APPEAL from the Appellate Court for the First District; heard
in that court on appeal from the Circuit Court of Cook County;
the Hon. HAROLD P. O'CONNELL, Judge, presiding.
MR. JUSTICE UNDERWOOD DELIVERED THE OPINION OF THE COURT:
On May 25, 1950, the Mutual National Bank of Chicago, as trustee under a trust agreement dated December 22, 1944, known as trust no. 1371, acquired title from one Jerry C. Lorenz and his wife to a single-family residence in Chicago. On March 8, 1957, Mutual National, as such trustee borrowed $28,500 from Chicago Federal Savings and Loan Association evidenced by its promissory note dated March 8, 1957, and secured by a mortgage and rent assignment on the real estate and acknowledged by an authorized officer of the trustee on March 11, 1957, which mortgage and rent assignment were recorded March 15, 1957. On June 3, 1958, Mutual National as such trustee borrowed $10,000 evidenced by a note payable to bearer, and secured by a trust deed conveying the real estate to Chicago Title and Trust Company as trustee, acknowledged June 5, 1958, and recorded June 10, 1958. This trust deed was specifically subject to the Chicago Federal mortgage. On December 4, 1958, Mutual National as such trustee borrowed $4,535, evidenced by a note payable to bearer, and secured by a trust deed conveying the real estate to Chicago Title and Trust Company as trustee, dated December 4, 1958, and recorded December 17, 1958.
Default having been made in the payments due under the first mortgage, Chicago Federal filed its complaint to foreclose its mortgage on July 21, 1959, making parties defendant Mutual National as trustee under the land trust, Chicago Title and Trust Company as trustee under the second and third mortgages, Frank S. Cacciatore and Lucille M. Cacciatore, as being in possession of the premises and as beneficiaries under the Mutual National trust agreement of December 22, 1944, and numerous other defendants possibly having some interest as judgment creditors, lien claimants or the like, and unknown owners, including the owners of the bearer notes secured by the second and third mortgages. The United States of America was made a defendant as claiming some interest in the premises by virtue of a tax lien for $7,911.57 against Frank Cacciatore, notice of which lien was filed by the Collector of Internal Revenue with the Cook County recorder on July 29, 1957.
The United States of America filed its answer on August 18, 1959, denying its lien is inferior to the lien of Chicago Federal, and asking the court to determine the rights and priorities of the respective parties. Chicago Title and Trust Company as trustee under the second mortgage, and one David J. Peilet as owner of the note secured by the second mortgage, answered admitting the priority of the Chicago Federal mortgage but alleging the second mortgage to be superior to all other claims. One Stephen L. Ruff was added as a party defendant as an assignee of the beneficial interest under the Mutual National trust. He answered admitting his ownership of the beneficial interest in Mutual National trust No. 1371. Thereafter, on October 28, 1959, all other defendants were either defaulted or dismissed, and the cause was referred to the master in chancery. On December 23, 1959, an amended complaint was filed adding additional defendants, none of whom are involved here. At the hearing before the master, all three notes and mortgages and the Federal tax lien were proved and admitted in evidence, and the master in his report found Ronald Wayne & Co., Inc., an Illinois corporation, to be the owner of the Chicago Federal note, mortgage and rent assignment by assignment of February 18, 1960, and Wayne & Co. was substituted as plaintiff.
On July 26, 1960, a decree of sale was entered by the circuit court of Cook County approving the master's report, overruling the exceptions to the report, and directing the sale of the premises by the master. The decree further found Wayne & Co. entitled to $38,903.49 for principal, (including $663 advanced for 1958 real-estate taxes), interest, attorneys' fees and court costs; Peilet, as owner of the second mortgage note, to be entitled to $12,426.64 for principal, interest, attorneys' fees and court costs, subject only to the prior rights of Wayne & Co.; Sam and Vita Dattulo as owners of the third mortgage note, to be entitled to $5,254.33 for principal, interest, attorneys' fees and court costs, subject only to the prior rights of Wayne & Co. and Peilet. The decree further found that Ruff had been the owner of the sole beneficial interest of the trust (Mutual National No. 1371) since December 19, 1958; "subject however to the interest of the United States of America, in said beneficial interest, in the sum of $4,826.31, plus interest at 6% per annum from March 8, 1957, which interest of the United States had attached to the beneficial interest of the trust herein at the time of the recording of the federal tax lien on July 29, 1957, * * *." In default of payment, sale by the master was ordered of the mortgaged premises, all subject to the usual redemption provisions, including a specific provision giving the United States of America one year from the date of sale in which to redeem.
