United States v. Buffalo Sa v. Bank

PETITIONER:United States v. Buffalo Sa
RESPONDENT:Bank
LOCATION:South Carolina State House

DOCKET NO.: 96
DECIDED BY: Warren Court (1962-1965)
LOWER COURT:

CITATION: 371 US 228 (1963)
ARGUED: Dec 03, 1962
DECIDED: Jan 07, 1963

Facts of the case

Question

Audio Transcription for Oral Argument – December 03, 1962 in United States v. Buffalo Sa v. Bank

Earl Warren:

Number 96, United States, Petitioner, versus Buffalo Savings Bank.

Mr. Jones.

John B. Jones, Jr.:

Mr. Chief Justice, may it please the Court.

This case involves the federal tax lien which is created by Section 3670 of 1939 Internal Revenue Code.

The question is whether a subsequent local property tax lien shall be preferred over an earlier federal tax lien whether because of the existence of a mortgage to which the Federal Government grants priority or for some reason peculiar in the nature of the local property tax.

The facts are quite simple and they’re undisputed.

In 1946, the respondent bank, lent $2600 to one Joseph Victory.

He took back a mortgage covering this indebtedness and that mortgage was created in 1946.

Seven years later, in 1953, United States filed notice of a federal tax lien in the amount of some $857, and this was against Victory.

In 1957, four years later starting from July 1, 1957, local liens or various real estate taxes owed to the City of Buffalo, real estate taxes owed to Erie County and certain sewer rents began accruing.

In 1958, the respondent bank brought an action in the Erie County court to foreclose his mortgage which by that time had been paid down to some $1400 and for an interest of 5%.

When the United States answered in this action, its originally $157 lien had been paid down to $690, and the record that gives no indication that Mr. Victory was insolvent as the Court will recall from earlier cases when it goes off on the revised statute Section 3466 that there is an indication into solvency.

That’s not present here and this case involves the federal tax lien standing alone as such.

William J. Brennan, Jr.:

I’m sorry Mr. Jones, perhaps you’ve already said it.

What’s the — what are the dates?

When was the federal tax lien filed?

John B. Jones, Jr.:

January 15, 1953.

There’s a great deal of time difference here.

Let me just go through those again.

William J. Brennan, Jr.:

Yes.

John B. Jones, Jr.:

The mortgage was given to — in 1946, seven years later, the federal tax liens came along in 1953 and four years later, the local tax did so that not the common case where we’re worrying about a minute of time.

There’s no question about that recording in here, everything that needed to be was recorded and there’s no close interplay there.

It’s a remarkable case in that regard.

When the mortgagee was in the Erie County court, it moved for summary judgment and the Erie County court granted this motion and said that property should be sold subject to local taxes but free and clear of the federal tax liens.

And the proceeds would then go to satisfy the mortgage debt first.

Now, a moment’s reflection will make it clear that if the property is sold subject to the local taxes that price which a bidder is willing to pay will be reduced by the amount equal to the local taxes since there’s practically no way of escaping that obligation.

And at the same time, since the Federal Government must look only to the sales proceeds, its chances of recovering the federal tax lien under that form of sale are diminished.

And on appeal by the Government, the Appellate Division reversed on essentially the same ground.

And it’s — on its remand, its — it suggested that the local authorities, they made parties to the action, and the property sold free and clear of all liens with the priorities to be determined in allocating the sales proceeds that came in.

When the case went back to the county court, they did issue an order saying that it should be so free and clear of all liens but it came up with another special provision that provided that local taxes should be paid as expenses of sale citing the Section 1087 of the New York Civil Practice Act which does appear to say that for purposes of that article, that is the article governing sales pursuant to mortgage foreclosures that for purposes of that article, local taxes shall be considered expenses of sale to be paid by the person handling the sale.

William J. Brennan, Jr.:

Was that law in effect from the mortgage was (Voice Overlap) —

John B. Jones, Jr.:

Yes.

That’s a very long standing law and might make it right clear at this point that there’s no suggestion that this is a law which New York has enacted to, to put something over into federal lien.

That 1880 as the date that’s fixed in my mind that that law come from my — I would submit that it has somewhat a different purpose read in context of the New York Act.

It doesn’t say that they are expenses of sales which says, that they shall be deemed to expenses of sale and while being this quite an ambiguous word, I have a feeling that it means something less than saying that they are expenses of sale.

Byron R. White:

Well, did the Court of Appeals give it some interpretation or is that the one implicit anyway?

John B. Jones, Jr.:

I think it would have to be implicit on the point and I’m not sure that this Court would want to make a new examination.

The only point it seems (Voice Overlap) —

Byron R. White:

Well, could we —

John B. Jones, Jr.:

It seems to be carrying off a lot of freight to say that a casual phrase that it’s deemed to expense of sale would produce this (Voice Overlap) —

William J. Brennan, Jr.:

Well, if that’s interpretation of the Court of Appeals (Inaudible) that statute would stop with that.

