Earl Warren: Number 61, Ethel Meyer, Petitioner, versus United States. Mr. Sherman.
Samuel W. Sherman: Yes, Your Honor, if the Court pleases. This case is here on a writ of certiorari to the United States Court of Appeals for the Second Circuit. Ethel Meyer, the petitioner, is the wife of Peter Meyer, deceased. Peter Meyer, in 1943, had life insurance policies totaling some $50,000. Under 1943, he borrowed from the Huntington National Bank of Ohio the sum of about $26,000 and made assignments and pledged these life insurance policies upon which his wife was the beneficiary to the bank for these loans which were made to him. Now, in 1943, Peter Meyer did not owe the United States Government any moneys, any tax moneys at all. In 1945 and 1946 -- 1946, the tax liabilities for those years arose which were due to the Government of the United States from Peter Meyer. Now, the Government in 1946 and in 1947 made assessments on those tax moneys some $6100. And as soon as they made those tax assessments under the Code, United States Code, the tax liens arose. Now, they were unpaid. These taxes were unpaid. In 1955, Peter Meyer died, so that there was due to the Government from his estate some $6100. The bank having received assignments and pledge of these policies upon his death, the bank received the sum of $26,800 or thereabouts, $26,000, I should say, $26,800, which was due the bank for the loans and that exhausted practically with the exception of some $400, the entire shares surrender value of the policies.
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: Yes, Your Honor. Under the agreement, the bank had the right to collect the money that was due it from all -- from the entire proceeds of the policies. There's no question about that.
William J. Brennan, Jr.: Net proceeds?
Samuel W. Sherman: Net proceeds.
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: Yes.
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: Yes. Yes, Your Honor, from the entire amounts. Now, the widow received her moneys, the balance of the proceeds which would be some $24,000 or $23,000 from the insurance companies. And the United States Government then brought an action against Ethel Meyer, individually and as executrix of the estate, of Peter Meyer's estate, to collect this $6100. And the -- the position that counsel for Mrs. Meyer took was that this money is justly due to -- from her estates because it was due from the estate, the husband and the estate owed the money. However, the courts granted summary judgment against her personally upon the basis that the proceeds that she received were subject to those tax claims. Now, because there are decisions rendered by the United States Supreme Court in the case of -- which were handed down in 1958, in the case of Commissioner against Stern and United States against Bess, where this Court has held, and I've omitted an important trace of this case, New York State Section 166 has an insurance law which states that the proceeds of life insurance are entirely exempt from creditors of the insured. Various other States throughout the United States have similar laws. This Court has interpreted laws of various States and as I recall, the Commissioner against Stern case and United States against Bess, involved Kentucky statutes as well as New Jersey statutes which contained similar provisions of exemption. Now, in the case of Commissioner --
Byron R. White: (Inaudible)
Samuel W. Sherman: Unless of course, the -- the -- yes, pledges the proceeds, yes, Your Honor. Now, the cases have held that --
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: No, Your Honor. This is --
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: The bank loans were but we maintained that the tax lien which the Government had never attached to the proceeds because this is the crux of the case. This is the distinguishing feature of our case from any other case.
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: I can't claim anymore than that Your Honor. That's right.
William J. Brennan, Jr.: (Inaudible) They gathered the proceeds, even the Government contends to recognize (Inaudible)
Samuel W. Sherman: Your Honor --
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: Yes. This is the crux of the case and I'm going to come to it right this minute. The Government is relying upon a decision which was handed down in the United States against Behrens in 1956 or some two years before this Court handed down decisions in United States against Bess, in which Judge Learned Hand had before him a situation not similar to ours and briefly, the facts in the Behrens case were as follows, in which the equitable doctrine of marshaling was -- was applied. In the Behrens case, we had the tax liens arising and attaching immediately to the cash surrender value, immediately, which is done (Inaudible) as I'll come to in a moment. Thereafter, because the tax liens in the Behrens case weren't filed, they had to be recorded and the bank in that case being an innocent holder, having -- not had an opportunity to check against the recording acts, to see whether there were any tax liens on fire. The bank subsequently, in the Behrens case, lent money to the insured and -- and up to the full amount of the cash surrender value. Now, what happened there was this. In as much as the tax lien was not filed in the proper office, the Court in the Behrens case held that the Government did not have a first lien but it had a second lien subject to the bank, but it still had a lien. And Judge Learned Hand said in applying the marshaling doctrine, he says, in as much as the bank can collect the proceeds of the policy and also the entire proceeds of the policy, which would include the cash surrender value, "We will allow the bank to attach its lien to the widow's share so that the Government which had the tax lien on the cash surrender value can be paid." We don't dispute that, but we say that our case is a material difference, is our case. In 1943, there was no tax lien. There was not even a tax due. In 1943, Mr. Meyer borrowed from the Ohio Bank the full cash surrender value of the policy, so we start with the face there is no more cash surrender value left, whatever. The Government didn't have a secondary lien, it didn't attach. There was nothing due the Government at that time. Now, some three years later, the Government comes along and makes an assessment. As soon as that assessment is made, if there is any property or property rights that the insured has in 1946 and 1947, it will attach, but there's nothing left because the cash surrender value was disposed off, so that the marshaling doctrine can't apply. The cash surrender value was disposed off in 1943. Now, the Government's lien attaches to what? To any other property or property rights that the insured had.
