United States v. City of New Britain

delivered the opinion of the Court.

The question presented by this writ involves the relative priority of statutory federal and municipal liens to the proceeds of a mortgage foreclosure sale of the property to which' the liens attached.

Two mortgages on the real property of a corporation located in the City of New Britain, Connecticut, were foreclosed by judgment sale in the Superior Court of Hartford County, and a gross sum of $28,071.24 was realized. Against this fund, there were claims of some $31,000, including expenses of the sale, the two mortgages, a judgment of record, and various statutory liens asserted by the City and by the United States. The federal liens, securing unpaid withholding and unemployment taxes and insurance contributions totaling $8,475.13, were created by § 3670 of the Internal Revenue Code.^[1]

A Connecticut statute provides that real-estate tax liens “shall take precedence of all transfers and incum-brances” in any manner affecting the property subject to the lien.^[5] Another state law gives the water-rent liens “precedence over all other liens or incumbrances except taxes” on the property subject to the liens.^[6] The funds available for distribution being insufficient to pay all claimants in full, the Superior Court directed that the expenses, the City’s liens, the mortgages, the judgment lien, and the United States’ liens be paid in that order. The United States appealed from the judgment insofar as the statutory liens of the City were given priority over those of the United States. The Supreme Court of Errors of Connecticut affirmed, 139 Conn. 363 , 94 A. 2d 10 , and we granted certiorari, 346 U. S. 809 .

When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing the United States, whether secured by liens or otherwise, by § 3466 of the Revised Statutes, 31 U. S. C. (1946 ed.) § 191. In that circumstance, where all the property of the debtor is involved, Congress has protected the federal revenues by imposing an absolute priority.^[7] Where the debtor is not insolvent, Congress has failed to expressly provide for federal priority, with certain exceptions not relevant here,^[8] although the United States is free to pursue the whole of the debtor’s property wherever situated. The State, having a lien only upon property within its boundaries, may not reach beyond the state line to fasten its lien upon other property. The record does not establish that the taxpayer in this case was insolvent.

It does not follow, however, that the City’s liens must receive priority as a whole. We believe that priority of these statutory liens is determined by another principle of law, namely, “the first in time is the first in right.” As stated by Chief Justice Marshall in Rankin v. Scott, supra:

“The principle is believed to be universal, that a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds, unless the lien be intrinsically defective, or be displaced by some act of the party holding it, which shall postpone him in a Court of law or equity to a subsequent claimant.” 12 Wheat., at 179 .

This principle is widely accepted and applied, in the absence of legislation to the contrary. 33 Am. Jur., Liens,

The United States in claiming priority for all its liens relies heavily on two recent cases from this Court, United States v. Security Trust & Savings Bank, supra, and United States v. Gilbert Associates, 345 U. S. 361 . We do not think they are inconsistent with our decision in this case.

The Security Trust case involved an inchoate attachment lien that had not ripened into a judgment at the time the federal tax liens attached. We noted that “[njumerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded.” 340 U. S., at 50 . Thus, the attachment lien was “merely a lis pendens notice that a right to perfect a lien exists.” Ibid. Such inchoate liens may become certain as to amount, identity of the lienor, or the property subject thereto only at some time subsequent to the date the federal liens attach and cannot then be permitted to displace such federal liens. Otherwise, a State could affect the standing of federal liens, contrary to the established doctrine, simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment, etc., is determined.^[9] Accordingly, we concluded in Security Trust “that the tax liens of the United States are superior to the inchoate attachment lien . . . .” Id., at 51 . In the instant case, certain of the City’s tax and water-rent liens apparently attached to the specific property and

The State and the United States were both holders of general statutory liens in the Gilbert Associates case. But the question we have here did not arise there because that was a case involving personal property and insolvency of the taxpayer. We said in that case:

“Where the lien of the Town and that of the Federal Government are both general, and the taxpayer is insolvent, § 3466 [Revised Statutes] clearly awards priority to the United States.” 345 U. S., at 366 .

Here the contest is between two groups of statutory liens, one specific and one general, attached to the same real estate, with no question of insolvency involved; therefore, “the first in time is the first in right.”

The State finds the rule of “first in time, first in right” not applicable because of § 3672 of the Internal Revenue Code,^[10] which makes the lien of the United States invalid as to the prior recorded mortgages and the judgment in this case. It points out that the mortgagee could have paid the delinquent real-estate taxes and water rent, with the amount so paid becoming part of the mortgage debt covered by the mortgage lien,^[11] and suggests that the federal tax lien would therefore be invalid as to such amount by virtue of § 3672.^[12] From this and a belief that Congress did not intend, by giving mortgages and

We do not agree. The United States is not interested in whether the State receives its taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien. There is nothing in the language of § 3672 to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein, and the legislative history lends support to this impression.^[14]

Under the circumstances, we vacate the judgment of the Supreme Court of Errors of Connecticut and remand the case to that court to have determined the order of priority of the various liens asserted, in accordance with this opinion.

Judgment vacated.