The opinion of the court was delivered by: MISHLER
York-Hoover Corp. together with Elgin Metal Casket Co. ("York-Elgin") and the New York State Department of Taxation & Finance ("State") separately appeal from a decision rendered by Bankruptcy Judge C. Albert Parente on December 9, 1977, in an adversary proceeding which concerned the priority of various claims. York-Elgin appeals from that aspect of the decision which found the State possessed of a valid and prior tax lien on the bankrupt's assets (78 C 78). The State appeals from that part of the holding which postponed payment on a portion of its claim (78 C 196). Related as they are, we consolidate the appeals.
The essential facts are not in dispute. Prior to its adjudication in bankruptcy, United Casket Co. was a manufacturer of burial vaults and caskets. Failing financial conditions in 1975 caused the firm to ignore several sales tax assessments filed by the State during the latter part of that year. The State, on April 7, 1976, issued three warrants commanding the sheriff, after filing the warrants with the county clerk, to levy upon and sell United's property in satisfaction of the tax deficiency. The warrants were duly filed, but no levy followed. Instead, the parties executed an agreement which permitted United to pay the debt in weekly installments. The required payments were made until the commencement of Chapter XI proceedings; at present the deficiency stands at $49,144.50.
The York-Elgin claim derives from a security agreement executed on May 3, 1976. At that time, United was indebted to the claimants in an amount exceeding $200,000 for goods previously sold and delivered and monies advanced. In order to guarantee continued credit, United granted York and Elgin a security interest in all of its inventory, accounts, contract rights and general intangibles then owned or thereafter acquired. The security interest, embodied in an agreement executed on May 3d, was perfected on May 12, 1976 by the filing of requisite financing statements with the Secretary of State and Queens County Register. Thereafter, York and Elgin extended further credit on purchases of manufacturing supplies until the advent of reorganization proceedings.
By September 24, 1976, United's indebtedness to York and Elgin exceeded $325,000. Unable to meet its obligations, United, on that day, filed a petition for reorganization with the Clerk of the Court, pursuant to Chapter XI of the Bankruptcy Act. The petition was granted by order dated September 27, 1976, and United was continued as debtor-in-possession. A plan for reorganization was drawn, but could not be funded. Hence, on February 16, 1977, with open accounts receivable totaling $206,407.27, United was adjudicated bankrupt. Inventory and equipment were thereafter sold at public action realizing some $25,550.
During the pendency of Chapter XI proceedings, York-Elgin filed suit in the bankruptcy court seeking relief from the general stay provisions contained in Rule 11-44, Rules Bankr.Proc., and a declaratory judgment determining the priority of their security interest vis-a-vis the liens purportedly possessed by the State Department of Taxation & Finance and the Internal Revenue Service.
The issue was submitted to the bankruptcy court on stipulated facts.
After hearing extended argument, the bankruptcy court, in a decision rendered on December 9, 1977, found the State possessed of a valid and prior lien by virtue of New York Tax Law § 1141(b)(McKinney's 1969). That provision, which sets forth the available enforcement procedures the State may follow in pursuing collection of a sales tax deficiency, permits the tax commission to issue warrants and thereupon levy on the taxpayer's assets. Warrants duly docketed with the county clerk, the section provides, "shall become a lien upon the title to and interest in real and personal property of the person against whom the warrant is issued." New York Tax Law § 1141(b). Construing the statute to require nothing more than docketing, the bankruptcy court held the State's action sufficient to vest it with a prior lien notwithstanding its failure to levy on the personal property. However, the consequent lack of possession accompanying the tax warrants, the bankruptcy court held, triggered the operation of § 67(c)(3) of the Bankruptcy Act, 11 U.S.C. § 107(c)(3), which postpones payment of the tax deficiency to the costs and expenses of administration and priority wage claims. Construing the statute further, the bankruptcy court went on to rule that the State would first have to await York-Elgin's participation in the estate before receiving payment of the postponed increment.
