Earl Warren: Number 97, United States of America, versus R.F. Ball Construction Company and United Pacific Insurance Company. Mr. Prescott.
Alexander F. Prescott: Mr. Chief Justice, may it please the Court. It is stipulated that the sum impleaded in this case is a balance to -- from the R.F. Ball Construction Company for -- to the taxpayer for having completed a contract in San Antonio, Texas. The first question presented is the relative priority of federal tax liens in this fund and those of claims made by the surety under the Texas contract for payments that was required to make in an entirely separate contract under which the taxpayer defaulted in Kentucky. The court below has held that the application of the -- which was executed by the partnership with predecessor of the taxpayer corporation where the mortgage within the meaning of Section 3672 of the 1939 Internal Revenue Code. That statute, insofar as pertinent here, provides that no federal tax liens shall be valid against the purchaser, mortgagee, pledgee, or judgment creditor. The statute was enacted to protect the public from secret federal tax liens. The application which the court below held made the surety, a mortgagee provided that the partnership had transferred and conveyed as of this date, that's the date of the Texas contract to the surety all right, title and interest of the undersigned to all percentages and all of the sums which would come to, to the undersigned as collateral, security of the full performance of the Texas contract which was performed, and the payment of any other indebtedness or liability to the undersigned into the company whether heretofore or hereafter incurred.
Charles E. Whittaker: May I ask you? Is that -- is not the conference form of application used by all the indebtedness?
Alexander F. Prescott: We have made a search, if the Court please, of the textbooks and of the decisions of the states that its default and yet the -- any other indebtedness or liability, when it appears in each instrument, the courts some hold that there's no mortgage at all.
Charles E. Whittaker: I think you misunderstand me. What I say as it is, is not this form of bond application which you've just read the conference form used by all the bonding companies in the country?
Alexander F. Prescott: I trust it is, Your Honor.
Charles E. Whittaker: Yes.
Alexander F. Prescott: And a like one was executed late -- late application was executed by the taxpayer when the bonding company became surety on the Kentucky bonds. This contract or this assignment was executed in July of 1951. A few months afterwards, the partnership was incorporated and the taxpayer assumed the liabilities and took all of its assets. About nine months after the execution of this instrument, the taxpayer corporation entered into the Kentucky contract. In March of 1952 -- 1953, the first Government lien arose.
Speaker: How much was that lien bore?
Alexander F. Prescott: Six thousand and some dollars, if Your Honor please, plus interest.
Speaker: Plus the amounts of the --
Alexander F. Prescott: (Inaudible)
Speaker: 13,000
Alexander F. Prescott: Yes, sir, there were two other liens. On April the 30th, 1953, the work of the R.F. Ball Construction Company was accepted by the housing authority that is the work under the Texas contract. Between that period and the date upon which it was agreed as to the amount that the two -- the taxpayers under the Texas contract, the other two liens arose and all of the notices were filed. It was not until December, 1953 between December, 1953 and March of 1954 that any liability arose under the Kentucky contract that is the date that the payments were made by the surety under the Kentucky contract or from December, 1953 to March of 1954. Now, the real question in this case seems to be whether, we can apply or we ought to apply the principles that this Court has announced in connection with lien cases and statutory liens of all types to a contract. There's no question and the court below found and held that the liability of the surety here arose subsequent to the date all of the liens were filed. Yet, distinguished the recent decisions to this case and surety clauses, the (Inaudible) nor the lien cases on the ground that there was a question of statutory lien while here, the liens arose out of contract. However, there was no lien at the time that the Government's liens were filed. The surety had no lien. I have to say first though that among the tax writers, they all say this is a contrariety of opinion among the states as to how they would treat mortgages which provide for future advances and then the mortgages which were treated the same. They do state and I think that this is in connection with this Court's admonition that the taxing statutes ought to be applied uniformly throughout United States and that the terms used in Section 3672 ought to be used in there or to be construed in their conventional sense. There is no conventional sense among the decisions as to the treatment of this type of mortgage. The case cited on the surety's brief, Wright against Voorhees, an Iowa case, the last case in his index where the suit brought by a mortgagee against his mortgagor to recover two losses. He had pledged a security for loans specified and paid. The mortgagee defended on a condition which included any other indebtedness similar to the condition here. And the Court held that to accept the mortgagee's decision would convert the instrument into a mere blanket mortgage having no reference to the subject matter referred to in the instrument, and the judgment in favor of the mortgagor was affirmed. Now most of the states hold that where there's an open-end mortgage, here, we have one that's sold from both ends and first I should perhaps say that where there is no security that security has promised which the Court hold in a case where there is an assignment of potential gross income or acquired property. The lien, if it did exist, attaches to the act that acquires property when acquired but under the statutes relates back to the date of the execution of the instrument.
Speaker: What law do you think the Government characters this instrument whether it's a mortgage or a pledge or (Voice Overlap) --
Alexander F. Prescott: The -- the 3672 of the 1939 Code determines whether it'll have the status and preference it will have over the liens.