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: True, Your Honor. That is the agreement between the bank and the insurers, but the Government isn't --
William J. Brennan, Jr.: (Inaudible)
Samuel W. Sherman: Yes. Your Honor, under the cases, the cases hold and I will read this Court's decision that the tax lien can only attach to cash surrender value during the lifetime of the insured and the trouble with this -- with the Government's --
Byron R. White: (Inaudible)
Samuel W. Sherman: There can't be second lien Your Honor, but the -- it must attach during his lifetime. Now in this case, it could only -- Your Honor --
Byron R. White: (Inaudible)
Samuel W. Sherman: No, it didn't because -- because it's only payable after his death. The insured can't do anything with the cash surrender value.
Byron R. White: I'm talking about the cash surrender value --
Samuel W. Sherman: Yes Your Honor.
Byron R. White: -- in which persist property during his lifetime?
Samuel W. Sherman: It is.
Byron R. White: In which event -- in which event both the bank, I'm suggesting both the bank and the Government had a lien on the cash surrender value.
Samuel W. Sherman: Well, the only difference is this, --
Byron R. White: But if the loan has been paid, certainly the -- you wouldn't suggest for a minute that the Government did not have a lien. What if the loan with the bank had been paid before the insured died, would you suggest the Government didn't have a lien on --
Samuel W. Sherman: Yes, it would. If that were the situation, it would because then the Government's lien would attach during the lifetime of the insured. That's the distinction, I read it right from the -- from the --
Byron R. White: I know. You -- you just suggest those, there cannot be a second lien of the -- on the same cash surrender value.
Samuel W. Sherman: There can be a second lien, Your Honor, but the -- an existence of a lien is not enough. It's got to attach during the lifetime of the insured. And in this case, it didn't attach during the lifetime of the insured.
William J. Brennan, Jr.: Well I gather your point is that as long as the insured lives, if the bank had to collect its loan, they could collect it only out of the insurance or the cash surrender value, is that it?
Samuel W. Sherman: No, Your Honor, it could collect to that --
William J. Brennan, Jr.: As long as the insured live, if they had to collect the (Voice Overlap) --
Samuel W. Sherman: Yes. Yes, Your Honor.
William J. Brennan, Jr.: Collectible only at the cash surrender value.
Samuel W. Sherman: Yes. Yes, Your Honor. I -- I misunderstood. It's perfectly right.
William J. Brennan, Jr.: And then for this reason you say that at the time that the federal tax lien attached, there was no cash surrender value in his lifetime to which it could've had?
Samuel W. Sherman: That's -- that's correct, Your Honor. As a matter of fact, this Court in the -- this Court in the Bess case made the same statements at page 57, which is quoted from on page 14 of my brief. It says, "The question, therefore, is whether the cash surrender values with the liens attached were transferred to Mrs. Bess as beneficiary when Mr. Bess died." Now, she -- she received no transfer of any cash surrender value. She only collected her own proceeds. As a matter of fact in the Behrens case where the equitable doctrine was applied, Judge Learned Hand and I quote his language on page 10 of my brief. It says this, "The tax lien not being filed did not indeed have priority over the pledge, but it's attached because there was a tax lien in the beginning." Then Judge Hand goes on and says, "The United States does not assert that it could recover if no lien had attached to this surrender values during Behrens' life." That significant language and then -- and then the other cases decided by this Court, there were holdings that the tax lien must attach during the lifetime of the insured because --
Speaker: I don't understand why the mere possibility that the Government's lien might not have been satisfied had -- had the man collected during her lifetime out of the cash surrender value, prevents the lien from attaching subordinate (Inaudible)
Samuel W. Sherman: Well, Your Honor, the -- the difficulty there is this, if the bank -- if the bank had been paid, undoubtedly there would've been a new cash surrender value sprung up sometime and if he had gotten that money, the Government's lien of course, would attach. Well, the Government's lien would attach but in this situation, all she collected were proceeds which were exempt under state law and the decisions of this Court holds that where creditors have an exempt -- where credit -- where the proceeds of a policy are exempt from creditors, then the -- as far as tax liens are concerned, we follow state law.
William J. Brennan, Jr.: (Inaudible) would not be New York state law, would it? If this bank loan they proceeded for example with cash surrender value of the policy, this agreement that then have known to be payable out of the proceeds after that, would've been a good agreement under New York law, would it not?
Samuel W. Sherman: As far as the -- yes, it would. Yes, Your Honor, it would. The bank could collect it. But we're dealing now with the tax lien which is not --
William J. Brennan, Jr.: I'm -- I'm trying to understand what -- what's the significance of the New York insurance provision that proceeds are exempt from the liens of creditors?
Samuel W. Sherman: Well --
Byron R. White: They would certainly not have been exempt from the lien of this bank loan.
Samuel W. Sherman: No, they -- it's never exempt from bank liens. In other words, whatever the -- the insured creates, the statute has no -- it does not concern itself. If the insured agreed to pay the bank and he pledged the policies, naturally, the bank is entitled to be paid. We're talking about other creditors.