John B. Jones, Jr.:

I think that’s the position.

But on — when this county court judgment again was appealed to the Appellate Division, the Appellate Division modified the judgment and on the grounds that it was necessary to apply what it understood to be the rule of the New Britain case which is cited by this Court.

And that rule was that having determined that the sale should be made and the — this question of priority should be resolve in the allocation of the fund would be to set aside an amount equal to the amount of the mortgage which the Federal Government had conceded was prior, and setting aside for the amount of mortgage would include any interest do on the mortgage.

Then from all other proceeds, they should go first to pay the federal lien since the federal lien conceded no other priority.

Then if the excess proceeds — if there are still some excess proceeds available, they would be used to pay state taxes.

And then as the last resort, the state lien could go back against the share of the mortgagee because the state, as a matter of its own internal law had said that it should have priority over the mortgagee.

This case then went on appeal to the New York Court of Appeals and it was reversed by the New York Court of Appeals in an opinion by Judge Burke and four other judges, with Judge Fuld and Judge Foster dissenting.

They agreed with the Erie County court that the payment of later local taxes as expenses of foreclosure was the proper result under the New York statute.

The dissenters took the position which we espouse here that such provision runs directly contrary the decision of this Court in New Britain.

In looking at this case, it seems to the Government that it’s advantageous to recognize that the two liens we’re talking about here primarily are the federal tax liens which have been very strongly characterized by this Court over the years as intending to reach every piece of property which the taxpayer owned.

It is a lien in support of certainly a basic function of Government and the one that’s crucial to the existence, the gathering of revenue.

At the same time, states typically, place great reliance of — if not major reliance on the property tax as a source of their revenue and typically the state gives a — what amounts to a super priority to the property tax in the sense that they — the state does not care at what point a person acquires an interest in the land.

Anybody who wishes to deal with the land must see that the taxes are paid whether they rose prior to his interests, add for his interest or in any other circumstances.

And so, this is really a contest of wills if you will between the Federal Government fighting hard to maintain the supremacy of its federal lien and the state government relying on the fair effort of its legislature to give to the local property tax everything which it can give.

Now, though this is a struggle between the two jurisdictions, the fact is in the case before us and in all cases which should be decided under the New Britain doctrine, the state is going to be paid because the Federal Government concedes that the state — it can’t — its grant of priority to the mortgagee is not a sufficient reason for it to step in and forbid the mortgagee from paying the state, and thus the state have a jurisdiction over the mortgagee typically can get its interest from there.

Potter Stewart:

What if the mortgagee had paid the delinquent state taxes?

John B. Jones, Jr.:

After the — after they arise in the federal tax lien?

Potter Stewart:

Yes, yes.

John B. Jones, Jr.:

We would certainly take the position that that was not and have taken the litigation that if it’s paid afterwards that’s not given the original priority of the mortgage.

John B. Jones, Jr.:

That’s not before this Court now but we have maintained that position in litigation in the Bond and Christensen cases from (Inaudible) Fourth and Ninth Circuit.

Potter Stewart:

Oh, on your brief, I knew about the Bond case, that’s in the Fourth Circuit.

John B. Jones, Jr.:

Right.

Potter Stewart:

Your brief seems to indicate a different point of view.

I don’t know — because I was able to find —

John B. Jones, Jr.:

Well, perhaps at this point that we do think there’s something that the mortgagee can do.

A mortgagee can set up an arrangement which is known perhaps by experience to many of us that they collect the fund for the payment of tax insurance.

This was involved a little bit in the Bond case and it wasn’t litigated.

And if they set up an escrow fund to pay taxes and insurance, the mortgagee can keep those things current and have immediate notice as soon as there is a likelihood of default.

The mortgagee pays the taxed themselves, knows what’s going on if the monthly payments are not coming in and the escrow fund isn’t building up, it knows immediately that there is a danger of running up tax liability.

So therefore, it will have notice.

Now, this is not to say that if it lets the matter run on that it has any way to protect itself beyond that point because we can’t let him pay the taxes before but we can let him take taxes before the federal lien arises and back to the mortgage.

But after the federal lien arises, he’s making a subsequent event after the Federal Government and we see no reason why that event should be maintained but the escrow arrangement will keep him fully current.

And then since he has immediate notice of the default, he can at that time check the federal tax lien status and see whether he wishes to make further advances or wishes to foreclose.

And that’s a matter which we feel the mortgagee is in a much closer position to us, say, than the Federal Government, because it seems to us that in a great majority of cases, it’s going to be the mortgagee who’s expose to the situation.

The Federal Government operates from — operates with a tremendous number of taxpayers — how many millions of taxpayers are delinquent — I don’t’ offer here.

I don’t know the number but certainly it’s more than a number who are delinquent in the hands of any one mortgagee.

So I would like to state again that the context here is who is going to bear a super priority which the state imposes or which the state grants its own taxes.

