FSM SUPREME COURT
TRIAL DIVISION (Pon.)
Cite as Bank of Guam v. Island Hardware, Inc. (II),
3 FSM Intrm. 105 (Pon. 1987)
BANK OF GUAM,
ISLAND HARDWARE, INC., MID-PAC
CONSTRUCTION CO., INC., SETS INC.,
CHUA ENG CHUAN and the
FEDERATED STATES OF MICRONESIA,
CIVIL NO. 1986-056
Before Edward C. King
FSM Supreme Court
February 11, 1987
For Plaintiff: Michael Berman
(Bank of Guam) Attorney-at-Law
P.O. Box 1491
Kolonia, Pohnpei 96941
For Defendants: R. Barrie Michelsen
(Sets Inc., Chua Attorney-at-Law
Eng Chuan) Ramp & Michelsen
Kolonia, Pohnpei 96941
For Defendant: Jack Warndof
(Federated States Chief of Litigation
of Micronesia) FSM Attorney General's office
Kolonia, Pohnpei 96941
Assistant Attorney General
FSM Attorney General's office
Kolonia, Pohnpei 96941
With respect to liens, first in time is not always first in right. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 108 (Pon. 1987).
Liens under 54 F.S.M.C. 135 have priority even over liens which arose earlier in time. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 108 (Pon. 1987).
A prior statutory lien will not necessarily be given priority over all liens which arise subsequently. Rather, the effect to be given to a statutory lien must be determined through interpretation of the statute which provides for the lien. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 108 (Pon. 1987).
The statute 54 F.S.M.C. 153 does not require the government to give notice of its lien claims to any other creditors or even to the taxpayer. This statute, then, authorizes a lien which may be kept secret from interested parties. The effect of such a lien should be determined against the background of the strong general policy against secret liens. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 108 (Pon. 1987).
Creditors; Liens; Taxation
A section 153 lien should be treated as an equitable lien, its effect to be determined on a case-by-case basis with a view toward equitable considerations, especially when the government has taken reasonable and timely action to notify such other parties of the government's claims based upon tax delinquency. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 109 (Pon. 1987).
Any lien rights of the government under section 135(2) supersede even preexisting lien rights of any other party. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 110 (Pon. 1987).
Creditors; Liens; Taxation
The priority lien rights provided for the government in section 135(2) relate only to wage and salary tax claims and not to gross revenue taxes or other taxes. Bank of Guam v. Island Hardware, Inc. (II), 3 FSM Intrm. 105, 111 (Pon. 1987).
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EDWARD C. KING, Chief Justice:
The motion here of Sets Inc. and Chua Eng Chuan, for a summary judgment
against the Federated States of Micronesia, involves another segment of the battle over the remaining assets of Island Hardware Inc.
Here, the issue is whether the government has lien rights under 54 F.S.M.C. §§ 135(2) and 153, based upon wages and salary tax and gross revenue tax obligations of Island Hardware accrued from 1983 through 1985, which have priority over the claims of the judgment lien creditors in assets seized pursuant to writs of execution issued in 1986, before the existence and amount of the government's tax claims had been communicated to the creditors of Island Hardware.
The Court concludes that the government has liens against all of Island Hardware's property, including the proceeds of the property sold in the execution sale. However, only the lien which arises under 54 F.S.M.C. 135(2) is entitled to priority over the claims of the judgment lien creditors, and that lien secures only the government's wage and salary tax claims.
I. Factual Background
Sets Inc. and Chua Eng Chuan are judgment lien creditors of Island Hardware, Inc. Writs of execution were issued on their behalf on June 19, 1986. Property of Island Hardware was seized by national police officers pursuant to those writs.
After the Island Hardware assets were seized but before the execution sale, the Federated States of Micronesia filed cross-claims against Sets Inc. and Chua Eng Chuan in this litigation seeking a declaratory judgment to the effect that the Federated States of Micronesia has tax liens superior to the rights of those judgment lien creditors. Shortly before the execution sale, the government moved for an order requiring that the proceeds of the execution sale be deposited with the Court pending decision as to the proper disposal of the proceeds. That motion was granted and the proceeds remain available now.
II. Legal Analysis
A. The Section 153 Lien Claim
The government, contending that Island Hardware owes some $18,900 for business gross revenue taxes, and wage and salary taxes accrued from 1983 through 1985, relies upon two separate statutory provisions as establishing lien rights securing the government's tax claims against Island Hardware. The first is in subchapter V of the tax law, relating to general enforcement:
Lien on property - All taxes imposed or authorized under this chapter shall be a lien upon any property of the person or business obligated to pay said taxes and may be collected by levy upon such property in the same manner as the levy of an execution.