Speaker: Well, that's as to the preference but as to character of the instrument whether it is a mortgage or not. What law governs, state law, federal law, if state law, what state?
Alexander F. Prescott: Federal law, when we're dealing with a question of priority, its priority over a federal tax lien. This Court has many times said that it is always a federal question to determine the type of adverse lien where this Court -- in court not to be determined by state laws. If -- if there'd be some questions in Your Honors' mind on the question of an interest in the property, I'd like to call attention to the decision New York against Maclay. And there the Court was applying the priority statute provides statutes 3466. It first held that an adverse lien of the State was in court and then questioned the correctness of the so-called mortgagee cases. And referring to the mortgagee cases, it referred to the regular common law mortgage as distinguished from an equitable mortgage and it indicated there the possibility or perhaps I might seem to say the likelihood that the Government could take under 3466 ahead of the mortgage, a common law mortgage. Evidently, the Court is not suggesting that you could take other people's property. Here, the assignment is specifically for security. Now, as I have said, the question really is, does the doctrine of relation apply against the United States in a contract of this type where admittedly, the mortgagee, as he calls himself, was not -- had no lien. At the time the instrument was executed, he had no lien and certainly no court lien at the time the Government's first lien arose. He had no lien that he could enforce at the time our notices of liens were filed.
Speaker: They had to have a lien. Did they have to have --
Alexander F. Prescott: This Court has many times said that the mortgages and lien and all of the tax writers who attempt to define it, if Your Honor please --
Charles E. Whittaker: (Inaudible) requiring the mortgagee has within -- on that type of (Inaudible)?
Alexander F. Prescott: Well, I think not -- I don't think there's such a suggestion in the decision below, if Your Honor please. But it was -- the assignment was specifically as security, that's quoted from the instrument. And we start from there and find that we have no lien up to the time that our tax liens go on. That's under the decisions -- the majority decisions of the states. Most of the decisions of the states hold that they had no lien, but they say that when the lien that comes to court, it will relate back to the date of the execution of the instrument. There's another reason, we submit, why the doctrine of relation should not be applied against the United States in mortgages, where a subsequent encumbrance of it and this is non-recorded instrument.
Charles E. Whittaker: (Inaudible)
Alexander F. Prescott: May -- becomes such before a -- an advance which is filed under the instrument is made. He taxed ahead in -- on the motion of the decisions, some of them none. Under some of the decisions and I have heard in Connecticut the decision of this Court which was Connecticut law, the -- the mortgage, he doesn't even take his original -- original sum, it's $6000 in that case. But gives way took a subsequent encumbrance of it. It seems astounding, if the Court please, that that of those the way the decisions run in determining the effect of this type of mortgage. The -- I'm sorry about the -- not on the brief, Townsend against Todd, 91 U.S.452. In addition, it was contended by the Government below that we came within the Texas statute because the systems have not been recorded. The court below held otherwise. However, the Fifth Circuit has already held in another case, that one of the recording statutes and under one of the recording statutes of Texas, the United States was a creditor, and as a creditor, the mortgage unrecorded was not valid. If the Government cannot either look to the state statutes which would not give uniformity if it were filed, then it seems this Court or the federal court must look to the realities if this mortgage is used in 3672 is to be uniformly applied. And the -- the -- it seems not unreasonable, certainly, that Congress intended by mortgage to put the Government in a position where a junior creditor could not -- a credit -- a junior mortgagee that is one junior to federal tax liens could obtain upon what the Federal Government could not. Under state court decisions, many of them or most of them will say, the unrecorded lien of this type or an innocent take of the value would come between those two, the first mortgage and the second mortgage, that the second mortgage, in attack of the first mortgage and United States cannot unless the realities of the situation are considered. There is a second question in the case and that if the allowance of attorney's fees to the interpleader. This Court holds in scope here, we think, that attorney's fees may not be allowed out of the fund upon which the Federal Government has tax liens. There are several court decisions cited on the Government's brief which are in accord with our position, the Ellman case was distinguished which was cited by the taxpayer or the surety historically and by the court below. The rules, we submit, and the statutes provide that no cost shall be assessed against the United States unless there be some statutes specifically permitting it. There is no such statute pointed to and the Ellman case and this case used the discretion, equitable discretion, of the District Court in allowing an attorney's fee out of fund to which the Federal Government had the lien.
Earl Warren: Mr. Groce.
Josh H. Groce: May it please the Court. I will -- he states that -- counsel stated that the surety was urging this interpleader thing. Actually, I am forced to argue something in which, I am not at all interested by virtue of the Court's rule, but I will have to argue the interpleader side, because the Court would not allow division argument. The interpleader is the one who is interested in the interpleader's fee and not -- by not the surety company. The surety is -- concedes that the interpleader should be entitled to its plea. The question here is in connection with the interpleader plea is where the sovereign seeks the benefits of an interpleader action. Can that sovereign escape the burdens of that? Here, it's undisputed as to Ball's position in this matter. It had in his hands some 13 odd thousand dollars of money that the Government was claiming. The surety was claiming, materialmen were claiming, it could not be safe to itself determine whom -- to whom to pay that fund.So, it interpleaded the fund and it stipulated that a $500 interpleader fee would be reasonable in the case.