Is it going to be the Federal Government or is it going to be the mortgagee?

And if there’s an inequity in this, in our position, that it should be born by the mortgagee, we would suggest that it comes not from the Federal Government adopting an equitable position but from the state courts refusing to yield the priority of its local lien for any prior right that has vested even before the local lien has come into being.

In support of the decision below, and I think this is a fair characterization of the brief which had been filed in this Court, there run two things.

The first and what I would like to characterize is the nominal thing.

It goes on New York property law, Section 1087 which makes these expenses — makes these payments of local taxes expenses of sale.

And I think a careful reading of the opinions in the briefs make it clear that none of the parties espousing this view, believe that it can stand alone, that a mere characterization of that nature can’t override the clear mandate of this Court in New Britain.

And I would like to point out that if these local taxes were to be treated as expenses of sale, it would seem hard to find the limit on the expenses which could not be treated as expenses of sale because surely the expenses of sale hitherto an innocuous word for federal tax purposes does indicate something with some relation to the mechanics of posing out an account getting property into — straightened out and setting out a new title to the property.

But it doesn’t — and to things that are related to that process.

Potter Stewart:

And you would concede that those come before the federal tax lien, wouldn’t you?

John B. Jones, Jr.:

The things like are an auctioneer’s fee.

Potter Stewart:

Yes.

John B. Jones, Jr.:

And perhaps to the tax expenses accruing while it’s in the hands of the Court.

John B. Jones, Jr.:

In other words, the tax became due in the brief period of times in the Court’s hand.

That might stand on a different status.

But —

Potter Stewart:

Or was (Voice Overlap) —

John B. Jones, Jr.:

— it must be related in time to this mechanical process of using the judicial process to enforce a — the right of a mortgagee.

Arthur J. Goldberg:

Well, Mr. Jones, on your argument that the mortgagee assert (Inaudible) priority was a federal law (Inaudible) the federal lien by order of the state law?

John B. Jones, Jr.:

Well, I would say except it seems to me that the federal lien has already made a substantial concession in saying that any federal liens will give this man everything that he took prior to the date they recorded the federal lien.

They say to a mortgagee, “If you get your mortgage, prior to the date that we attach our lien, we will not go against that interest that you have on that date”.

So, the Federal Government has already made a concession.

The state makes not —

Arthur J. Goldberg:

(Inaudible)

John B. Jones, Jr.:

Well, of course that will depend a great deal on the individual figures but whatever you may say about the Federal Government’s generosity, it far exceeds the state.

The state has given nothing.

It says that the tax stays with the land no matter what.

You can’t — he can’t have equity against the state tax.

So that (Inaudible) — in the — the Federal Government has made one move, it would seem to me that if we’re talking about equities, the next move is up to the state if they’re really that interested in the equity.

So I believe that this characterization of expenses of sale as espoused by the respondent here is not sufficient to carry the case.

And it must be — this Court is called upon to either say that the New Britain case did not reach the point which we say it did reach and it’s decisive of the question here or else that it was wrongly decided.

And thus, I think that is the substance of the argument here.

And the basis for this as it’s made, is that local property taxes have historically a very close relationship to land and that there is in people’s minds appealing that the local property taxes relate very closely to the services and the protection which are given to the land.

And they look to various provisions of local law which show this close relationship.

Now, I would like to say in the amicus brief there’s a suggestion that there is no personal liability for New York property taxes.

We did not answer this in our reply brief but I would like to suggest to the Court that the examination of the New York law will suggest that there is a personal liability for the real property tax.

If I may give a citation, I suggest that Section 71 of the 1959 edition of the tax law would be a citation that would make that clear.

I just — I’m sorry, we didn’t put that in our brief.

I wouldn’t think the Court would want to pick that statement up in error.

William O. Douglas:

Section 71 of the 1951 Code?

John B. Jones, Jr.:

The 1959 —

William O. Douglas:

1959.

John B. Jones, Jr.:

— tax law.

John B. Jones, Jr.:

This is McKinney’s New York — Mr. McKinney’s New York Consolidated Laws.

There is a more current provision but that wouldn’t have been governing at the time of this action.

Now I’m sure there’s a superficial appeal to treating this mystical relationship between the property and its property tax in the local services and viewing every holder of property as having something that can be periodically diminished by local taxes.

And it’s certainly possible to imagine the system of Government that allows this kind of state priority for local property taxes.

I’m not sure that it would be a better system than our own but it seems to me clear from the decision of this Court, it is not the system which has been adopted and followed for many years.

The — in United States v. Schneider in 1893, this Court’s spoke in the strongest possible terms about the priority of the federal tax lien, the language that was in the revised statute at that time was I suppose as one could imagine to the present language of the tax laws, the Court pointed out to what extent it was in the work and move of the Constitution that this federal tax lien must have priority over everything in the country.

And 20 years later, Congress didn’t repudiate this decision in any sense but it did announce that there would be specified categories of people who would be protected against this all prevailing tax lien.