The uncontested claims of the party against whom summary judgment is
sought must be taken as true for purposes of the motion. The analysis therefore must proceed on the premise that prior to issuance of the writs of execution the government had valid claims against Island Hardware for wage and salary taxes and gross revenue taxes. By virtue of 54 F.S.M.C. 153 then, the government already held a tax lien on the property of Island Hardware before the writs were issued.
The government contends that the fact that the statutory lien existed prior to issuance of the writs of execution leaves no doubt that the government's section 153 lien claims must be given priority over any rights the judgment lien creditors have under the writs of execution. However, it is simply not true that the priorities of all liens are determined solely by reference to when the liens arose.
This case furnishes two examples that first in time is not always first in right. The first example is one relied upon and urged by the government. The government contends, and the court agrees in a later portion of this opinion, that liens under 54 F.S.M.C. 135 have priority even over liens which arose earlier.
A second example was discussed in the earlier opinion in this case. There, this Court recognized that a pre-existing equitable lien might not be given precedence over lien rights subsequently acquired by third-party creditors who acted without knowledge of the pre-existing lien. Bank of Guam v. Island Hardware, Inc. (I), 2 FSM Intrm. 281, 296 (Pon. 1986).
It is apparent then that a prior statutory lien will not necessarily be given priority over all liens which arise subsequently. Rather, the effect to be given to a statutory lien must be determined through interpretation of the statute which provides for the lien.
The statute here is silent as to the importance and priority to be given to the lien created by 54 F.S.M.C. 153. However, an inference can be drawn from the nature of the rights granted. The statute does not require the government to give notice of its lien claims to any other creditors or even to the taxpayer. Indeed the tax law even authorizes the government to maintain secrecy about the lien except as disclosure is required to give the lien effect. 54 F.S.M.C. 116. This statute, then, authorizes a lien which may be kept secret from interested parties. The effect of such a lien should be determined against the background of the strong general policy against secret liens referred to in the earlier opinion in this case. Bank of Guam v. Island Hardware Inc. (I), 2 FSM Intrm. at 290.1
The statute contains no suggestion that this statutory lien was intended to sail into the current flowing against secret liens. The legislative history also is devoid of any such suggestion. SCREP No. 21, House J. of 4th Cong., 1st Reg. Sess. 259-64, also 141-45 (1971); SCREP No. 2, Senate J. of 4th Cong., 1st Reg. Sess. 250-53, also 29-30, 45-48 (1971).
Under these circumstances, the Court will not assume that the statutory lien is to be given priority over the rights of subsequent lienholders who obtain their liens in good faith, without knowledge of the government's lien claim. I conclude that a section 153 lien should be treated as an equitable lien, its effect to be determined on a case by case basis with a view toward equitable considerations, especially when the government has taken reasonable and timely action to notify such other parties of the government's claims based upon tax delinquency.
Here, the government does not say that it took any steps to notify Sets Inc. or Chua Eng Chuan of its tax or lien claims at any time prior to seizure of the assets. Nor is it claimed that these judgment lien creditors either had actual notice, or should have learned of the tax delinquency through government tax collection efforts or by any other means.
Thus, there is no issue of disputed fact and, as a matter of law, the judgment lien rights of Sets Inc. and Chua Eng Chuan in the seized assets and the proceeds thereof must prevail over the government's section 153 claims.
B. The Section 135 Lien Claims
The other lien provision relied upon by the government is found in subchapter 3 of the tax law, relating to taxation of wages and salaries.
(2) If any employer shall fail, neglect, or refuse to deduct and withhold from the compensation paid to an employee, or to pay over, the amount of the tax imposed by this chapter, such employer, shall, moreover, be liable to pay to the Government the amount of the tax, which amount shall (whether or not tax withholdings constituting trust funds have been commingled with said employer's assets) form a lien on the employer's entire assets, having priority over all other claims and liens.
This provision is similar to 54 F.S.M.C. 153 in that both sections establish government liens upon any assets or property of the party obligated to pay. Both liens are also similar in that they are not triggered by any action of the government. Instead, a section 153 lien attaches to "all taxes imposed or authorized" and a section 135(2) lien arises upon the failure, neglect or refusal of the employer to deduct and withhold or to pay over the amount of the tax.
Yet the section 135(2) lien is profoundly different from a section 153 lien for while section 153 is silent I on the question of priority, section 135(2) states unequivocally that lien rights established thereunder have "priority over all other claims and liens." In the face of such clarity, there can be no doubt that any lien rights of the government under section 135(2) supersede even preexisting lien rights of any other party.
It remains to be determined however whether section 135(2) secures only the government's claims for wage and salary taxes or extends also to gross revenue tax claims.