Felix Frankfurter: It stipulated.
Josh H. Groce: Yes, it stipulated that a $500 fee would be reasonable if allowable under the law.
Harold Burton: The Government did that.
Josh H. Groce: Yes, the Government did, Government so stipulated, yes, sir.
Felix Frankfurter: What disqualification it will have?
Josh H. Groce: Yes, they are contending, that this Court's decision in the Liverpool case, he spoke of it as the Scoville case, it's the Liverpool case, Your Honor. They say that the Liverpool case forecloses that. Well, that is not the case. I have here the briefs of the Government in the Liverpool case. The Government in that case insisted that that was not an interpleader action, it was a garnishment action controlled by Rule 677 of the Texas Rules of Civil Procedure. This Court followed them and there was not one thing said about an interpleader's fee whatsoever. That cost would be taxed according to Rule 677, which is the garnishment rule in Texas. Now --
Felix Frankfurter: Are there no -- has this question not come up where property is put into the treasury of the Court and to rule about it, I mean the interpleader problem or the surrender of property in which the Government claimed an interest and then the question arises whether in that kind of a situation they're being advanced before the Court, the Court as a matter of conscious can deal with it in relation to the funds?
Josh H. Groce: That's exactly what have --
Felix Frankfurter: I have not --
Josh H. Groce: So far as I know, this Court has never passed on that question.
Felix Frankfurter: I think, 1789?
Josh H. Groce: No, sir. Not -- so far as I know.
Harold Burton: How about Government questions (Inaudible)
Josh H. Groce: Sir? No, sir. I'm -- I'm sorry to say that it is not. The federal interpleader statute is not a statute, it -- well, it is a statute, but the attorney's fees that are allowable is not mentioned --
Harold Burton: Oh, I'm not talking about attorney's fees, but several interpleaders covered by statute.
Josh H. Groce: Oh yes. That is correct, but not -- not the matter of attorney's fees.
Stanley Reed: Oh no, no.
Josh H. Groce: Yes.
Harold Burton: I don't --
Josh H. Groce: Now, this court --
Felix Frankfurter: What are the -- does the interpleader has to anything, “Never mind the United States.” Does it say anything about cost and -- and fee -- attorneys fee?
Josh H. Groce: The interpleader asked for five --
Felix Frankfurter: The interpleader asks. It's done by presentation.
Josh H. Groce: No, sir. It does not.
Felix Frankfurter: There's nothing about it.
Josh H. Groce: No, sir.
Felix Frankfurter: That statute, a general rule --
Josh H. Groce: Left -- left that to the --
Felix Frankfurter: Inferential power (Voice Overlap) --
Josh H. Groce: -- to the inferential powers of the courts. Now, this Court followed --
Felix Frankfurter: And the lower court says the question hasn't arisen whether the recent Court and the United States has a claim to it whether then it is to be treated like any other litigant?
Josh H. Groce: Yes, sir.
Felix Frankfurter: There is that?
Josh H. Groce: Yes, sir. That's exactly what to do -- what the lower --
Felix Frankfurter: But I'm asking you whether there had been no adjudication either since the beginning of the nations. Has there been no adjudications in the lower court on this question of making a reasonable or sensible, call it what you will, and just -- and wrote upon the immunity of the sovereign against from being charged with cost of fee.
Josh H. Groce: Yes, sir, there are four.
Felix Frankfurter: There is a difference. For instance, there are English cases which make a difference of this sovereign immunity pursuit, if in fact there's -- there is in court, then the Court can make this position even though the sovereign has an interest in it.
Josh H. Groce: Yes, sir.
Felix Frankfurter: Now is there nothing in the lower court?
Josh H. Groce: Nothing in -- there are four -- four cases in the lower court, but this -- this particular case being two of them once in the trial court and once in the Court of Appeals.
Felix Frankfurter: And what are the other --
Josh H. Groce: But the Ellman case and the American Airlines Insurance case, that is the decision from the Missouri court in 299 South Western Second which is referred to in the briefs. And there the Missouri court said, that --
Felix Frankfurter: That's a state case --
Josh H. Groce: Sir?
Felix Frankfurter: That's a state case and I'll be glad --
Josh H. Groce: Yes, sir. What's involved in -- on the question and is discussing federal law.
Felix Frankfurter: Yes, but I want to know -- that you'd have to tell us, not just the docket at least, I want to know if there were any explicit decisions by anybody on Circuit or District or Circuit Court or Courts of Appeals to date.
