The opinion of the court was delivered by: Robert D. Morgan, District Judge.
DECISION AND ORDER ON PLAINTIFF'S MOTION FOR JUDGMENT ON
The complaint herein seeks to have plaintiff's alleged
security interest in the proceeds of certain equipment held to
be a superior lien to that of the United States Government for
taxes. After answers by all defendants, plaintiff has moved
for entry of judgment on the pleadings.
Jurisdiction is founded in 26 U.S.C. § 7426, 28 U.S.C. § 1346(e),
2410 and 2463, and venue here is asserted under
28 U.S.C. § 1402(c). There is no dispute with respect to either
jurisdiction or venue.
The motion is supported by affidavits and sworn documents.
A written agreement by all parties to this action, containing
comprehensive recitals, and other undisputed documents are
attached to the complaint. The Government's opposition to said
motion is also supported by affidavits and sworn documents. It
is clear, therefore, under Rule 12(c) F. R.C.P., that the
motion must be treated as one for summary judgment and be
disposed of as provided in Rule 56 F.R. C.P. All parties have
been given reasonable opportunity to present any material
deemed pertinent;*fn1 and the question thus becomes whether
there is any genuine issue as to any material fact requiring
trial or whether judgment should be entered as a matter of
The following sets of facts are clear and undisputed:
1. Plaintiff loaned $600,000 in cash to Canadian Parkhill
Construction Equipment, Ltd. (herein CONSTRUCTION) on November
13, 1969, taking a note and chattel mortgage on 29 pieces of
heavy construction equipment which plaintiff believed in good
faith to be owned by the borrower, which mortgage, to the
extent necessary and with other documents, was promptly filed
and recorded so as to perfect any security title obtained
thereby and giving requisite public notice thereof in the
jurisdictions here pertinent. The two other "Canadian"
corporate defendants, Canadian Parkhill Pipe Stringing, Inc.
(herein INC.), for whose tax liability the United States
asserts its lien, and Canadian Parkhill Pipe Stringing, Ltd.
(herein LTD.), of which CONSTRUCTION and INC. are both wholly
owned subsidiaries, had
knowledge of and guaranteed the loan in writing.
2. On February 16, 1970, notices of seizure were issued by
the Internal Revenue Service on behalf of the United States,
and served on INC., covering, among many other things, the 29
pieces of equipment involved in the mortgage to plaintiff
which were in the possession of INC. under lease for business
use. This followed proper notices of lien by the United States
Government for federal taxes and required withholdings alleged
to be due and unpaid from INC. in the amount of $793,416.73.
3. CONSTRUCTION defaulted on its loan payments due after the
one for December, 1969, and on April 20, 1970 a formal demand
for full payment was served on it by plaintiff.
4. On May 26, 1970, after failure to agree on the ownership
of the property involved or the priority of the respective
asserted liens, all present parties to this action agreed, in
writing, upon an auction sale of the equipment, with an escrow
of the proceeds (less fees and expenses) without prejudice to
existing or future claims thereto. Such sale was held on July
16, 1970, and the Northern Trust Company of Chicago, Illinois
now holds over one million dollars in trust, under said escrow
agreemnt, subject to determination of the respective rights
therein or thereto in an action such as this, if not by future
agreement between the parties.
Apparently the gross sale price of the equipment listed in
plaintiff's mortgage was $603,744; but the record does not
fully disclose the total costs of sale and escrow, of which
plaintiff should bear some proportionate part even if its
security title is upheld.
Plaintiff, by its motion, asks judgment against the escrow
fund for $603,744. Defendants LTD., INC., and CONSTRUCTION
take the position that such judgment for plaintiff should be
granted promptly to stop the accumulation of interest on the
acknowledged obligation of CONSTRUCTION to plaintiff, on which
LTD. and INC. are guarantors; but these defendants concede
that there should be withheld "such amount as the court may
deem appropriate as a proportionate charge against said
proceeds on account of the costs and expenses of the auction
sale." The United States Government opposes the motion,
contending that there are material issues of fact which
require trial. The Government agrees, however, that the sole
question presented to the court by this motion is whether
there is any such material issue. See Rule 56(c) F. R.C.P.,
and June v. George C. Peterson Co., 155 F.2d 963 (7th Cir.
Based on its affidavits and documentation on file, the
Government contends that plaintiff cannot have obtained any
security title to the equipment through its mortgage which
CONSTRUCTION executed, because "all or almost all of the
above-mentioned equipment seized by the Internal Revenue
Service was owned by Taxpayer * * * (INC. not CONSTRUCTION)"
(Emphasis added); that INC. paid the purchase price for 28 out
of the 29 units listed in plaintiff's mortgage; that INC.
charged the purchase cost thereof to business expense on its
tax returns; and that in November, 1968, INC. received a Bill
of Sale from the original seller of 12 units of the equipment
listed in plaintiff's mortgage. This latter document was some
eight months after INC. appears from the records to have
conveyed same to its parent, LTD., but also eight months before
it was listed as property of CONSTRUCTION in plaintiff's
Upon analysis, the issue before the court is quite simple.
The Government's position is that INC. (Taxpayer) owned most
of the equipment, that CONSTRUCTION did not own it, and,
hence, that, with no title, CONSTRUCTION could not possibly
have made a valid mortgage of it; or that, at the very least,
there are disputed questions of fact bearing on CONSTRUCTION'S
title at the time of the mortgage which must be material to
the validity of the mortgage, likewise because, without clear
title to be mortgaged, the mortgage could convey no security
interest. Plaintiff's whole position on this point is that
even if it be conceded for the sake of argument that there are
disputed questions of fact bearing on the technical validity
of CONSTRUCTION'S title, they are completely
immaterial to the validity of the mortgage and the superiority
of plaintiff's lien as a matter of law, because, on the other
facts which are before the court and not disputed, plaintiff is
shown to be a mortgagee for value in good faith, not subject as
a matter of law to such of the mortgagor's possible title
defects as might be shown, particularly where, as here, the
alleged real owner (INC.) knew of the mortgage and did not
assert its title but actually guaranteed the loan. Careful
consideration leads this court to the conclusion that the
plaintiff is correct, as a matter of established law, and that
its motion should be granted.
It is clear that any security interest in equipment that
plaintiff acquired attached in November, 1969. Such interest
was superior in time to any lien of the Government under
Section 6323 of the Internal Revenue Code. The Government's
notices of lien were filed in February, 1970. See 26 U.S.C. § 6323(a)
and Paramount Finance Co. v. United States,
379 F.2d 543 (6th Cir. 1967). As shown by affidavit of J.A. McAuliffe on
file, prior to making its substantial loan to CONSTRUCTION,
involved here, plaintiff, which had successfully loaned money
on equipment three times previously to various of the Parkhill
companies, checked their financial standing directly and with
third parties, required exhibition of documents purporting to
show conveyance of title to the equipment to CONSTRUCTION, as
well as certification from successive Parkhill auditing firms
as to what the books showed in this regard. These documents,
including corporate minutes, fully confirmed an apparent title
in CONSTRUCTION, at least as between it and its parent (LTD.)
and sister corporation (INC.). Without registered equipment
titles of some kind (and there is no contention that such