That is the Section 3672 which is amply cited to you.

And if there was any question about the application of this sup — of this heavy priority of the Federal Government to state and local taxes, we submit that that was put to rest in the Michigan versus United States case in 1943 where Chief Justice Stone speaking for a unanimous court made it very clear that it would be no grounds for holding that any different rule applied to state and local taxes.

And he gave full consideration to these arguments about the peculiar nature of the local tax.

And then comes to what is to us the key case, one we could submit fully governs here and that is the New Britain case decided 1954 again by a unanimous court.

There, the proceeds of the sale were insufficient to satisfy the mortgagee’s federal tax lien and the local taxes.

It came up to this Court and as a matter of fact, the Government was there arguing to somewhat a stronger or more extreme if you will position that is now arguing, if they’re contented that local tax liens were entitled to — not specifically mentioned in the statute and as long as they were mere liens, it hadn’t been reduced the possession, they were entitled to no priority at all.

But this Court examined the precedent and legislative history and decided that Congress in enacting the federal tax lien intended to include the first in time, first in right doctrine.

And then it went on to say that any local liens which are superior — which proceeded in time, the federal tax lien would be given priority.

Then it was left with the question what about the mortgagee who is protected under federal law but not protected under state law and so that the effect of not giving further priority to the local taxes would be to take the local taxes out of his share.

The Court on page 88 spoke very clearly, and I think it completely refutes the contention that they did not consider this imposition on the mortgagee.

There they said, United States is not interested in whether the state receives its taxes and water rents prior to the mortgagees and judgment creditor.

That is a matter of state law.

And in context, there’s no question that the Court held that that would have to be the result.

And we think that this — there is no reason for departing from this rule at this time.

Arthur J. Goldberg:

Mr. Jones, were you checking with the — do I understand in the record that the absence of the state law first (Inaudible) the mortgagee, they did a (Inaudible) a tax lien.

John B. Jones, Jr.:

Under the federal law.

Arthur J. Goldberg:

Federal government (Inaudible)

Now, then to the —

John B. Jones, Jr.:

Yes.

Arthur J. Goldberg:

— to the second, as to (Inaudible) in the New York Court of Appeals, New York state tax came first, the mortgagee is second and federal tax third.

John B. Jones, Jr.:

That’s right.

Arthur J. Goldberg:

Now, you contend for the — whether the New York law has (Inaudible) the government tax comes first, the state tax second and (Voice Overlap) —

John B. Jones, Jr.:

No no, it’s not that.

John B. Jones, Jr.:

They said its — the mortgagee is first but he is limited to the amount of his mortgage.

And that set aside in what was called here a priority adjustment fund.

And then you pay the federal lien.

Now that maybe nothing.

It maybe peanuts or it may pay it off entirely.

In which case, there would be a surplus which would then go to state taxes.

But after you have taken the — in the excess fund they’re over the mortgagee fund, you go first to the federal and then to the state.

If you need more to satisfy the state, you can go back against the mortgagee but you can’t do it to satisfy the Federal Government.

And I think the crucial thing to sort out in these arguments which are made by respondent here is that many of them apply regardless of whether there’s a mortgagee in the picture.

These arguments about the peculiar nature of the state tax lien of necessity would state that whatever the Federal Government completes — competes against a local property lien, the Federal Government would lose.

And as I said that maybe a considerable system of law but it is one against which this Court has spoken clearly and specifically on many occasions in the past.

Potter Stewart:

I don’t quite understand the argument made with respect to what happened in the New Britain case on remand back to the Connecticut Court.

What —

John B. Jones, Jr.:

It is the con — well, it is the intention, as I believe, of respondents that this Court did not realize that the effect of their holding to say that the mortgagee’s preference would be limited, the amount of the mortgage.

— was not unaware of it by that language I quoted from page 88.

(Inaudible)

John B. Jones, Jr.:

No, it’s a little confusing to read because the fact that it isn’t the mortgagee at all, he’s a judgment creditor who is the lawman, they had first a mortgagee, a second mortgagee and the judgment creditor but they can all be considered as mortgagees for this purpose and he — it’s very clear that he didn’t get the money —

(Inaudible)

John B. Jones, Jr.:

That’s right.

The state tax had to be satisfied.

Earl Warren:

Mr. Little.

John Horace Little:

Mr. Chief Justice, members of the Court.

At the outset, I believe Mr. Jones said that Section 71 would seem — of the tax law would seem to imply that there was a first all liability under New York law for real estate taxes but I can say categorically that there is no such liability.

The real property taxes are never collected from any individual.

They are levied on the land as such.

That has been the law for the 35 years that I have practiced.

In answer to Mr. Brennan’s — Justice Brennan’s question about whether the Court of Appeals had ever interpreted the sections involved, yes they have in the case cited in my brief, Wesselman against Angle, which I will mention later in the argument.