Josh H. Groce: The Circuit --
Felix Frankfurter: If you say no --
Josh H. Groce: The Circuit Court in this case --
Felix Frankfurter: Well, I know --
Josh H. Groce: -- is the first -- is the first Circuit Court to pass upon the question. There are these other cases that I will refer to. In that case, the Missouri court said, “The Supreme Court of the United States has many times held that where the sovereign invokes the aid of a court, it must submit to the applications of the same principles which govern private suitors citing many authorities from this Court. Any other rule would be unconscionable and we, to use our courts, free from the obligation to abide by the rule which binds other litigants.
Felix Frankfurter: Isn't it there something on this under Western May by Mr. Justice Holmes? A case called the Western May.
Josh H. Groce: If Your Honor please, I'm sorry I am arguing in another lawyer's point.
Felix Frankfurter: It is all right.
Josh H. Groce: I -- I am -- I can't say that I have exhausted the authorities. I'm merely arguing as the other lawyer asked me to argue.
Felix Frankfurter: You're in the envy of a position of a barrister.
Josh H. Groce: [Laughs] Except that I have -- had to resume this responsibility. The next case is the Ellman case which we -- which is relied upon by the interpleader. And there it's -- there the trial court said, “There is nothing in the language of the statute,” that's the interpleader statute, which would warrant the Court in penalizing an innocent stakeholder simply because the United States happens to be a party to a litigation, it hold it holy as contended for by the Government would engraft by decisional law a purpose in favor of the United States, not specifically provided for by Congress and unwarranted on equitable principles. Now, will this Court?
Felix Frankfurter: May I -- may I suggest, speaking to you in behalf of your legal client, may I suggest that that -- that if there is a strong controlling long continued statutory policy -- policy expressed in legislation by Congress, that becomes not irrelevant in determining and then putting this Court whether it should as a matter of decisional law go against such a policy of Congress or should respected as part of its own discretionary determination of law that Congress has decided. That -- that's not an unknown principle of judicial consideration, is it?
Josh H. Groce: No, sir, I would -- that sounds -- sounds fairly reasonable to me, sir.
Felix Frankfurter: Well in 1789, Congress has felt that Uncle Sam should be treated as to these matters. As a -- I don't mean in this kind of a case but --
Josh H. Groce: Not in an interpleader action, Your Honor.
Felix Frankfurter: I understand that.
Josh H. Groce: And there is that Congress passed the interpleader statute and it made no specific exceptions as far as the Government was concerned and at a time when in all times, the interpleader who was an innocent stake holder was entitled to his fees that he should not be penalized just because the Government was a party to the -- party to the suit.
Speaker: Having done so well from your colleagues, why don't you get onto your own --
Josh H. Groce: I would like too, sir.
Speaker: -- argument.
Josh H. Groce: [Laughs] Thank you. The question with reference to the principle element in this case is whether or not, prior contract rights may be destroyed by subsequently file tax liens. Now, in order to get to that, let's get a brief resume of what the facts in this particular case are. On June the 26th, 1951, a contract for the construction of a housing project of over three-and-a-half million dollars was left by the San Antonio Housing Authority to R.F. Ball Construction Company. R.F. Ball Construction Company was desirous of subcontracting the painting and the interior decorating, which he entered into a contract with Jacobs for approximately a quarter of a million dollars for that. Jacobs then was required to put up a platform performance-bond. And he applied to the United Pacific Insurance Company for this performance-bond. And in consideration of them executing this quarter of a million dollar bond, he read -- he assigned to the United Pacific Insurance Company all of the retained percentages on that job, Your Honors are familiar with the --- where a construction contract where 10% is withheld each month from the amounts that are paid so that at the end of the time, there would be that sum for the protection. Those retained percentages on the job were assigned in the following language to the bonding company. That Jacobs does assign, transfer, and convey as of this date as collateral security for the payment of any other indebtedness or liability of Jacobs to the company whether heretofore or hereafter incurred. Now, is there anything wrong with that transaction? I believe Justice Whittaker calls attention that that is an everyday business transaction. It's done everyday. It's a perfectly legitimate and valid transaction whereby the bonding company can procure some security. Yes sir?
Charles E. Whittaker: Well, I -- well, I was asking if this was the standard form --
Josh H. Groce: That's right, sir.
Charles E. Whittaker: -- on the application that's ruled by the conference of bond underwriters and the university used in a country, is this why --
Josh H. Groce: Yes.
Charles E. Whittaker: -- is -- that's it?
Josh H. Groce: Yes, sir.
Charles E. Whittaker: All right.