The government emphasizes the reference in section 135(2) to "the tax imposed by this chapter." It is true, as the government urges, that these words, if they were standing alone, would seem to refer to all taxes set forth in chapter 1 of title 54 of the FSM Code, including gross revenue taxes, imposed in subchapter IV of chapter 1, as well as the wage and salary tax imposed by subchapter II.
For several reasons however, I conclude that section 135(2) applies only to wage and salary taxes, not to gross revenue taxes. First, subchapter V, 54 F.S.M.C. §§ 151-156, contains the general enforcement provisions, including the section 153 lien, applicable to gross revenue taxes and wage and salary taxes. The fact that 54 F.S.M.C. 135(2) is set out separately from the general enforcement subchapter suggests that the section 135 lien is intended for a separate purpose. Specifically, location of subsection 135(2) within a section and subchapter which relates only to the responsibility of employers to collect withholding taxes indicates that the subsection is intended to apply only to that particular kind of tax.2
The language in section 135(2) also supports this conclusion. Section 135(2) refers to the party required to pay over the amount of the tax as the "employer." This same nomenclature appears throughout the subchapter II wage and salary provisions, and is in sharp contrast to section 153, which speaks of the "person or business obligated to pay." Use of the word "employer" in section 135(2) suggests that the section was intended to relate to the obligations of employers with respect to wage and salary taxes of their
employees, not to the general tax obligations imposed upon persons or businesses.
Sections 135 and 153 also differ significantly in their references to taxes. Section 135(2) speaks in the singular, of "the tax" imposed. The Section 153 references are inclusive, "all taxes imposed," and plural, "said taxes." These differences confirm that while section 153 is intended to cover more than one kind of tax, section 135(2) refers to only one type.
That there are differences between wage and salary taxes and gross revenue taxes which justify special government priorities for collection of the former can be discerned from the general statutory scheme as well.
The gross revenue tax is imposed directly on, and collected from, the business organization or person who receives the revenues. The amount of the tax is received as income of the business and is property of that business. In contrast, the wage and salary tax is imposed on the employee. The employer merely withholds the amount of the tax from the employee's pay. Thus the money held by the employer to pay the wage and salary tax is not the employer's money, but that of the employee, and is to be used to pay a tax assessed against the employee, not the employer.
In recognition of this fact the tax law specifies that withheld wage and salary taxes are held by the employer in trust. 54 F.S.M.C. 135(1). The section 135(2) priority lien provision is but a corollary, arising out of the peculiar fact that the amounts held and to be paid over by an employer are not the property of the employer. It is reasonable that the government should be granted a priority for the amount of these taxes, rather than allow the funds to be lumped with the assets of the employer, vulnerable to claims of the employer's creditors.
For all of these reasons, I conclude that the priority lien rights provided for the government in section 135(2) relate only to wage and salary tax claims and not to gross revenue taxes or other taxes.
C. Proceeds and Assets
Finally, the Court notes the claim of the judgment lien creditors that the sale proceeds are not assets of Island Hardware and therefore are beyond the reach even of the government's priority lien rights under section 135(2). Were it not for the government's motion, and this Court's consequent order for deposit of the proceeds of the sale with the Court, that argument might be persuasive. Here however, the government asserted its rights prior to the sale. The order for deposit of proceeds was an equitable order designed to accommodate the general wish of the parties to go forward, while preserving the Court's jurisdiction and assuring that the rights of the parties asserted before the sale of Island Hardware's property would be preserved pending Court decision. Whatever lien rights existed in Island Hardware's property before the sale remain in effect as to the sale proceeds.
Partial summary judgment is granted confirming that the judgment lien rights of Sets Inc. and Chua Eng Chuan are superior to the section 153 lien rights of the national government of the Federated States of Micronesia. Summary judgment is denied the judgment lien creditors to the extent of any claims of the government for wages and salary taxes which qualify for priority lien protection under 54 F.S.M.C. 135(2).
* * * *
1. In the United States, this policy has contributed toward a holding that the rights of a judgment creditor are superior to a pre-existing, but unrecorded, statutory tax lien under 23 U.S.C.S. § 6321. United States v. Speers, 382 U.S. 266, 275, 86 S. Ct. 411, 416, 15 L. Ed. 2d 314, 320 (1965) ("The question ... is whether the government, unlike other creditors and contrary to the general policy against secret liens, should be given advantage of a lien which it has not recorded.").
2. This location is not merely a happenstance of codification. In the original legislation, P.L. 4C-2, enacted by the Congress of Micronesia in 1971, the language now in section 135(2) was in section 5, combined with the provisions now in 135(1) and (3). The heading for section 5 was "Taxes withheld by employer held in trust; employer's liability." This is comparable to the current FSM Code heading for 54 F.S.M.C. 135: "Employer's responsibility for withheld taxes." The entire section was then, as section 135 is now, preceded and followed by sections which relate only to the wage and salary tax.