Wesselman —

John Horace Little:

Wesselman against Angle.

Potter Stewart:

I missed your very first statement, Mr. Little, I apologize with the — the tax (Voice Overlap) —

John Horace Little:

I have said that —

Potter Stewart:

— as such you said.

John Horace Little:

Mr. Jones had said that Section 71 of the New York tax law would seem to imply that there was a personal liability.

I know of no such personal liability.

It’s a New York real property tax has always assessed against the land and I have never known of any time when they sought to collect it from the landowner.

Potter Stewart:

Well, of course he — he’s the man who signed the check, the land doesn’t.

John Horace Little:

But if he didn’t pay it, they couldn’t sue him for it.

Potter Stewart:

Could not.

John Horace Little:

No sir.

Potter Stewart:

They would — they just proceed against the land and so (Voice Overlap) —

John Horace Little:

That is correct.

They would foreclose their tax lien and there would be no deficiency against the taxpayer owner.

First of all, may I point out the essential difference that this Court in the number of decisions as shown to be between a federal tax lien and a real property tax.

And that the federal tax lien attaches only to the interest of the taxpayer owner in whatever property is the lien against while the real property tax is a lien against the home of the real property including the interest of the owner and the mortgagee, any judgment creditor, anyone who claims any interest in the property would be subject to the real property tax.

The respondent believes that this decision on the New York Court of Appeals should be sustained for several reasons.

The first one is that when the federal tax lien attached to the mortgagor’s interest in the real property, it attach subject to the right in the mortgagee to have the real property taxes paid from the proceeds of the foreclosure sale.

In this case, our mortgage provides as all New York mortgages do that in case of a default, the mortgagee was entitled to sell the mortgage premises according to law.

That is a contract right and the law mentioned is as much apart of the mortgage terms as ordered — it was set forth in full therein.

And that law is at — found in Sections 1082 and 1087 of the New York Civil Practice Act.

1082 says that when a plaintiff becomes entitled to a final judgment in a foreclosure action, it must direct the sale of the mortgage premises or so much thereof as is needed to discharge the mortgage debt, the expenses of the sale and the cause of the action.

And Section 1087 of the Civil Practice Act directs the referee appointed to sell the mortgage property unless the judgment otherwise provides to pay the taxes as an expense of the sale.

All of the taxes and assessments which — let me state that more clearly.

The judgment directs the referee appointed to sell.

To pay out of the proceeds of the sale, all taxes and assessments and water rents which are liens on the property and says that the sum — the sums necessary to make these payments are expenses of the sale with the — within the meaning of the term as used in any part of that section.

These statutes have been a part of the law of New York since 1880 and they are a property right in the mortgagee.

When the mortgagor executed his mortgage, he reduced his ownership rights in the property.

And the federal lien attached only to his reduced ownership.

This reduction in his ownership rights came from the contractual assignment conveyance on mortgage to the mortgagee of this right given under New York law.

I maintain that the New Britain case does not apply here.

New Britain as the Government counsel said — stated started in the Superior Court of Hartford County in Connecticut as an ordinary mortgage foreclosure and proceeded in accordance with the Connecticut foreclosure law until after a sale of the mortgage premises when the proceeds were brought into Court and a supplemental judgment was then rendered which directed the payment from those proceeds of the expenses of the sale, attaches to the City of New Britain the amount to the mortgagee, the amount to the judgment creditor, and the balance to the federal lien.

John Horace Little:

The Government appealed from this decision and at that point, the City of New Britain which had not heretofore — theretofore have been a party intervenes so that it might contest the appeal.

In the Supreme Court of Errors of the State of Connecticut, the only parties present were the Government and the City of New Britain, and the only issue presented to the Court was the irrelative priority of the federal lien and the city taxes.

The Supreme Court of Errors of Connecticut affirmed the con — the Superior Court of Hartford County and the Government’s petition for certiorari to this Court which was granted.

And again, in this Court, the only parties present were the City of New Britain and the Government and again, the only question presented was the relative priority of the federal lien and the city taxes.

It was on remand to the Connecticut Court that the question of relative — of the rights of the mortgagee and judgment creditor came into consideration because it was the Connecticut’s Court which said that the Connecticut procedure required the payment of the real property taxes from the proceeds of the sale.

This Court did not say that.

New York procedure does not require that the real property taxes be paid from the proceeds of the sale.Either the property can be so subject to the real property taxes or the judgment can correct that the referee appointed pay them as an expense of the sale.

The New York Court of Appeals in considering this case made the statement that there was no question of circular priority in New York since first the real property taxes were paid as an expense of the sale before the surplus from which the federal lien must be paid was created.

My point on that is that since the mortgagee and the judgment creditor were not present in this Court to state their position that any implications in the New Britain judgment — in the New Britain decision which would indicate whereas the Government claims that the — this Court intended that the mortgagee should bear the expenses of the real property taxes is over to take the — as far as they’re concerned.