Josh H. Groce: All right. There were no taxes even due at that time. None of the taxes that that the Government is seeking to collect were even due at that time, or had accrued. Now, some nine months later, the surety incurred an additional liability on the Kentucky contract, which under the law and by contract, Jacobs was obligated to indemnify the surety against loss on that job. But that was a present obligation incurred by the surety on April the 4th, 1952. And it was a present obligation to pay subject only to be defeated or nullified by the performance of the principle which the principle never did. And whether what -- what -- is anything wrong with that transaction? Now, here we have the surety company with the retained percentages at that time and mind you, the San Antonio job had been going on for some nine months and presumably their retained percentages have been retained every month and that there was money on hand. At that time of the execution of the Kentucky contract, you have a situation where there are certain funds supposed the San Antonio job had already been completed and this $13,000 was there. And suppose immediately the Kentucky contract went sour and the bonding company had to take over at a lost of the $13,000. Could it be said for a moment that the bonding company wasn't secured by that assignment of those -- of those retained percentages? Well, of course it could. Now, what is the next step in the picture? The next step in the picture is that on April the 30th, 1953, the housing authority in San Antonio accepted the work of Ball, the general contractor which showed that all work, including Jacobs' work of painting and interior decorating had been completed. Now, just how long before that had been completed? It's not in the record but I assume that Jacobs' work had been completed for some time because it was the painting and the interior decorating and not landscaping which is the last thing on the job. Still, up to the -- and on April the 30th, it was agreed that on this Jacobs' contract, there were $13,228 of retained percentages. All right, what do you have there? There's still, not one single tax lien has been filed. And mind you, that is against mortgagees, pledgees, purchasers, a tax lien is not valid until it has been filed, and not one single -- single cent of a tax lien has been filed at that time. There's still no notice of -- notice of a tax lien. The surety now, what was the situation now? The surety was obligated on its $36,000 Kentucky contract bond, and it had as collateral security to protect the assignment of $13,000 which was in the hands of Ball. Now, thereafter, in May, June, and September of 1953 for the first time notices of tax liens were filed in accordance with 3672. Now, when the first default on the Kentucky contract took place --
Harold Burton: The taxes had nothing to do with the transaction at all, has it?
Josh H. Groce: Sir?
Harold Burton: The taxes had nothing to do with anything --
Josh H. Groce: No, sir. The taxes had nothing to do with the -- either of these two jobs. Yes.
Harold Burton: Well, it's -- it's stipulated that it's not to be considered one way or the other, (Inaudible) or impleaded to them.
Josh H. Groce: All right, sir. Let us say, when the first default to be stipulated here, it is that the parties made no stipulation as to where these taxes came from. Let's put it that way so that they -- the Government does not claim that they were taxes due on this particular job and the bond -- the Government does not claim that the bonding company owes the taxes.
Speaker: (Inaudible)
Josh H. Groce: The Government has tried often hard to make the bonding company pay these taxes but they -- been the surety companies have been successful so far. Let us say, just when the first default on the Kentucky contract took place, it's not in the record. But mind you, on this obligation which the bonding company surety assumed in April -- on April the 4rth, 1952. It was required to pay. It didn't voluntarily pay, but it was required to pay during December of 1953 and March of 1954, the sum of $12,900 and whatever -- whatever it is. Now, this -- it was required to pay that and it was based upon that present obligation, it was not an open-end mortgage at all. And what is the legal? Then now, so, let's go back. Now what is the legal effect of this assignment that --
Charles E. Whittaker: (Inaudible) by an open-end mortgage (Inaudible) as you argued not only a fixed present capital but the question on that is for which the Jacobs Company might become obligated to the surety in the future.
Josh H. Groce: I used the term “open-end” mortgage, Your Honor, to mean where you go to the bank and make an assignment in consideration of the bank advancing new moneys over a period of time. Under the Phillips case, where the bank does that and is under no obligation to pay to -- the lien to the money -- the federal tax lien comes in and cuts off the bank's right to give you any further -- I make use of any further loans, now that is what is known as an open-end mortgage in the way I used it.