William J. Brennan, Jr.: As I recall -- as I recall the Bess case, there was no commitment of the bank -- of the proceeds to any loans of the receipts (Inaudible)
Samuel W. Sherman: Well, in the Bess case, Your Honor, the widow received the entire proceeds of the policy. There were no bank loans, whatever. It was held in that case that by reason of the tax lien which the Government acquired, that whatever she received, she must pay to the extent of the cash surrender value to the Government for tax liens.
William J. Brennan, Jr.: But there --
Samuel W. Sherman: In our case, --
William J. Brennan, Jr.: There because the insured had not committed any part of the -- of the proceeds of the insurance in the payment of any debts, as in this case. Here --
Samuel W. Sherman: Your Honor, I think -- yes.
William J. Brennan, Jr.: If certainly the insured, committed the whole proceeds, not merely the cash surrender value to the payment of the bank loan.
Samuel W. Sherman: That's part --
William J. Brennan, Jr.: Now, that was not so, in the Bess case.
Samuel W. Sherman: No, in the Bess case, we had no loans, whatever. Your Honor in the Bess case simply held this. That -- that a tax -- that a tax lien that the Government has will attach to the cash surrender value and when the insured dies with his property, the Government then is entitled to collect from the widow the equivalent of the cash surrender value because that's property and property rights to which the tax lien applies.
William J. Brennan, Jr.: (Inaudible) and is New York follow this rule of equitable marshaling?
Samuel W. Sherman: Yes, Your Honor, Judge Learned Hand -- this was a decision in --
William J. Brennan, Jr.: No, but I mean does New York State follow that rule?
Samuel W. Sherman: That I don't know Your Honor. As far as taxes are concerned, --
William J. Brennan, Jr.: Generally, --
Samuel W. Sherman: Generally, I think it is followed now. The equitable doctrine is followed and we have no dispute with that. But we say that in the application of the equitable doctrine, the facts are entirely different. The Government gets a lien immediately during the lifetime of the insured. That lien attaches. But it doesn't file it and because it doesn't file it, a subsequent bank loan which is made, comes first as a creditor and head of the Government by reason of the statute requiring filing, but the Government's lien is dead, becomes a secondary lien, then when the insured died. The theory is that even though the widow only receives the proceeds less the cash surrender value, she's still liable because of -- under the equitable doctrine that's applied, the Court says, in as much as the bank has a first lien on the entire proceeds of the policy, we will permit the bank to collect that portion of the proceeds which doesn't represent the cash surrender value. And then the Government's lien that has a reason, secondary lien that has a reason, he will permit the Government to collect it from the cash surrender value. This is not our case. This -- our case is entirely different. In our case, the Government never had a tax lien that could attach to the cash surrender value because in 1943, before any taxes were due, the full cash surrender value was -- we'll say mortgage, if I may put it so or assign the -- the policies were assigned to the bank as collateral security.
William J. Brennan, Jr.: (Inaudible) might be a good word -- for word but there's nothing New York law which wouldn't make possible a second mortgage, doesn't it?
Samuel W. Sherman: The second mortgage? No, Your Honor, except this, that on the decisions which have been handed down today, they're all in accord that the Government's tax lien was to attach during the lifetime of the insured. Then in this case, it couldn't attach during the lifetime. It could only attach after his death.
William J. Brennan, Jr.: It couldn't write when you mean into a first lien in the lifetime of this insured, unless he paid the bank loan.
Samuel W. Sherman: That's right, that's right. He couldn't even write to them to a second lien.
Hugo L. Black: He had no collectible interest at all, in this policy as I understand it except the cash surrender value (Voice Overlap) --
Samuel W. Sherman: That's right, Your Honor. That's right.
Hugo L. Black: So he had nothing on which the lien could attach?
Samuel W. Sherman: Could attach and having disposed of it in 1943, we cannot apply the equitable doctrine either because then, we would be violating -- when I say, we, I mean, the theory would be violating the New York State Statute, which says that the proceeds that a widow or any insured will receive is exempt from creditors of the insured. And in this case, the Government would then be coming along and -- and saying this count that statute, we come first.
Hugo L. Black: What would select its death out of money that the husband never owned and never could have collected but which was that as a wife upon his death.
Samuel W. Sherman: That's right, Your Honor. And since the proceeds under New York State Statute are exempt from claims of creditors, the Government must show that it acquired a lien during his lifetime and it couldn't because disposition was made on that before any tax claim even arose, and that's some substance of our case. Thank you Your Honor.
Earl Warren: Mr. Kovner.
