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UNITED STATES v. J.H.W. & GITLITZ DELI & BAR

October 8, 1980

UNITED STATES of America, Plaintiff,
v.
J.H.W. & GITLITZ DELI & BAR, INC., Israel W. Tannenbaum, and New York State Tax Commission, Defendants



The opinion of the court was delivered by: WEINFELD

The issue presented by this action is the priority of payment of funds in an account held by an attorney, the defendant Israel W. Tannenbaum ("Tannenbaum"), as escrow agent for the defendant J.H.W. & Gitlitz Deli & Bar, Inc. ("Gitlitz") in the amount of $ 12,380.37. Plaintiff, the United States of America, commenced this action to recover unpaid federal withholding and unemployment taxes from Gitlitz and to foreclose federal tax liens on the escrow account. *fn1" Tannenbaum contends he is entitled to priority for unpaid fees for legal services rendered Gitlitz, out-of-pocket expenditures and disbursements, and escrow fees. The New York State Tax Commission ("Commission"), also named as a defendant, seeks to obtain payment of its lien for unpaid sales and franchise taxes owed to the State by Gitlitz. *fn2" The essential facts have been stipulated and the parties agree that the matter is ripe for summary judgment.

I. The Facts

 Gitlitz owned a restaurant and bar at 157 East 57th Street, New York City that was closed prior to March 1, 1975. Commencing about that date Tannenbaum rendered services in connection with the sale of the furniture and fixtures and the reopening of the restaurant. Additional services were rendered thereafter, when the purchasers defaulted in payments due under the sales agreement, in the repossession of the furniture and fixtures pursuant to the New York Uniform Commercial Code and the subsequent resale of the restaurant. Tannenbaum also negotiated with the landlord of the premises, the Internal Revenue Service ("IRS") and the Commission to ensure that the restaurant's assets remained in place pending its reopening. He also defended Gitlitz in three actions brought against it by trustees of union welfare funds on behalf of employees of the restaurant. Under the agreements for the sales of the restaurant Tannenbaum, as escrow agent for Gitlitz, received $ 12,380.37, the subject matter of this action. Tannenbaum asserts that the fair and reasonable value of his legal services is $ 4,750, of his services as escrow agent is $ 830, and of his expenses and disbursements is $ 455, a total of $ 6,008. He claims a lien in this amount on the fund in his possession which is entitled to priority over the liens of the United States Government and the State of New York. Before and during the period in question, the IRS made the following assessments, including interest and penalties, against Gitlitz: Taxable Assessment Period Date Total 6/30/74 9/9/74 $ 3,122.31 9/30/74 12/9/74 4,705.00 3/31/75 5/19/75 3,585.05 12/31/74 6/26/75 5,563.54 12/31/74 6/26/75 441.19 In addition, the Commission docketed six warrants against Gitlitz for unpaid sales and franchise taxes as follows: Date Docketed Amount of Warrant June 4, 1975 $ 134.86 June 12, 1975 3,586.65 July 31, 1975 2,654.67 October 3, 1975 2,653.57 March 29, 1976 849.23 September 21, 1976 8,303.61

 The United States and the Commission assert liens on the fund held by Tannenbaum in the amount of their respective tax assessments. They agree that as between them, the first three assessments made by the IRS on September 9, 1974, December 9, 1974, and May 19, 1975 in the total amount of $ 11,412.36, including interest and penalties through June 30, 1980, are prior to any liens of the Commission. As to the Commission liens, the United States concedes that they are prior to the United States' subsequent liens in sufficient amount to exhaust the balance of the available funds. The remaining issue to be determined is the priority, if any, to be accorded Tannenbaum's claimed liens in relation to those of the United States and the Commission.

 II. Lien Priorities Between the United States and Tannenbaum

 A federal tax lien takes priority over a competing lien unless the competing lien either falls within one of the statutory priorities set forth in the Internal Revenue Code or is a valid state-created lien that became choate prior to the perfection of the federal tax lien. *fn3" Tannenbaum's lien must fall within one of these two exceptions to overcome the usual federal tax lien priority. The Court finds that neither exception sustains Tannenbaum's claims.

 A. The Priority Statute

 Of the priorities established by section 6323(b) of Title 26 of the United States Code, the sole one arguably applicable to Tannenbaum's claims is section (b)(8), which provides in pertinent part as follows:

 
Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid ... with respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement.

 By its terms section 6323(b)(8) affords priority status to the lien of an attorney for the reasonable value of his services if those services were incurred in securing a judgment or settling a claim. *fn4" The section looks to local law to define the extent of this entitlement. *fn5"

 Under New York law, the lien of an attorney for his services in securing a judgment or settlement is governed by section 475 of the Judiciary Law, which codifies the common law "charging lien." *fn6" Section 475 provides:

 
From the commencement of an action, special or other proceeding in any court or before any state, municipal or federal department, except a department of labor, or the service of an answer containing a counterclaim, the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination. The court upon the petition of the client or attorney may determine and enforce the lien. (Emphasis supplied.)

 New York courts have held that an attorney is not entitled to the benefits of section 475 unless he has commenced an action or asserted a counterclaim on behalf of his client. *fn7" None of the services provided by Tannenbaum meet this requirement. On the contrary, the bulk of his services consisted of negotiations with creditors and prospective purchasers of the restaurant so as to permit its reopening and continued operation-services of the type that commonly are performed by real estate agents or brokers. There were, of course, legal services rendered in the drafting of documents when such negotiations were consummated.

 The only compensation Tannenbaum claims based on an appearance before a judicial tribunal is that stemming from his defense of three lawsuits brought against Gitlitz. New York law is clear, however, that the representation of a defendant in resisting a claim against him does not invoke the protection of an attorney's lien under section 475 unless a counterclaim is asserted. The essence of the right to a charging lien in the attorney's favor is the creation of a fund or proceeds out of which he is paid. *fn8" In the three actions brought by the trustees of pension funds to recover benefits due employees of the restaurant, Tannenbaum neither represented Gitlitz as a ...


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