Charles E. Whittaker: You mean that's a matter of (Inaudible)
Josh H. Groce: [Laughs] All right. All right, sir. What is -- what was the effect of this assignment as collateral security? Well, obviously, it's either one, a mortgage or a pledge, or two, it's an outright assignment. Now, if it was a mortgage or a pledge, then on the 3672, it being prior in time, it is prior in length. It's a -- if it is an outright assignment, then at the time of the filing of the tax liens, Jacobs, under 3670, had no property or rights to property in the fund to which the tax lien could apply. The Texas law which created these and this is the law that prevailed.I believe, Your Honor, asked what law prevails on that. This Court in the case of Morgan versus the Commissioner, 309 U.S. held that unequivocally on a very recent case from New York based upon that, held the same thing, that its state law, the Court explains, creates legal interest and rights. The Federal Revenue Act designate what rights or interest so created shall be so taxed. So, under the Texas law, what is the effect of this assignment? I read from the Texas case of Southern Surety Company versus Bering. When this, as a part of the consideration for the execution of the surety bond by the appellant surety company conveyed and assigned under said surety company as security for indebtedness, then due by him to the company and any subsequent indebtedness which he might incur to it, any and all payments. Funds, moneys or property due are to become due to him under his building contract with the press company, he is thereby assigned the bond in question in this case, the validity of the assignment is in no way affected by the fact that there was no bond in actual existence at the time that it was made. Now, that's the Texas law that this Court said that must be applied. As early as 150 years ago, this Court, in an opinion by Chief Justice John Marshall in the case of U.S. versus Coy, upheld what is known in law as indemnity mortgages. There, a deed has been made to one Coy by one Fitzgerald who was a public servant of the United States Government to secure Coy from any liability that he might have -- might have to pay by virtue of his security to the United States Government. In consideration of the payment -- well, here is what this Court said. The deed is made to save Coy harmless on account of his having become surety of Fitzgerald to the United States. All the covenants in the deed appeared to the Court to be fair, legitimate and consistent with common usage. That is -- that has been the law of this Court for more than 150 years. The law of Texas though is the one that prevails so we cite the Supreme Court of Texas on an indemnity mortgage where it says the same thing. The desire to indemnify a security against loss was a sufficient consideration for the execution of the mortgages. Now here is what corpus juris says with reference to indemnity mortgages. It is well settled that a mortgage given by way of indemnity, that is not found on the present debt but meant to secure the mortgagee against loss or damage in consequence of any contingent liability or responsibility which he has assumed or agreed to assume for or on behalf of mortgagor and surety as bail, endorsed or otherwise is valid and be enforceable. An indemnity mortgage maybe given to secure the mortgagee not only as against debts or liabilities for which he has already assumed responsibility or liability but also to protect him against loss or damage on endorsement, suretyships, or other liabilities which he may in the future entered into for the benefit of the mortgagor. Now, when Congress used the term that a federal tax lien should not be valid as against any mortgagee, pledgee, or purchaser, any mortgagee which is prior in time, what does it mean? Does it mean nor we are eliminating indemnity mortgages from that -- that category of any mortgagee. No, we're going to eliminate that, and that is exactly what this Court -- what the Government in this case is contending in this Court. Now of course, it could be said to be a pledgee in this case because it is -- it is cash, you might say, because these retained percentages have been referred to in by the decisions as just so much -- like so much liberty bonds.
Charles E. Whittaker: What difference would that make? Statute says it is a mortgagee or a pledgee or (Voice Overlap) --
Josh H. Groce: That's -- I -- I agree, Your Honor, but they come back and say it can't be a pledge because there was no transfer of the possession. Well, of course, there couldn't have been any transfer of possession because the pledgor didn't have possession to begin with. The -- the possession was in the -- in R.F. Ball Construction Company. But even if this assignment as collateral security is not a mortgage or a pledge, it was still an assignment. And under the Texas law, that's Southern Surety case versus Bering Manufacturing Company that I quoted for you just a moment ago, as well as numerous federal decisions including several decisions of this Court, Salem Trust Company versus Manufacturers' Trust -- Finance Company, Conard versus Insurance Company, U.S. versus Kaufman, Harrison versus Terry, Brent versus The Bank of Washington. After Jacobs made the assignment, he no longer had any property or rights to property in this fund to which the lien, the tax lien could apply under 3670, because the 3670 says that the lien shall apply only to property or rights to property belonging to the taxpayer and subsequent to the assignment, he had no such -- no such interest. The Government would say that these principles that are of the Scoville, the Avery case, the New Britain, the Security Trust, all of those cases, not one single one of those cases had to do with contract rights, Your Honors. They had to do with some state statutory lien such as a water-rent lien, a landlord's lien, an attachment lien, a garnishment lien. Things of that sort which sought to come in under the term of judgment creditor. Not mortgagee, pledgee, or purchaser, but judgement creditor and they have not ripened into.
Felix Frankfurter: Do you think this right -- this is -- this right more than -- than the interest of New Britain in the New Britain case?
Josh H. Groce: Oh yes, sir.
Felix Frankfurter: You do.
Josh H. Groce: Oh yes, sir. Not that I think that Congress intended that it had to ripen because after all no mortgage is coy if you want to use the word coy in the sense that it's complete until after it has been foreclosed, because you don't know how much interest is going to be due, you don't know how whether the mortgagors are going to pay part of it, you don't know whether -- whether attorney's fees are going to be added to it by people --
Felix Frankfurter: All of it -- all of it was to New Britain.
Josh H. Groce: Oh no, sir.
Felix Frankfurter: What was it then?
Josh H. Groce: New Britain was a mechanics lien as I recall it.
Felix Frankfurter: Well, I know but what more -- in what sense was that in coy in the sense in which this is --
Josh H. Groce: Oh, there were so many other things that had to be done in order to perfect the lien. Oh, yes, there were many things that had to be done to perfect that lien that had not been done.
Felix Frankfurter: It had been (Inaudible) about and --
Josh H. Groce: Sir?
Felix Frankfurter: Just as in the (Inaudible) about and foreclosed the interest of the city. That's all as I remember New Britain.