Joseph Kovner: If it please the Court. The Government's position in this case can be summarized, I think, shortly in three or four propositions. The first one is that as a matter of legal precedent and prior authority, this case is on all force with Behrens. There is no distinction. In fact that in Behrens, the unrecorded federal tax lien here arose before the bank made its loan is immaterial because the lien as against the bank can become effective until it was recorded. And the Behrens' opinion makes it quite clear, explicitly clear that the cases to be treated as one in which there is a prior lien in favor of the bank for a loan made by a bank against the security of an insurance policy. So that the Behrens case is -- is merely in point and is the decided law prior to the case coming here that was relied upon by the court below, it was also relied upon by the Sixth Circuit, the recent case went, which is pending on certiorari -- petition for certiorari. So the question is whether Behrens was wrong or right. We think it's right. We think the case is clearly stated by Judge Learned Hand, when he points out that when you come to the point of the death of the insured, you have a bond, in pace amount of the insurance policy, which is subject to claims on creditors. One claim that of the United States which is good against the part of the fund, the insurance proceeds, the other claim that of a bank which is good against the whole of the bond, all of the proceeds. The wife claiming as beneficiary, her interest is junior to both, since it was wholly contingent one, arising only after the taxpayer's death and on the condition that she would remain his beneficiary at that time, since he deserved during his lifetime, the full power to change beneficiary. Her interest up until the point of his death was a mere expectancy, vesting only at his death, but vesting subject to these prior liens.
Hugo L. Black: If they were there.
Joseph Kovner: Well, one was clearly on part of the proceeds --
Hugo L. Black: On -- on just cash, they're in the value.
Joseph Kovner: Cash value, the other, subject to a single lien. But that I think, did not wipeout the Government's lien, it merely made it a junior here.
Hugo L. Black: Did the Government get a lien on something she -- she didn't own -- he didn't own and never did own?
Joseph Kovner: But if the Court please, I would say, --
Hugo L. Black: Except by a formulation which occurs in that Behrens case --
Joseph Kovner: No, sir.
Hugo L. Black: -- which have ignores the fact --
Joseph Kovner: No.
Hugo L. Black: -- that the contract was made in New York, wasn't it?
Joseph Kovner: Yes.
Hugo L. Black: And governed by New York laws --
Joseph Kovner: Yes, sir.
Hugo L. Black: -- the part of it.
Joseph Kovner: Yes sir.
Hugo L. Black: And the very time the contract was made, it meant that she would get that part that exempt to her under New York laws.
Joseph Kovner: If -- if she remained a beneficiary at the time of death, but may I -- may I take a point --
Hugo L. Black: But she did, (Inaudible)
Joseph Kovner: She did but may I take a point as to one statement Your Honor made, Justice Black. That it was getting something out of something that wasn't if I understood you, the insurance property. And I suggest that the insurance proceeds were property of the insured to a very substantial extent, as this Court said in Chase National Bank. He could control its disposition. He bought it, he created -- he created it. He paid for it. He could dispose of it, the facts of this case show that he did in a very important way. He assigned it to a bank as security for loan to him. Now, he could assign somebody else's as property --
Hugo L. Black: He didn't assign it to the bank security for his tax.
Joseph Kovner: I beg your pardon sir?
Hugo L. Black: He didn't assign it to the bank as security for his tax. The Government might have his taxed on --
Joseph Kovner: I understand that.
Hugo L. Black: -- on his -- his right to have done so if he had done it, he wouldn't have done much that way.
Joseph Kovner: That's right. But in the doctrine of marshaling, the unsecured, the creditor, the one bond creditor always gets the benefit of a fund that he couldn't get directly. May I put it this way? To our mind, the case comes to this. The taxpayer during his lifetime owns one asset. The cash surrender value of a certain insurance policies. There are two liens on that, one of the bank junior -- senior and the other, the federal tax lien. He also -- he also has made a contract with the third party, the insured, which when taken together with the assignment of that contract to the bank, putting it altogether has said to the insurer and to the bank, "If I die, it might get to the bank as unpaid, you pay the bank." Out of this other plan, this other plan, you pay the bank. And the Government's position in (Inaudible) therefore is that leads the other -- the first step, the cash surrender value available to pay the bank -- the (Voice Overlap) --
Hugo L. Black: However, you get it. You don't get it from anything he wanted to do and you don't get it from New York law.
Joseph Kovner: Oh, I can get from New York law and -- in two respects. First, that New York law -- New York law recognizes the cash surrender value as an asset of the insured during his lifetime. New York law recognizes that the insured taxpayer may make this kind of a contract with an insurer to pay his debts out of a certain sum of money that will become available upon his debt. New York law gives him the full power and control with that sum of money could come into existence upon his death, and New York law says that he can assign that to a bank to get a loan.
William J. Brennan, Jr.: I take it then if -- if this insurer had not made the contract with the bank -- the bank, you may collect out of the proceeds of the policy. But had made a contract with the bank, you may collect only out of the cash surrender value policy, you wouldn't be here.
Joseph Kovner: That's right. Of course sir.
William J. Brennan, Jr.: But the only reason you are here is that the contract he made with the bank allowed the bank to collect out of the proceeds.
Joseph Kovner: Or if I may put it in my way, the contract he made with the bank provided another fund to pay the banks. Yes, sir.
William J. Brennan, Jr.: Well, the fact is though I gather somewhat -- your adversary said that under New York law, the property or the -- the proceeds would attempt and exempt from the final creditors, what more the insurer agreement with the bank if the bank could collect that at first?
