110-118 Riverside Tenants Corporation appeals from a judgment of the United States District Court for the Southern District of New York (John M. Cannella, J.) denying its recovery of certain funds held in escrow. Affirmed, with modification.
Feinberg and Kearse, Circuit Judges, and John R. Bartels, District Judge.*fn*
JOHN R. BARTELS, District Judge:
Defendant-Appellant 110-118 Riverside Tenants Corporation ("Apartment Corporation") appeals from a decision and order of the United States District Court for the Southern District of New York (John M. Cannella, J.) granting a motion by plaintiff-appellee United States of America ("Government") to compel the law firm of Snow Becker Krauss, P.C. to turn over funds in an escrow account representing the balance of the proceeds of a sale of a cooperative apartment formerly owned by taxpayer John G. Broady.
This case involves the unique property rights of the owner of a cooperative apartment. Ordinarily the purchaser of a cooperative apartment receives a package of rights constituting a proprietary lease (standard as to all tenants) of the premises and a number of shares of the cooperative building corporation which are allocated to the purchaser depending on the size of the apartment. On December 1, 1968 John G. Broady acquired a cooperative apartment ("Apartment") at 110 Riverside Drive, New York, by purchasing 417 shares of stock in the Apartment Corporation and signing a proprietary lease ("Lease") for the Apartment.*fn1 Among other things, the proprietary lease involved here provides that shares cannot be transferred, except to the lessor, or after compliance with the provisions of the lease relevant to the assignment of the lease (A-167); that there shall be no assignment of the lease without the transfer of all the shares allocated thereto (A-148-49); that the Board must approve the transfer of the shares and the assignee (A-149); that the lease shall expire on ten days' notice if at any time during the term of the lease the lessee shall cease to be the owner of all the shares (A-159-60); and finally, that unless the owner of the shares pays his monthly proportionate share of the maintenance, after ten days' notice of default the lease shall terminate and the shares shall be surrendered to the Apartment Corporation. (A-160, 163). Thereafter the Apartment Corporation shall sell the shares at a private or public sale, applying the proceeds and expenses of the sale to the indebtedness of the lessee and paying over any surplus to the lessee. (A-163)
In 1975 the Internal Revenue Service filed notices of tax liens against Broady pursuant to Title 26 United States Code Section 6321 for unpaid taxes for the years 1951-1954. In 1979 the Government commenced an action in the district court against Broady and the Apartment Corporation for Broady's unpaid assessed taxes and moved to foreclose tax liens on Broady's shares of stock. In 1984 the Government was awarded judgment against Broady for $2,396,264.12, and on March 11, 1985 a judgment on the shares of the Corporation was entered.
It was not until after foreclosure of the lien, in April 1985, that Broady defaulted on his maintenance payments due to the Apartment Corporation. As stated above, the shares of the stock of the Apartment Corporation are allocated to a specific lease without which they cannot be effectively sold. They are not freely negotiable and confer no independent rights separate from the Lease. By the same token, the Lease cannot be assigned without the assignment of the shares.
Efforts were made by the Apartment Corporation to evict Broady, which was accomplished in July 1986, and, in July 1987, the Apartment Corporation entered into a contract for the private sale of the shares of stock. In September 1987 the Apartment Corporation moved for an order approving the private sale of the Apartment "after payment of monthly arrearages owed by defendant Broady to the cooperative corporation and the corporation's costs and disbursements (including legal fees and disbursements) necessarily incurred in connection with the dispossess proceeding and sale." (A-47) In December 1987, the Government moved to approve the private sale of the Apartment.
On January 27, 1988 the parties entered a stipulation (A-116) regarding the sale of Broady's shares. Four months later, in April 1988, Broady's shares were sold for $901,030. Under the stipulation, the sum of $90,103, to which the Apartment Corporation claimed it was entitled under the terms of the Lease for unpaid maintenance charges, legal fees, and other miscellaneous charges, was placed in escrow by Snow Becker Krauss, P.C., the counsel for the Apartment Corporation, pending the disposition of this case. Thereafter, without authorization from the district court or permission from the Government, Snow Becker Krauss, P.C. paid $9,207 out of the escrow fund to the City of New York as a Real Property Transfer Tax which Judge Cannella ordered to be returned to the escrow account since he adjudged that all the proceeds belonged to the Government.
The Apartment Corporation contends that it is entitled to the entire escrow fund since under the terms of the Lease Broady was indebted to the Corporation for maintenance charges and was entitled only to the net proceeds of the sale of the Apartment, after payment of his debts to the Corporation. The Government, on the other hand, claims the entire fund on the theory that the tax liens attached to the gross proceeds of the sale prior to the Corporation's claim to Broady's indebtedness. In addition, the Government claims it is not liable for the expense of the sale and that the $9,207 expenditure for the transfer tax should be returned to the escrow fund.
The District Court held that the federal tax lien had priority over the competing claim of the Apartment Corporation and awarded the entire proceeds of the sale to the Government.