I point out at this time that in the case of United States against the Ball Construction Company decided in this Court in 1958, four years after the New Britain case, Mr. Justice Whitaker wrote a dissenting opinion which Mr. Justice Douglas and Mr. Justice Burton, and Mr. Justice Harlan joined.

And in that dissenting opinion, made the statements that they — the report of dissenting justices believed that the controversy in New Britain was over that portion of the proceeds of a real estate mortgage foreclosure of sale which exceeded the amount of the mortgage.

It added, we think it is not only apparent that Section 3672 (a) had no application to that case but also that the court expressly so declared.

And further, in New Britain this Court was not dealing with any mortgage pledge or other contractual lien or with any question of priority of an antecedent mortgage over a subsequently filed tax liens.

As I say, New Britain did not consider the rights of the mortgagee and judgment creditors and New Britain, anything in it that suggested that the taxes couldn’t be paid as an expense of sale is contrary to the later direct holding of this Court in the United States against Brosnan that they might be paid as an expense of sale.

As it pointed out in the majority opinion in the Court of Appeals which is set forth at page 80 in the record, the Government’s brief in Brosnan brought to this Court’s attention of fact that there was a Pennsylvania statute very similar to the New York statute which said that in order to — when you conduct the foreclosure sale in Pennsylvania, the real property tax is against the mortgage premises have to be paid as an expense of the sale.

That was brought to this Court’s attention not only in the Government’s brief, but also in the opinion in the Circuit Court below.

And yet, this Court did not consider it as sufficiently valid objection to the Pennsylvania foreclosure procedure to mention it in its opinion.

The Court did say in Brosnan that we believe that so far as this Court is concerned the need for uniformity in the collection of federal taxes in these instance is outweighed by the severe dislocation to local property relationships which would result from our disregarding state procedure and to apply New Britain as the Government pressed that it’d be done here would severely dislocate or establish property relations in New York and we put New York mortgagees at a distinct disadvantage to the Pennsylvania mortgagees who do not have to pay the taxes or contribute towards the payment of the federal tax.

Furthermore, the affirmance of the New York Court of Appeals’ judgment in this case would be in accordance with the intent of Congress when it enacted Section 3672 (a) which is now in the 54 Code 6323 (a).

That is the section which says that a prior recorded mortgage has had — has priority over a subsequently filed federal tax lien.

It would also be in accordance with the intent of Congress at the time that 2410 of Title 28 was adopted.

2410 is the enabling section by which a mortgagee may join the Federal Government in a state foreclosure and cut off the lien of the Federal Government.

House Report 1018 on the 62nd Congress, Second Section at the time they were considering 3672 (a) said there is no reason why the Government should not occupy the same position with reference to liens and properties as does the individual.

And House Report 95 of the 71st Congress, Second Section at the time 2410 was being considered said that that was offered as legislation to correct the then existing situation where he, the mortgagee, is therefore in effect defeated of his own right to foreclose unless he is willing to pay off the Government lien at that for which he is in no way responsible and he being a person to whom the Government would in no way look for its payment.

I respectfully submit that the requirements of Section 3672 (a) are not satisfied by merely setting aside the amount that’s due the mortgage debt without regard to whether the mortgagee gets it or not.

The Government’s argument is based on a misinterpretation of New Britain.

I’ve already pointed out that in 1958 four members of the Court did not think New Britain had anything to do with the rights of mortgagees and judgment creditors.

But if it did, all the Court said there was, that when competing for payment from the same fund at the same time, the federal lien must take precedence over the state liens.

To sustain the Government’s contention would mean that that — this Court meant in that decision that regardless of what the circumstances or in how remote — how remote in time, no state procedure can prevent the federal collector from getting his tax from the mortgagee.

I respectfully submit that that was clearly not so stated, no implication to that effect can be found in the reading of the New Britain decision and four members of this Court have thought so.

John Horace Little:

We contend that the — both of the judgments which were rendered by the Erie County Court were proper.

The first one is subject to the taxes.

It takes nothing away from the Government because they’re not — there’s no competition at the time.

And the second one provided for the payment by the referee to foreclose as an expense of sale is in accordance with the — establish New York foreclosure procedure, those statutes have been on the books since 1880 and they’re just as much a part of New York law as those Pennsylvania statutes which say same thing are a part of the Pennsylvania law.

If I (Inaudible) — excuse me, if I have said anything of consequence here the other day, I think it is that the requirements of Section 3672 (a), now 6323 (a) of Title 26 of the U.S. Code are not satisfied by setting aside the amount of the debt without regard to whether the mortgagee is made whole there from or not.

This Court has —

Byron R. White:

(Inaudible)

John Horace Little:

I haven’t gone into that, Mr. Justice White for the reason that it isn’t involved in my case.

