The opinion of the court was delivered by: CONNER
This proceeding was initiated to resolve conflicting claims to insurance proceeds in the amount of $7,354.29, plus interest from April, 1972, now held by The Hartford Fire Insurance Company ("Hartford") as a stakeholder. PPG Industries, Inc. ("PPG") originally commenced this action in the New York State Supreme Court, New York County, to obtain the fund as a secured creditor of Car Color, Inc. ("Car Color"), the insured. Subsequently, the United States of America intervened as a tax creditor and the action was removed to this Court, pursuant to 28 U.S.C. § 1441, 28 U.S.C. § 1340 and 26 U.S.C. § 7402.
Presently before the Court is an application by the United States of America for an order setting aside that portion of a Report issued by Magistrate Harold J. Raby on July 25, 1974, which held the Government's tax liens against Car Color to be subordinate to the claim of PPG.
To render understandable the nature of the claims asserted, it is necessary to describe briefly the events which preceded the filing of the action.
In October, 1970, Car Color entered into a Security Agreement with PPG whereby PPG obtained a security interest in all of the equipment of Car Color, as well as its inventory and any future proceeds of the inventory. In addition, Car Color agreed to insure the equipment and inventory for the benefit of PPG. The agreement further provided that Car Color would assign the right to receive the proceeds of the insurance to PPG and direct the insurer to pay such proceeds to PPG.
The Security Agreement was duly filed with the Secretary of State, and the County Clerk, Westchester County, in accordance with the provisions of the New York Uniform Commercial Code ("UCC").
On December 10, 1971 and March 27, 1972, the Internal Revenue Service assessed taxes against Car Color totaling $2,078.10, but neglected to file notices of these tax liens until May 4, 1972. Prior to this filing, on December 23, 1971, a fire destroyed the premises of Car Color and it ceased doing business.
Thereafter, PPG commenced an action against Car Color in the New York Supreme Court, New York County, for goods sold and delivered. A default judgment was entered on April 14, 1972 in the sum of $12,300.90. That judgment is still unsatisfied.
On November 29, 1972, Car Color commenced an action in the New York Supreme Court, Westchester County, against Hartford to recover the proceeds of the fire insurance policy it obtained pursuant to the Security Agreement. That action was removed to this Court, and resulted in a verdict and judgment on April 24, 1973, in favor of Car Color for $7,354.29 with 6% interest from April 3, 1972. 73 Civ. 157. To date, the attorneys who represented Car Color in that proceeding have not received their fee.
In May, 1973, the New York State Department of Labor filed claims against Car Color for unemployment insurance taxes; and in July, 1973 the State of New York filed tax liens for sales and withholding taxes.
The competing claims presented to Magistrate Raby were:
United States $ 2,078.10
Henkin & Henkin, Esqs. 2,451.53
New York State Tax
The Hartford Fire Ins. Co.
In an extremely thorough Report, Magistrate Raby determined that the fund should be distributed as follows:
Henkin & Henkin, Esqs.
(first priority) $ 2,654.25
The Hartford Fire Ins. Co.
(second priority) 500.00
PPG (third priority) 4,200.04
United States (fourth priority) 0
New York State (fifth priority) 0
The Magistrate concluded that when the fire occurred, PPG had a legal right to the proceeds of the insurance policy, and therefore ruled that: a) although the assignment to PPG was initially equitable, it became a legal and "choate" assignment when the fire occurred; and b) an assignment or pledge of an owner's rights under a fire insurance policy as collateral security for an indebtedness is valid.
The Government now asserts that the Magistrate erred and that PPG's lien cannot take priority over its lien because PPG had not perfected a security interest within the meaning of Section 6323 of the Internal Revenue Code before the filing of the Government's tax lien.
The Government does not contest the validity of PPG's security interest in the secured property, but claims that:
"the assignment of fire insurance proceeds -- the fulfillment of which depends upon a subsequent fire, the determination of loss, and the insurance company's fixed obligation to pay -- is the assignment of a future right which does not grant to the assignee priority over ...