It is from this ruling that both sides appeal. York-Elgin takes issue with the first part of Bankruptcy Judge Parente's decision holding the State possessed of a prior lien. The State, in turn, attacks the other aspect of the ruling which further postpones payment of that increment of the tax lien representing the amount of administration and priority wage claims to plaintiff's participation in the estate. We turn to examine first the viability of the State's lien.
Section 1141(b) of the New York Tax Law provides in pertinent part:
As an additional or alternate remedy, the tax commission may issue a warrant, directed to the sheriff of any county commanding him to levy upon and sell the real and personal property of any person liable for the tax, which may be found within his county, for the payment of the amount thereof, with any penalties and interest, and the cost of executing the warrant, and to return such warrant to the tax commission and to pay it the money collected by virtue thereof within sixty days after the receipt of such warrant. The sheriff shall within five days after the receipt of the warrant file with the county clerk a copy thereof, and thereupon such clerk shall enter in the judgment docket the name of the person mentioned in the warrant and the amount of the tax, penalties and interest for which the warrant is issued and the date when such copy is filed. Thereupon the amount of such warrant so docketed shall become a lien upon the title to and interest in real and personal property of the person against whom the warrant is issued. The sheriff shall then proceed upon the warrant, in the same manner, and with like effect, as that provided by law in respect to executions issued against property upon judgments of a court of record . . . if a warrant is returned not satisfied in full, the tax commission may from time to time issue new warrants and shall also have the same remedies to enforce the amount due thereunder as if the state had recovered judgment therefor and execution thereon had been returned unsatisfied. (emphasis added.)
Considering the frequent use of this enforcement alternative, the paucity of case law interpreting the command and reach of the statute is surprising.
The State, emphasizing the clarity of the underscored sections, argues that the simple filing of the warrants and their docketing by the county clerk is sufficient to create a choate lien on the bankrupt's real and personal property; that the statutory language of execution and levy only prescribes enforcement procedures and in no way limits or qualifies the efficacy of the lien once it properly attaches. York-Elgin on the other hand urges the court not to isolate the highlighted language, but to consider the full command of the statute. Pointing to that part of the provision which directs the sheriff to ". . . proceed upon the warrant in the same manner and with like effect, as that provided by law in respect to executions issued against property on judgments . . .," York-Elgin argues that the principles on which the attachment of judgment liens turn also control the efficacy of state tax liens. More specifically, York-Elgin urges the relevance of Article 52 of New York's Civil Practice Law and Rules which pertains to the enforcement and priority of judgments. The mere docketing of warrants, York-Elgin argues, gives rise to a choate lien only on the debtor's real property, CPLR § 5203 (McKinney's 1972). Any lien attaching to personal property on docketing and issuance of the execution, York-Elgin contends, was of limited duration and fell when the State failed to levy on United's property either by seizure or service of the execution, CPLR §§ 5230 and 5232 (McKinney's 1968).
We cannot view the pertinent provision of the Tax Law with the same myopic simplicity the State does. York-Elgin's suggested construction of § 1141(b) is at the very least persuasive. The statute, when considered in its entirety, can be logically read to grant the State, upon the docketing of tax warrants, a choate lien on the taxpayer's real property and an inchoate lien subject to perfection by levy on his personalty. Such a construction is entirely consistent with the requirements of CPLR Article 52 and the direction in § 1141(b) requiring the sheriff, after docketing, to proceed upon the warrant "in the same manner and with like effect" as under executions against property issued upon judgments. Moreover, such an interpretation lends meaning to the last sentence of the subdivision which permits the State to issue new warrants should the original be returned unsatisfied. Accord; United States v. Weather Service, Inc., 74-2 U.S. Tax. Cas. 9724 (E.D.N.Y.1974) (docketing of warrants in absence of levy does not give State "perfected" lien); In Re Estate of Robbins, 74 Misc.2d 793, 346 N.Y.S.2d 86 (Sur.Ct.1973) (lien attaches to personalty only upon ...