I would —

Byron R. White:

(Inaudible)

John Horace Little:

That’s correct but we did not advance it because at that time, the United States versus Bond had been decided and that in that Court, the Circuit Court of Appeals have said that if the mortgagee advances money to pay taxes which have accrued after the filing of the federal lien is advancing money to pay it on — in court lien and that advance cannot take precedent over the federal liens.

I would call your attention to the dissenting opinion of Justice — Circuit Judge Haynsworth in that Bond case where at some length he said that if he believe that Congress did not intend to protect the mortgage but he intend — it intended to protect the mortgagee, to protect the mortgagee and all of rights which he ordinarily and customarily had — always had, namely the right to make an advance necessary to preserve the security for his indebtedness.

Byron R. White:

Now, well do you — under your procedure, they’re under the form of a mortgage which you take is the filing of the federal tax lien and had been a default?

John Horace Little:

No.

No more so that the filing —

Byron R. White:

Do you mean this isn’t the lien — this isn’t —

John Horace Little:

— of the any subsequent —

Byron R. White:

This isn’t the lien against the property failure to pay which within a reasonable time gives you the right to foreclose?

John Horace Little:

No sir.

There can be any number and there are frequently are any number doing your mortgages put on the property after the first mortgage and there can be judgments obtained against the owner.

There can be mechanics liens filed against the owner but as long as he pays his principal and interest, and as long as he pays the taxes, there’s nothing in the first mortgagee can do about it.

Byron R. White:

But this — the filing of the lien prevented you from keeping taxes current.

John Horace Little:

But it doesn’t come within any provision of the New York mortgage.

Byron R. White:

Well, does your — does your — does your bank in — make any effort internally to ascertain or report or —

John Horace Little:

We have it, the records checked once a year.

It is true for —

(Inaudible)

John Horace Little:

I beg your pardon.

They could’ve foreclosed after the federal lien.

John Horace Little:

Not simply because the federal lien was filed.

But the taxes could be obtained (Voice Overlap) —

John Horace Little:

If the taxes had become the lien, we could, yes.

Hugo L. Black:

If you — he didn’t pay the taxes and he didn’t foreclose.

John Horace Little:

We didn’t pay the taxes and we didn’t foreclose immediately.

The effect of what the Government asked here that we establish an escrow fund or without an escrow fund, it doesn’t make any difference that if immediately under the — the mortgagee would have to start foreclosure.

He wouldn’t be able to give any leeway to the owner as we frequently do so that they may rehabilitate themselves and save their property.

We would have to immediately foreclose.

The Government in its brief says I believe also in Judge Fuld’s opinion that if the — what we ask is that — would make it necessary for the Federal Government to immediately foreclose its lien would conversely what the Federal Government asked would make it necessary for us to immediately foreclose our lien.

As I say, I believe the important thing is that what the Government asked for here is directly contrary to what Congress said it intended whether it enacted this section giving priority to the mortgagee over subsequently filed lien.

I tend that this Court has always said that it looks to substance and not to form.

So the mere setting aside of the amount to the mortgagee without regard to whether he gets it in the end does not satisfy the requirements of that section.

We believe that it doesn’t matter what theory the Court adopts to do it.

You can adopt my theory that when the mortgage — mortgagee on the execution of the mortgage received the contractual right to have the taxes paid from the sale proceeds of the mortgage property and that constituted the diminution of the ownership rights of the owner.

When he made the mortgage, he encumbered his property and he encumbered it exactly to the extent of the terms of that mortgage.

So that the mortgage — the lien attached to the proper — to the ownership rights of the — property rights of the owner in the mortgage property he had at the time the lien was filed.

Or you can sustain the New York Court of Appeals’ decision on the ground that it’s an established foreclosure procedure.

Going back to 1880, it says the same as the Pennsylvania pursuant — foreclosure procedure which also requires the payment of real estate taxes as a part of the foreclosure proceeding and that therefore New York’s procedure must be as good.

The Court of Appeals in that —

Potter Stewart:

Isn’t that — that’s rather a standard provision I suppose in most states.

They may not have con — have the language of these are — deemed the expenses of sale or something like that but it’s a standard for — you know, its around — most the states.

Wouldn’t it be that the local taxes had to be paid in the mortgage foreclosure procedure?

It’s nothing unique in New York and Connecticut (Voice Overlap) —

John Horace Little:

I don’t think so.

I don’t think that the — well, I will say —

Potter Stewart:

If the buyer wants to get a — wants to get a good title —

John Horace Little:

I don’t think they have to —

Potter Stewart:

— to have the liens on it.

John Horace Little:

They do have to be paid in Connecticut.

There’s no question about it, the Connecticut Court said so.

They do have to be paid in Pennsylvania.

John Horace Little:

There’s no question about it in the past and in — case, these sections, ordinance law of Pennsylvania are said — are cited.

In New York, they don’t have to be paid.

The property can be sold subject to them.

Of course, in those states where as in the Bank of America against the United States, the companion case to Brosnan where the foreclosure is under the exercise of a part of sale on a trustee there is no question about taxes involved.