Joseph Kovner: Well, but that's the very glide effect the creditor (Voice Overlap) --
William J. Brennan, Jr.: No, I -- I understand it, yes. That would be so. And so -- and without such an agreement --
Joseph Kovner: Yes.
William J. Brennan, Jr.: -- I think if the New York law provision which accepts --
Joseph Kovner: Yes.
William J. Brennan, Jr.: -- that proceeds from it there by (Inaudible) of the States.
Joseph Kovner: Yes. But our point is that that New York provision is subject to the control of the taxpayer.
William J. Brennan, Jr.: Yes, I understand that. And it gathered it to your adversary too (Voice Overlap) --
Joseph Kovner: Well, I -- I think, yes he does. It seems to me the -- my -- my adversary's effort to please the situation as of the date of the taxpayer's debt simply ignores this other very substantial fund which was created by the taxpayer, which he paid for, which he controlled, which was available to pay any of his debts that weren't paid at the time of his debts.
Byron R. White: Well, you said -- is it your position that the New York law does govern this all matter?
Joseph Kovner: I beg your pardon, sir?
Byron R. White: Is it your position that the New York law does govern this matter on whether marshaling applies or whether it doesn't or what assets would be exempt?
Joseph Kovner: No. New York law applies it to a considerable extent. There is one point New York law that doesn't apply and that is the part of New York law which exempts insurance proceeds complains of creditors. That statute as such does not apply to United States --
Byron R. White: Yes.
William J. Brennan, Jr.: On this fact. Oh. Oh, I could --
Joseph Kovner: Yes, as such, it doesn't apply to that thing.
William J. Brennan, Jr.: No, but that doesn't disregard marshaling. It's certainly --
Joseph Kovner: No, even disregards --
William J. Brennan, Jr.: It does apply here --
Joseph Kovner: No, it doesn't apply here.
William J. Brennan, Jr.: -- by the facts.
Joseph Kovner: On these facts, it's not applicable at all.
William J. Brennan, Jr.: Yes.
Joseph Kovner: Not in this case. Because the exemption statute assumes that there is property of a debtor which but-for the exemption statute would be applicable to his debts. That's not applicable -- that exemption statute is not applicable for a debt due United States, the tax debt due the United States because the tax debt due United States has its own very limited exemptions and it does not include insurance proceeds. It didn't applicable to the insurer because under the New York law, the insurer could waive that exemption and submit his property to with the insurance proceeds to the payment of the debt.
Hugo L. Black: Of the what?
Joseph Kovner: To a payment of his debt. So it's not in the picture. The question really as -- and I think, I can conclude on Judge Hand's reasons. The question is at the time that the taxpayer's debt, there were two volunteer available to pay the taxpayer's debt and the -- what it seems to me that what the doctrine of marshaling to say, what its rationale is, it's an old doctrine. It goes way back. It's been involved in any number of situations. It is -- it's invoked in New York. It's been invoked by this Court, is that the creditors -- secured creditors will be paid before there will be anything left for general claims or -- or subsequent claims and the knob of this case --
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: It could -- yes. We don't know. We don't know in this record.
Arthur J. Goldberg: We have that 1449 (Inaudible)
Joseph Kovner: Well, Justice Goldberg, the --
Arthur J. Goldberg: But I think (Inaudible)
Joseph Kovner: We don't know. We don't know what the cash surrender value of the policies was, at the time, the loans to the bank -- were made by the bank. We don't know whether the bank loans were in excess of the cash surrender value or not. It could have been.
Hugo L. Black: If this giving us security for the bank and made it liable for the debt, why are limited to the bank? I could do whether I will get anything. Why wouldn't the other creditors have a right to come in and get, you can pay the new funds --
Joseph Kovner: Well, that's a --
Hugo L. Black: -- subject to creditors?
Joseph Kovner: Because the creditors would be bound. Creditors who writes, it depends only upon state law and having no consensual claim upon the proceeds would be barred by the States.
Hugo L. Black: In other words that -- having no agreement from him to pay them, they couldn't recover but the Government having no agreement from him can recover.
Joseph Kovner: Look quite, sir. I don't think that puts it if I myself -- that States will --
Hugo L. Black: How -- why -- did the Government have an agreement with him? Can you imagine any?
Joseph Kovner: No.
Hugo L. Black: If its find any implication that he wanted this by agreeing to make your security to the bank for the debt that he wanted debt to provide for payment of his taxes and take his insurance to witness with it?
Joseph Kovner: Oh, I -- if -- if the Court please, I don't know whether he had that in mind because I don't know those facts but I do say that when he said to the bank, "I'll see -- I am willing to see toward it. That you can be paid out of money that would otherwise have gone to my widow." He released other moneys for the payment of the federal tax lien.
Hugo L. Black: For the Government and nobody else.
Joseph Kovner: Well, that may be because the Government's tax debt has special rights that a lot -- are barred by state exemption statutes. I don't think that's so difficult being --
Hugo L. Black: But it's a little difficult without the committee's exemption, didn't he? You don't find anymore difficulty on that?
Joseph Kovner: Well, I recognize that fee.
Hugo L. Black: I'm not talking about (Voice Overlap) --
Joseph Kovner: I'm not saying --
Hugo L. Black: -- those loans --
Joseph Kovner: I'm not --
Hugo L. Black: -- they've been given all over the country.