United States of America filed notice of appeal from this decree to the Appellate Court, First District, asking that its tax lien "be found and declared to be prior to the rights, claims and interests of all other claimants in this cause, save the holder of the first mortgage * * *." On September 16, 1960, an order was entered by the circuit court making the notice of appeal a supersedeas without bond and staying the execution of the terms of the decree of sale except as to the foreclosure of the first mortgage lien. Thereafter, on December 19, 1961, the Appellate Court affirmed the decree. The United States of America petitioned for leave to appeal to this court, and Peilet and Chicago Title and Trust Company, trustee under the second mortgage, answered the petition for leave to appeal by agreeing that the issues are important and merit review by us, and therefore we granted leave to appeal. No other parties to the litigation appear here.
An examination of the record indicates that the master proceeded to sell the premises to satisfy the lien of the first mortgage, and that the sale produced $2,454.92 after payment of the first mortgage indebtedness and costs. It would appear that this litigation resolves itself to the question of who gets the $2,454.92, it apparently being conceded that both the tax lien of the United States of America and the Peilet second mortgage note amount to more than that sum.
Since the balance of the proceeds of sale will satisfy neither the second mortgage debt nor the Federal tax lien in full, it is unnecessary for us to determine the relative priority of the third mortgage debt and the Federal tax lien, as the point has become moot.
The government questions the payment of subsequently accrued taxes by the first mortgagee, the taxes being for a year subsequent to, and the payment being made subsequent to, the date of filing of the government lien. The government concedes that the first mortgage is prior to the governmental lien which was filed subsequent to the execution and recording of the first mortgage, and the mortgage instrument expressly provides for the payment of after accruing taxes. The rights of the beneficiary were necessarily subject to such after accrued taxes. Since payment of the taxes was made by the mortgagee pursuant to authority given it by the trustee prior to the date of the filing of the governmental lien, there can be no question regarding the propriety of such payment and the precedence thereof over the governmental lien. The beneficiary having previously directed the execution of the first mortgage, and the trustee having previously executed the first mortgage which authorized the mortgagee to make payment of such taxes in order to protect its security, no subsequent action could affect the authority of the mortgagee to make such payments and include the amount thereof in the total secured by the first mortgage lien. Wright v. Langley, 36 Ill. 381; Thackaberry v. Johnson, 131 Ill. App. 463, affirmed 228 Ill. 149.
In addition to the foregoing reasons for holding the subsequently accrued and paid taxes prior to the government lien, there is an entirely separate and independent ground upon which such action may be sustained. The Appellate Court was clearly correct in denying the government's claim for priority over the tax advance on the independent ground that the Federal lien against the trust beneficiary did not attach to the real estate to which the beneficiary had no title under the law of this State as is hereinafter more clearly set forth.
As between the second mortgage of June 3, 1958, and the Federal tax lien, notice of which lien was filed July 29, 1957, against Frank S. Cacciatore, the admitted beneficial owner under the Mutual National land trust until December 19, 1958, the question of priority is an important one, since it goes to the very heart of Illinois land trust transactions and the right of innocent third parties to deal with a land trustee either as purchasers or mortgagees lending upon the sole security of the trust real estate.
The tax lien notice was filed pursuant to sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954 (26 U.S.C.A. 6321 et seq.). Section 6321 provides for a lien for unpaid Federal taxes in favor of the United States "upon all property and rights of property, whether real or personal, belonging to such person." Section 6322 provides the lien imposed by section 6321 shall arise at the time the assessment is made, and section 6323 provides the lien shall not be valid against any mortgagee, pledgee, purchaser or judgment creditor until notice is filed in the office designated by the law of the state in which the property subject to the lien is situated.
In Aquilino v. United States, 363 U.S. 509, 4 L.ed.2d 1365, the court said (p. 512): "The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had `property' or `rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that `in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the statute.' Morgan v. Commissioner, 309 U.S. 78, 82."
Only when the Federal tax lien has attached to the taxpayer's State-created interests, does the Federal law determine the priority of competing liens against the taxpayer's property or rights to property. Aquilino v. United States, 363 U.S. 509; United States v. Bess, 357 U.S. 51, 55, 2 L.ed.2d 1135. So, in order to determine Cacciatore's "property" or ...