But I would agree with you that in most states, in most states they do have to be paid as an expense of sale.

Arthur J. Goldberg:

(Inaudible)

John Horace Little:

The purchaser would acquire the title subject to those federal — or to those state taxes and it have to pay them after the sale or lose the property.

Arthur J. Goldberg:

A foreclosure?

John Horace Little:

Yes.

In the brief of the American Bar Association, amicus curiae, they advanced a further theory on which the New York Court of Appeals’ decision can be sustained.

And that is that since the federal lien attached only to the mortgagor’s property interest in the mortgage property and there is no question about that.

That’s been held time after time after time.

And that that property interest of the mortgagor was always subject to the annual recurring charges of the state’s taxing authorities to raise the money necessary to provide essential governmental services that therefore, the federal lien attached to the diminished ownership of the mortgagor as I’ve just expressed it.

In any event, I believe that the important thing is to stop the federal tax collector from fording the expressed intention of Congress when it adopted these sections and that is that the prior recorded mortgage get paid before the subsequently filed federal tax lien.

And Mr. Justice White, I think it’s not as important that we should have a right to advance money to pay taxes as it is that we should get back to principal that we have loaned and that is what is being threatened here.

In addition to the —

(Inaudible)

John Horace Little:

But that is something that we can see and know what will be.

But as it’s cited in the amicus brief, take the situation of a $1000 mortgage on a piece of property where there’s $1000 in real estate taxes against which of federal tax lien of $10,000 is filed.

The property is sold for $10,000.

The mortgagee has a $1000 put aside for him.

The Federal Government gets the remaining $9000.

There’s nothing left for the states so that the $1000 heretofore set aside for the mortgagee is taken from him and given to the state.

He has nothing.

(Inaudible)

John Horace Little:

We can always know that the state taxes are levied at a certain percentage of value and we can always anticipate, find up ahead, when it’s necessary to step in and protect our interest against the state taxes.

There’s no right of a mortgagee that it is so important as the right to the return of the principle of the amount he loaned.

And what — when that right is threatened, all business relationships are disrupted and long standing property interests are threatened.

Thank you.

Earl Warren:

Mr. Jones.

John B. Jones, Jr.:

I have just three quick points, Mr. Chief Justice.

Let me say that examples can be multiplied and what’s sauce for the goose is sauce for the gander.

If you change the amount of the liens and the example given by the Bar Association and have the large lien be the local tax lien, you’ll find the Federal Government by making a grant to a modest grant of priority to a modest mortgage find itself stopped with having the local taxes in large amount paid out.

The hypothetical can be multiplied but they’re certain.

And this is not to disagree with the point made by Mr. Little that there are occasions when the application of this rule will put the mortgagee with no opportunity during this but foreclose because that will have to be a result in some situations where the tax liens are large in amount and do eat up any remaining equity.

Mr. Little mentioned in the Brosnan case, I think it’s important to recognize with him that there was in the record in that case a claim of this nature under New Britain which could have been made.

It was not.

Now I don’t know whether that was a matter of Government strategy or Government overconfidence but there was a much more important point in the case which we thought the state procedure should not to be applied at all.

And this point was not raised of the — at the end, the factor of the judgment was that the New Britain point did slip by.

Point is made in the reply brief that we did not — we do not now contest this in Pennsylvania.

It’s quite difficult to turn these cases up under the Brosnan rule because we have to search the record ourselves, find cases where federal interests are involved, and then they have to be ones where the value of the property exceeds that at the mortgage before this point comes up at all.

We are, however, raising the point in the Supreme Judicial Court of Massachusetts in a case involving Milton Savings Bank and that’s under consideration by that Court at that time so is not in any sense conceded it.

And —

Potter Stewart:

In Massachusetts, the procedure is similar to that of Pennsylvania?

John B. Jones, Jr.:

Similar, yes.

For that (Inaudible) — for these purposes, it’s substantially similar.

And then just lastly, I have Section 71 before me and whatever maybe the practice in New York, the Section 71 did say that if he doesn’t pay it, he shall be firstly liable for the tax assessed against such parcel or portion of real property.

And I think that the law in practice may diverge but there is inherent in there a personal liability for the tax.

Arthur J. Goldberg:

(Inaudible)

John B. Jones, Jr.:

Well, he can keep his mortgagor current by this escrow arrangement device so that he —

Arthur J. Goldberg:

(Inaudible)

John B. Jones, Jr.:

When he have security, he has complete security against the federal tax under 3672 except to the extent that the state cuts in with its state tax so he can’t — assuming that he’s correctly judged the security of the underlying property.

He can’t be hurt anymore than the state taxes.

And he can keep fairly current on those or there will be a small amount which he cannot —

Arthur J. Goldberg:

(Inaudible)

John B. Jones, Jr.:

Frankly in advance and by a suitable escrow agreement.

I’m not saying everyone will pass but that was involved in the Bond case and there was no question raised.