Joseph Kovner: I beg your pardon, sir. I'm sorry.
Hugo L. Black: Where's those exemption laws, the effect that they've been given all over the country? You would come in and take this, the Government would, on the fear that him alone, of all the creditors, come in and place the taxes and get the widow's exemption away from her that her husband had bought for her in the insurance policy.
Joseph Kovner: Oh, I -- I submit sir, the federal statute governs the exemption state, that will tax. I mean it does not provide them any exemption for -- for insurance. The Congress thought that point that Your Honor is making was --
Hugo L. Black: But the federal -- federal statutes --
Joseph Kovner: -- what he ought to be recognizing could provide.
Hugo L. Black: -- federal statute hasn't said that that New York exemption law cannot be advised in favor of a widow, has it?
Joseph Kovner: Yes, but it is -- but this Court has said that New York exemption laws in favor of the widow do not bar the federal tax debt.
Hugo L. Black: Not if -- not if the -- not if the taxpayer has the money.
Joseph Kovner: Well, but our point goes back to the fact that this is money in the essence which the taxpayer created a fund, he created it that she could control them and she could apply to the payment of his debts. It isn't money that just -- had no connection with the taxpayer and that -- on that ground.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: Another creditor?
Arthur J. Goldberg: Yes.
Joseph Kovner: No, the Government does enjoy a unique position in this respect because another creditor who had no claim against the proceeds would be barred by the state exemption statutes.
Arthur J. Goldberg: I assume that the federal has the lien (Inaudible)
Joseph Kovner: Oh, yes.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: Here?
Arthur J. Goldberg: Suppose there were two creditors that the Government (Inaudible)
Joseph Kovner: Well, if the -- if the creditor -- if a -- a private creditor who has a lien on the cash surrender that, during the cash surrender value was the law, can only get the cash that (Inaudible)
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: And he can't get no more.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: He can't get to --
Arthur J. Goldberg: (Inaudible) his right the while process --
Joseph Kovner: Yes.
Arthur J. Goldberg: -- to this case --
Joseph Kovner: Yes.
Arthur J. Goldberg: -- by asking how (Inaudible)
Joseph Kovner: Yes, yes.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: Yes.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: The value only.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: Only.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: Only, yes.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: No.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: No.
Potter Stewart: Why not, why wouldn't it?
Joseph Kovner: Well, because the private credit -- because the -- the Government recognized this --
Potter Stewart: Suppose I'm concern, if your answer is no but if you can convince me that your answer is no then you lost your case.
Joseph Kovner: Well, if the Court please, if I lose my case by stating to you what the law is, I've lost my case because of the law not because of my answer. But if I understand it, a private creditor -- I beg your pardon sir.
Speaker: (Inaudible)
Joseph Kovner: No. My understanding that one man extended to the total proceed.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: That's right. That's right
William J. Brennan, Jr.: Then someone gets a judgment against (Inaudible)
Joseph Kovner: Yes.
William J. Brennan, Jr.: (Inaudible)
Joseph Kovner: The precise difference is that the private creditor is barred by the state exemption statute as to the proceeds and that policy --
William J. Brennan, Jr.: (Inaudible)
Joseph Kovner: -- but the Government is --
William J. Brennan, Jr.: (Inaudible)
Joseph Kovner: Well, my understanding of the case is if the Court would say that in such a case, the private creditor who had a lien only on the cash surrender value would be getting the benefit of the debt proceeds which were by statute exempt from his claim and it would not extend the marshaling doctrine on that account.
Speaker: (Inaudible)
Joseph Kovner: Yes. Well, I --
Speaker: (Inaudible)
Joseph Kovner: No. I think that marshaling -- the -- let me put it this way. The private creditor in the case given would have had the benefit of the marshaling doctrine but-for a state exemption statute. That state exemption statute does not apply to the United States and therefore, the marshaling doctrine can be ignored.
Potter Stewart: I know, but except in Mr. Justice Goldberg's hypothetically case, the -- the debtor had voluntarily agreed by contract that the proceeds, the entire proceeds to the life insurance policy would be available to the first creditor.
Joseph Kovner: That's right.
Potter Stewart: And therefore, the statute has been waived, has it not?
Joseph Kovner: As to the first creditor.
Potter Stewart: Yes. And therefore the -- and the second creditor has a lien on the on the cash surrender value which is property of the insured during his lifetime and the extent of his property during his lifetime.
Joseph Kovner: Yes.
Potter Stewart: And therefore, wouldn't -- I don't see how the -- how the state statute would come into effect at all.
Joseph Kovner: Well, I'm -- I'm ground to (Voice Overlap) --
Potter Stewart: And if it does, again as I say, you convince me that you're wrong on behalf of the Government.
Joseph Kovner: I -- my only point is that I'm bound to advice the court of the law.
Potter Stewart: That the court taking the law as I stated finds that partakes the Government case, I will have to accept it.
