain of business and commerce,' as a lender or guarantor of loans or as a seller of property?" Plumb, Jr., Federal Liens and Priorities -- Agenda for the Next Decade, 77 Yale L.J. 228, 292 (1967).

 As one judge explained in a decision prior to the 1966 Act, the equities strongly favored the localities, but then national policy prevented a fair result:

"In granting priority to the [federal] mortgage, I am not unmindful of the several equities in favor of the municipality. In fact, it is only the weight of the superior decisional authority that has led me to the conclusion reached herein. The court is very much aware of the fact that since 1931 the national government embarked on a policy of making loans on various sorts of security. In no area was it more active than in the mortgage market. I am unable to see how such transactions differ from those between private parties. The explanation of sovereignty appears too unsatisfactory. . . . When a local government provides police and fire protection, health and education facilities, and water supply, all of which enhance the value of property within its jurisdiction, 'it is only an ordinary and legal exertion of government to provide means for its compulsory compensation.'" United States v. Ringwood Iron Mines, 151 F. Supp. 421, 426 (D.N.J.), aff'd, 251 F.2d 145 (3d Cir. 1957), cert. denied, 356 U.S. 974, 78 S. Ct. 1138, 2 L. Ed. 2d 1148 (1958).

 After enactment of the Federal Tax Lien Act of 1966, the Court of Appeals for the Fifth Circuit indicated that the "first in time" rule need no longer be rigidly applied. Connecticut Mutual Life Insurance Co. v. Carter, 446 F.2d 136 (5th Cir.), cert. denied, 404 U.S. 857, 92 S. Ct. 104, 30 L. Ed. 2d 98 (1971). Through the Farmers Home Administration (FHA), the federal government held a second mortgage on a Florida citrus farm as security for the extension of agricultural credit. The FHA took the second mortgage aware that the Connecticut Mutual Life Insurance Company held a prior mortgage on the property requiring payment of attorneys' fees by the mortgagor in the event of default on the underlying obligation. The FHA contended that its claim was superior to the lien for attorneys' fees on the grounds that, since the amount of attorneys' fees was not choate (specific and certain) when the FHA mortgage attached, the non-federal lien was not "first in time."

 This argument was rejected on the grounds that the Federal Tax Lien Act of 1966 had substantially ...

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