Before DUFFY, KNOCH and CASTLE, Circuit Judges.
On January 5, 1959, Standard-Crowley-Jackson (Standard) filed this action for interpleader against Crest Finance Co., Inc. (Crest), the United States and others. Thereafter, Standard paid $17,369.94 into the registry of the United States District Court for the Northern District of Illinois, subject to the decision of the Court as to which defendant or defendants shall recover. An order was thereafter entered dismissing the United States as party defendant, and granting the United States (Government) leave to file a complaint in intervention. On April 20, 1959, plaintiff filed an amended complaint making Road Machinery and Supplies Company (Road Machinery) and Peter Kiewit Sons' Company (Peter Kiewit) additional parties defendant.
Standard was the principal contractor for the construction of a portion of the Illinois Toll Road. On September 20, 1957, Standard and Twin Excavating Co., Inc., entered into a contract pursuant to which the latter furnished certain labor and materials for the road construction.
From March 21, 1958 through June 10, 1958, Crest made loans to Twin Excavating Co., Inc. which were secured by promissory notes and by assignments of accounts receivable of Twin Excavating Co., Inc. Each note provided that the accounts were pledged as security. The loans during this period totaled $67,722.53.
The District Director of Internal Revenue assessed federal withholding and social security taxes against Twin Excavating Co., Inc. with respect to wages paid to employees for services rendered between April 1, 1958 and September 30, 1958. The dates of the assessments were August 15, November 7 and November 14, 1958. Notices of the federal tax liens for said assessments were duly filed. On October 9, 1958, a notice of levy was served upon Standard by the United States. It was admitted by Standard that it owed Twin Excavating Co., Inc. the sum of $17,369.94, and it was this amount that Standard paid into court.
The Government admits that the claims of Road Machinery and Peter Kiewit have priority over its claims, but insists that it is entitled to the balance of the fund. Crest contends its liens which came into existence during the period March 1, 1958 through June 10, 1958, are prior and superior to all other claimed lien rights. Road Machinery and Peter Kiewit urge they are subcontractors who have perfected their liens under Illinois law and as such, have liens superior to the assignee of the contractor and superior also to the tax liens of the United States.
The Revenue Act of 1928, § 613(b), 45 Stat. 875, provided that a government tax lien shall not be valid against any "mortgagee, purchaser, or judgment creditor until notice thereof has been filed * * *." This was amended in 1939 to include "pledgee." Revenue Act of 1939, § 3672(a), 53 Stat. 882, 26 U.S. C. § 3672(a). Section 6323(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 6323(a) now in effect, has taken the place of section 3672(a) of the 1939 Code, and provides, "Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate * * *."
Under Illinois statutes, no filing or recording is required to perfect an assignment of accounts receivable. Ill. Rev. Stat. 1959, ch. 121 1/2, § 221. Crest argues its liens were choate prior to the filing of the federal liens in that it was clearly established that Crest was the lienor, that specific accounts receivable were subject to the lien, and that the amount of the lien was fixed. Crest cites United States v. City of New Britain, 347 U.S. 81, 74 S. Ct. 367, 98 L. Ed. 520.
The Government argues that what is a choate lien for this purpose is a question of federal law so that the characterization of a lien as choate under state law is not controlling; that the relative priority of a federal lien for unpaid taxes is also a federal question. United States v. Acri, 348 U.S. 211, 75 S. Ct. 239, 99 L. Ed. 264.
The Government's main contention is that the assignments to Crest cannot be pledges within the meaning of section 6323(a) because Crest did not have possession of the assigned accounts.The Government argues, in order to have an effective pledge under the common law and section 6323(a), the contract to pledge must be accompanied by a transfer of possession or control over the property or collateral pledged as security.
The Government concedes that a chose in action can be the subject of an effective pledge, but argues that although the property is incapable of actual delivery to the pledgee, this does not dispense with the requirement of transfer of possession. In such a case, it argues, the pledgee must have possession and control over the documents which represent the property.
Crest argues that it had done everything necessary to perfect the assignment under the Illinois statutes. In addition, the contract between the parties clearly indicates that a pledgorpledgee relationship was intended. The contract included a "Schedule of Assigned Accounts" which listed the specific accounts that were to be collateral for the loans. Standard knew that the accounts were assigned. It made payments directly to Crest. The only thing that was not done, and which the Government contends made all the other actions futile, was the transfer of the pieces of paper that represented the accounts.
It is well established that under the common law, a transfer of possession is an essential part of a valid pledge. 72 C.J.S. Pledges §§ 19, 20. The Illinois Supreme Court has held that certain agreements which purported to sell and assign accounts receivable outright were, in fact, security transactions and the transfers were pledges. Dorothy v. Commonwealth Commercial Company, 278 Ill. 629, 116 N.E. 143, L.R.A. 1917E, 1110; Mercantile Trust Company of Illinois v. Kastor, 273 Ill. 332, 112 N.E. 988. However, under Illinois law, an assignment of accounts may be different than a pledge. Immel v. Travelers Insurance Company, 373 Ill. 256, 26 N.E. 2d 114. The fact ...