William J. Brennan, Jr.: (Inaudible)
Joseph Kovner: I think Your Honor. There are cases which are so-called --
William J. Brennan, Jr.: (Inaudible)
Joseph Kovner: Well, those cases, if the Court please, were relied upon rather heavily by the petitioner in Wintner and where -- in the Wintner case, that's the case this -- that it's a companion to this case arising out of the Sixth Circuit. You held it pending the outcome of this case. And that argument was addressed to the Court in Wintner both to the District Court and the Sixth Circuit Court of Appeals, that it had been two private creditors. The doctrine of marshaling would have not been invoked because the effect would have been to defeat the exemption statute for the benefit of the widow. But the Sixth Circuit accepted the Government's argument that since the exemption statute did not bar the Government, the Government retained the benefit of the marshaling of asset stocks. Now, it is now -- it was there. It is. And it's just not feeling that the tax debt does have a special priority which private debts don't have. That's been illustrated by more than one case and --
Potter Stewart: By the term to the statue itself that it -- the lien attaches only to a property --
Joseph Kovner: It's true.
Potter Stewart: -- belonging to the taxpayer.
Joseph Kovner: That's right.
Potter Stewart: And all that belonged to the taxpayer was the cash surrender value.
Joseph Kovner: That's right. But -- but the -- but the reason why this Court limited the federal tax lien, which is otherwise all embracing through the cash value was because it interpose to invest a limitation upon the reach of the federal taxing and that it had to be property which the taxpayer could enjoy during his lifetime. That didn't mean that the proceeds weren't the taxpayer's property. It's our point here which somewhat counts us the equity which the Court is speaking of which lies behind the exemption statutes that this is not property of the wives that's being ceased by the Government to pay the husband's tax debt. This is property that the husband created that in a number of very important respects is his property that escaped the reach of the federal tax lien by his brother.
Potter Stewart: Oh, life insurance policy is a contract. I mean that's basically what it is.
Joseph Kovner: I beg your pardon, sir.
Potter Stewart: A life insurance is a contract --
Joseph Kovner: Yes sir.
Potter Stewart: -- between a person and an insurance company.
Joseph Kovner: That's right.
Potter Stewart: And the -- the only property that was -- that belonged to the -- to the insurer during his lifetime, he extended the property, was the cash surrender value of the policy.
Joseph Kovner: No.
Potter Stewart: Isn't that correct?
Joseph Kovner: Well, he also has during his lifetime a disposition of (Voice Overlap) --
Potter Stewart: Certainly -- certain contractual rights but the only property and money. The only -- the only --
Joseph Kovner: That's Right. The property is -- we use the old phrase abundant there a lot of --
Potter Stewart: Yes.
Joseph Kovner: -- banks. He has made a contract with the insurance company for which he pays to pay certain -- to pay a sum of money to people whom (Inaudible)
Potter Stewart: That's right.
Joseph Kovner: That's a pretty important right. This Court had in Chase National Bank that that was enough to include the property and this is a fair state tax. If it had not been his property at all, it could have been -- been included in his estate -- the state -- state tax purposes, I think this case really lies squarely between the rule to invest, that the reach of the federal tax lien is only to property which the taxpayer can possess during his lifetime and Chase which holds that as to insurance, the taxpayer has a very important property interest to whip the control and disposition of a sum upon his debt. And the Government's assertion is that those interest is so close that where the taxpayer has provided that a credit, another lien creditor will be paid out of that sum but that creditor ought to be satisfied out of that sum leaving the Government to collect assets otherwise, it would -- otherwise, it's been taken by that creditor now become available too. I think if you read Chase (Inaudible) the case is not quite so simple in equity of the widow because to suggest that it's the equity of the widow is only to suggest somehow or the other that the Government is taking property belonging to the widow.
William J. Brennan, Jr.: (Inaudible) your real difficulty is that -- well, that maybe true but nevertheless that these states statutes, whoever may have created this upon that, the state statutes gives us special exemptions to widows when their beneficiaries of life
Joseph Kovner: Yes.
William J. Brennan, Jr.: -- insurance policy from the claims of creditors.
Joseph Kovner: Yes, but --
William J. Brennan, Jr.: And -- and the fact that Chase said it was -- the creation really of the husband --
Joseph Kovner: Yes.
William J. Brennan, Jr.: -- he built it up.
Joseph Kovner: Yes.
William J. Brennan, Jr.: It has -- has to stock up against that provision of the state law.
Joseph Kovner: But -- but Justice Brennan, what I have quite take as the next step in that is the fact that these state exemption statutes do not directly by the federal collection of revenue. So that if you're saying -- you are saying the Federal Government --
William J. Brennan, Jr.: Well, that's to a third factor.
Joseph Kovner: I beg your pardon.
William J. Brennan, Jr.: That's to a third factor but I don't see that Chase would necessarily answer the problem. You can't -- you simply can't write-off the state exemption statutes.
Joseph Kovner: I don't know. The state exemption statutes indicate an equity here. The question is whether that equity goes so fast to defeat the federal tax lien these days.
Byron R. White: I gather -- you say that normally, the marshaling rule applies in New York but it doesn't apply where insurance policies are -- are involved on the -- and it doesn't -- it doesn't extend the benefit of the private creditor.