Josh H. Groce: No, I -- I think Your Honor is wrong. I'm not sure but I think --
Felix Frankfurter: I would think -- I'm with you on New Britain because I didn't like that case --
Josh H. Groce: [Laughs] There's a sequel to that. I see that 430 is here so --
Earl Warren: You can finish the case.
Josh H. Groce: Thank you, sir. The Government says that the liability of the surety arose subsequent to the State that these liens were filed. Now, that is sheer sophistry. The liability of the surety when it executed this bond on April the 4th, 1953, was fixed at that time. Now it's true that that liability was not discharged until after the fixing of the lien. But that, when they paid those -- when they paid off that claim, they had no alternative. It was not a question of an open-end mortgage because here, we have the obligation to fight and we had relied upon our security, and so if the liability was fixed as of April -- of April the 4th, 1953 where it's more than a year after that, that the Government filed their -- filed their liens. And here, the Government states something about the doctrine of relation back. We're not contending for any doctrine of relation back. The doctrine of relation back is an equitable doctrine. We claim that we have a perfectly valid legal mortgage or pledge or assignment. And we're not asking for the Court to apply any equitable doctrine of relation back at all.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: No, sir.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: No, sir, but 3670 says it must -- it must be property belonging to and if he has already assigned it, it doesn't belong to him. That's the -- that's my argument on that, Your Honor.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: Yes, sir. By adding the alternative an assignment out of him which divested him of any property or rights to property in the fund, one or the other. Now it's interesting to note that the Government in this case is seeking to have this Court judicially legislate on a matter that Congress not only has failed to legislate on but has specifically refused to legislate on. I have attached to my brief the report of the House Ways and Means Committee. In 1954, Congress was in the process of completely revamping the Internal Revenue Code. The Ways and Means Committee, their first report was to come in and spell out 3672 and did it find just who was a mortgagee pledgee or purchaser. But, it went then to the Senate Finance Committee and I have the report of the Senate Finance Committee. And the Senate Finance Committee says, “No, we are satisfied with the then court decisions construing who is a mortgagee or a pledge or a pledgee by the actualities rather than by nomenclature or some theoretical way.” The courts have and we've cited those authorities in -- in the -- in the brief. Many courts have passed upon the trial court in this instance. He says that the -- the courts do not decide cases on nomenclature. It's true that the parties to this transaction didn't place the label on it of either a mortgage or a pledge but as the trial court says courts do not decide cases on nomenclatures, they look to the substance of the transaction.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: Yes, sir.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: Yes, sir.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: Not now, sir. No, sir.
Charles E. Whittaker: It's not.
Josh H. Groce: No, sir.
Charles E. Whittaker: (Inaudible)
Josh H. Groce: The -- there's a good deal of history and I thought that the Government had abandoned any question with reference to that. They did not brief it. They did not put it on certiorari -- on their application -- petition for certiorari, and I assume that they had abandoned it but counsel did say something about not recording the -- the instrument. There was a statute that is in the record here that would have permitted it to be of record as of the time but that as soon as that -- a decision of the state court came out, the legislature immediately knocked that out and said “No, it did not apply to transactions such as this one.” So Congress then refused to legislate as they're asking this Court now to legislate. Thank you very much.
Earl Warren: Mr. Prescott.
Alexander F. Prescott: May it please the Court. The Texas statute at the time of this transaction did require the liquidation --
Earl Warren: Did require what?
Alexander F. Prescott: The liquidation of --
Earl Warren: Oh, yes.
Alexander F. Prescott: -- this type of instrument. It was substance to this kind after it was amended.
Charles E. Whittaker: Mr. Prescott, you said that it's practical?
Alexander F. Prescott: Yes.
Charles E. Whittaker: (Inaudible)
Alexander F. Prescott: I mean, an indemnity mortgage, sir.
Charles E. Whittaker: Well, (Voice Overlap) --
Alexander F. Prescott: An instrument that's claimed to be -- have been --
Charles E. Whittaker: Indemnity mortgages protect the statute and does the (Inaudible)
Alexander F. Prescott: It was amended effective May 21, 1955, provide that money to a contractor on a construction contract where the contractor assignor has furnished a surety bond shall not be included in it the definition of an account receivable. That statute prior to that amendment, this type of instrument was included as an account receivable and that an assignment was an account receivable and liquidation was essential to its validity. I should like firstly to -- the Government does not contend that a valid indemnity mortgage cannot be entered into. We make no such contention, but most of the states hold that you must set forth the condition contemplated at the time of the execution of the instrument with sufficient particularity that it -- and some of them say, “Gentlemen, you can put a limit upon it.” But if you -- if this instrument had said that this was to cover the liability of the surety under the Kentucky contract, then it might have been a mortgage within the rulings of the states, most of the states, they are not in Court. The second -- secondly, most that states hold that a mortgage is to secure a debt and without a debt, it has no effect as a lien. Now there was no debt here and the court below found that the liens were on before the potential liability of the surety became an actual liability. The liens were filed, have been filed. The voluntary advances take ahead of future encumbrances only if the advances be prior in time to the encumbrance. This is what most of the states hold. And where a mortgagee is bound to make future advances or indemnifies then up to the amount fixed in the mortgage, all for that indemnity specified the lien for such advances relates back to the date of the mortgage and it's superior to subsequent liens. That is where there is a specified indemnity in the instrument or it is set forth limited in amount. Here, there's no limited amount. If this --
Charles E. Whittaker: Again, a decision first applied by April 30 for (Inaudible)
Alexander F. Prescott: I -- I didn't --
Speaker: You said Congress specified by April 30th the amount subject to the collateral assignment.
Alexander F. Prescott: No, sir, I don't mean that. The condition of the instrument must be set aside. There's nothing in this instrument that specifies -- it has to do with this --
Speaker: Well, at least if that was the position (Inaudible) secured by April 30th, again prior to the -- aid of the --
Alexander F. Prescott: That was the amount --
Speaker: -- determining the encumbrance lien.
Alexander F. Prescott: That was the date that it was determined that an amount was due that is the date --
Speaker: (Inaudible)
Alexander F. Prescott: -- that was accepted. No, sir. Actually, the date that that was determined was in October of 1953 as of that date, and that's what the record shows.
Speaker: Well, it's not due by the (Inaudible)
Alexander F. Prescott: Yes, that's -- no the amount due to the taxpayer, sir. If --
Speaker: (Inaudible)
Alexander F. Prescott: Yes, sir. The amount due to the taxpayer was agreed to between the taxpayer and R.F. Ball Construction Company in October of 1953 after all of our liens on. The acceptance of the housing --
Speaker: I thought that was April 30?
Alexander F. Prescott: That's what my learned opponent here made a mistake when he said so.
Speaker: I thought was heretofore.
Alexander F. Prescott: May I read that, the -- from the opinion of Court from page 8. As the tax liens had been filed, the potential liability on the contract job incurred to the bonding company on April the 4th, 1952. That's referring back to the potential liability under the Kentucky contract. I'm speaking of the sum that was due or was determined to be due under the Texas contract, the security, and that was not determined as to amount. I should add here, this application was filed for a bond for two contracts in Texas. What became of the percentages, the application covers both of them. What became the percentages under the one contract is not shown. This is Texas 610, Texas 6 and another number which is in the record.
Speaker: (Inaudible)
Alexander F. Prescott: That's true. Yes, sir. There is a case -- I may just -- speaking of the application of these principles, the Court of Appeals in the State of New York has just decided the Aquilino case. It's not yet defaulted and I can't even say where it is. We haven't been able to find it. I should like to -- well, how could I cite it to the Court, may I make another list of applications and --
Felix Frankfurter: What's the case?
Alexander F. Prescott: -- and to call the Court's attention? What date was that decided?
Felix Frankfurter: By the Court of Appeals?
Alexander F. Prescott: You have it then?
Speaker: (Inaudible)
Alexander F. Prescott: Oh, I'm sorry.
Felix Frankfurter: District Court of Appeals of New York?
Alexander F. Prescott: Yes, sir.
Felix Frankfurter: We have that up (Inaudible) you give it to the clerk.
Alexander F. Prescott: We don't have it yet, sir. It's a --
Felix Frankfurter: You haven't read the opinion?
Alexander F. Prescott: I have the opinion here.
Felix Frankfurter: Well, if you can state on what page.
Alexander F. Prescott: That was under review by publication, we don't think it has (Inaudible) Your Honor. It's been passed a couple of weeks.
Felix Frankfurter: What's the name of the case?
Alexander F. Prescott: Three weeks. It's Aquilino. It's Robert Aquilino --
Felix Frankfurter: Would you mind telling us the spelling?
Alexander F. Prescott: A-Q-U-I-L-I-N-O and another copartnership, et cetera, against the United States and others. That's a -- that is the case in which the Court of Appeals --
Speaker: (Inaudible)
Alexander F. Prescott: Court of Appeals of the State of New York, sir, which is the Highest Court in the State of New York. In that case, the Court of Appeals reversed itself on former decisions. In a case involving the balance due on a municipal contract under New York statutes, the balance due on such contract is to be treated as a trust fund for the payment of the -- (Inaudible) -- and may I just leave in part of that -- the Court said and then I'll -- that runs pretty close, we say, to contracts, we submit. It says -- I mean that Court said in reversing its former decisions, it is now exceedingly well-settled that no state created rule may defeat the paramount right of the United States to levy and collect its taxes uniformly throughout the land. Well, that is said in connection --
Felix Frankfurter: Is that the only importance of the case?
Alexander F. Prescott: Oh no, sir.
Felix Frankfurter: Is that it?
Alexander F. Prescott: Oh no, sir. That -- that is important --
Earl Warren: Just finish your sentence.
Alexander F. Prescott: Thank you sir. Also because the fact that it's in Court where the United States against Kings County which is a Second Circuit decision.