Joseph Kovner: Well, I'm saying if you put a private creditor in place of the United States in this case --
Byron R. White: Either a consensual or --
Joseph Kovner: -- he could not involve --
Byron R. White: -- either a consensual or --
Joseph Kovner: -- the marshaling doctrine.
Byron R. White: -- or lien creditor, he cannot invoke the marshaling doctrine.
Joseph Kovner: Yes, Justice White. If you put a private creditor (Voice Overlap) --
Byron R. White: So, you must say then that the state exemption statute does not control but its federal law that controls --
Joseph Kovner: That's right.
Byron R. White: -- on its priority.
Joseph Kovner: That's right because the big difference between the two cases is that the private creditor is directly barred by the state exemption statute and the United States is not.
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: Well, but --
Arthur J. Goldberg: (Inaudible)
Joseph Kovner: -- but may -- may I suggest, Justice Goldberg, that the rule -- this Court has laid down in all the rule that the federal tax lien was not subject to state exemptions. It's a very basic --
Arthur J. Goldberg: But really what's (Inaudible)
Joseph Kovner: Yes, sir, that got to start with that, didn't try directly or indirectly.
Arthur J. Goldberg: That's quite both.
Joseph Kovner: That's the fact.
Potter Stewart: But -- but state law applies in the -- in -- in telling us what is property of the taxpayer, does it not?
Joseph Kovner: Oh, yes.
Potter Stewart: That's --
Joseph Kovner: But --
Potter Stewart: -- the Aquilino and Durham cases --
Joseph Kovner: Oh, yes, but I'm --
Potter Stewart: -- and Bess and Stern.
Joseph Kovner: -- but what I'm suggesting is that state law indicates that the insurance proceeds are property of the taxpayer but for the exception.
Potter Stewart: Where did you get that?
Joseph Kovner: What? I beg your pardon.
Potter Stewart: Where did you get that law (Inaudible)
Joseph Kovner: Well -- no, because merely all of the States have the exemption statutes and I -- there are some cases, I think almost every State in fact we cited textbook, the Court can find in the textbook, we cited it in very recent textbook a collection of those state statutes. As far as I know, the state statutes are -- are in almost every State, they vary. Some confine the exemption through immediate beneficiaries. The New York Statute does not. Some confine the exemption proceeds to a fixed amount not more than $15,000 or $20,000 but I don't regard those exemption statutes as any different from the several kinds of state exemption statutes of many -- of additional exemption statutes.
William J. Brennan, Jr.: (Inaudible)
Joseph Kovner: This is not the only state exemption as that.
William J. Brennan, Jr.: Your argument sounds to me now something like that there's some analogy in New Britain in that line of cases that this is a federal law question. And a problem of the federal lien --
Joseph Kovner: Yes.
William J. Brennan, Jr.: -- and that it's not that much influenced by state law, that this is not what his property, which we said and --
Joseph Kovner: That's right.
William J. Brennan, Jr.: -- that was a state law in question. This is really --
Joseph Kovner: Yes.
William J. Brennan, Jr.: -- a nature priority, isn't it?
Joseph Kovner: This case involves -- just indeed, if the Court please, I would submit that this case is controlled by a federal law, two points in federal law. One is the federal lien law, the exclusive priority and -- of the federal statute that it is subject only to exemptions expressly provided for by Congress and third, that the Federal Government in the collection of its federal lien is entitled to invoke the marshaling doctrine.
Samuel W. Sherman: Can I just have one minute, Your Honor?
Earl Warren: Yes. Yes, Mr. --
Samuel W. Sherman: Thank you sir. Your Honors, this is beyond dispute, a mere reading of Commissioner against Stern which was decided by this Court 1958 involving a Kentucky statute similar to the New York statute of exemption of creditors. And I'm quoting from page 42 of the Court's opinion just a mere sentence. "We hold that the Kentucky statutes govern the question of the beneficiary liability and treat no liability -- and create no liability of respondent," that's the Government, "to the -- to the Government in the circumstances of the case." In that case, in Commission against Stern, the Government -- the widow, upon the death of the insured received not only the proceeds but received also the full cash surrender value of the policy. And the Government came along and said, "Why, we want that money to the extent of the full cash surrender value." The United States Supreme Court in that case said, "The Government can't get it by reason of this exemption. It can only get it --" page 47, "We agree that the state law may not destroy a lien which has attached in the insured's lifetime." So that in this case, in our case, if the Government's lien attached in the lifetime of the insured, the Government would get it. But in as much as it didn't, this -- the -- the Government being accredited just like any other creditor must follow state law and these proceeds are entirely exempt on the state law and it hasn't gotten any greater right. Congress has not yet enacted any lien granting to the Government any right. As a matter of fact, the only law of Congress is laid down where the Government is given a tax lien on all property and property rights. What are property and property rights are still defined by state law. And in this case, Section 166 defines what a property and property rights and therefore, the Government's lien never attached during a lifetime and the widow isn't entitled to her own proceeds. She never got the chance to run the value. In the Behrens' case, the widow got the full cash surrender value and paid the bank the money. In our case, she only got her proceeds. That's entirely exempted. Thank you.
Earl Warren: Very well. We'll adjourn.