OFFICIAL OPINION No. 9

OFFICIAL OPINION No. 9 Corporations-Delinquent taxes-Perfection of liens. Under § 1401 of The Fiscal Code, 72 P. S. '§ 1401, a lien for delinquent State corporation taxes is perfected on the date of settlement, assessment or de- termination. Unemployment Compensation-Delinquent contributions-Perfection of liens. Under § 308.l of the Unemployment Compensation Law, 43 P. S. § 788.l, a lien for delinquent unemployment compensation contributions is perfected as of the date of recording in the office of the prothonotary in the county in which the property is located. Liens-State and federal claims-Judicial sales-Priority in distribution of funds. ·. Except where a prior properly recorded real estate mortgage is involved, liens for delinquent State corporation taxes, delinquent unemployment compensation contributions and unpaid Federal taxes are of equal rank in the distribution of funds available as a result of a judicial sale, and the order of distribution is determined by the order in time in which the liens are perfected. Where a real estate mortgage created by the debtor concerned is properly recorded prior in time to perfection of the lien for delinquent unemployment compensation contributions, a lien for unpaid State corporation taxes and a lien for unpaid Federal taxes, liens for State corporation taxes and Federal taxes have priority over the mortgage lien while the lien for delinquent unemployment compensation contributions is subordinated to the lien of the mortgage in the distribution of funds available as a result of a judicial sale. Liens-Claims of State departments and federal govnerment-Agreement for dis- tribution of funds arising from judicial sales. Section 1410 of The Fiscal Code, 72 P . S. § 1410, and § 309.l of the Unemployment Compensation Law, 43 P. S. § 789.1, do not grant the Department of Revenue and the Bureau of Employment Security, Department of Labor and Industry, the authority to enter into an overall agreement between the departments for the pro rata distribution of the funds arising from judicial sales and available for distribution. Sectior,L1410 of The Fiscal Code, 72 P. S. § 1410, and§ 309.l of the Unemployment Compell's~tion Law, 43 P. S. § 789.1, do not grant the Department of Revenue and ·the Bureau of Employment Security, Department of Labor and Industry, the authority to enter into an overall agreement with the United States govern- ment for the pro rata distribution of the funds arising from judicial sales and available for distribution. Harrisburg, Pa., September 19, 1957. Honorable Gerald A. Gleeson, Secretary of Revenue, Harrisburg, Pennsylvania. Sir: We have received your request for advice as to the relative priority of perfected liens arising out ·of Commonwealth claims for state taxes, Commonwealth claims for delinquent unemployment com- 64 OPINIONS OF THE ATTORNEY GENERAL pensation contributions and United States government claims for un- paid federal taxes in the distribution of the funds produced by judicial sales. Your letter also asks for advice as to whether the Department of Revenue and the Bureau of Employment Security, Department of Labor and Industry, priority lien holders, may enter into a blanket agreement to apportion between themselves on a pro rata basis the funds produced by judicial sales and available for distribution to them. Lastly, your letter asks whether a similar agreement may be entered into with the United States government. The relative priority of Commonwealth liens in the distribution of funds produced by judicial sales1 are provided for by statute. Liens for unpaid taxes are treated under § 1401 of The Fiscal Code, Act of April 9, 1929, P. L. 343, as reenacted by the Act of August 19, 1953, P. L. 1146, § 6, 72 P. S. § 1401, as follows: "All State taxes imposed under the authority of any law of this Commonwealth, . . . and all public accounts ... shall be a first lien upon the franchises and property, both real and personal, ... from the date of settlement, assessment or de- termination, and whenever the franchises or property of a corporation, association, or person shall be sold at a judicial sale, all taxes, interest, bonus, penalties, and public accounts due the Commonwealth shall first be allowed and paid out of the proceeds of such sale before any judgment, mortgage, or any other claim or lien against such corporation, associa- tion or person: ... " Contributions under the Unemployment Compensation Law are treated under the Act of December 5, 1936, P. L. (1937) 2897, § 308.1, 43 P. S. § 788.1, as follows: "All contributions and the interest and penalties thereon due and payable by an employer . . . shall be a lien upon the franchises and property, both real and personal, ... from the date a lien ... is entered of record in the manner here- inafter provided. Whenever the franchises or property of an employer is sold at a judicial sale, all contributions and the interest and penalties thereon thus entered of record shall first be allowed and paid out of the proceeds of such sale in the same manner and to the same extent that State taxes are paid: Provide(i,, however, That the lien hereby created shall not be prior to pre-existing duly recorded real estate mortgages . ... " (Emphasis supplied) 1 It is to be noted that this opinion does not deal with the priority of liens in situations where the distribution takes place under insolvency proceedings in any court. OPINIONS OF THE ATTORNEY GENERAL 65 The construction of these two statutory provisions requires separate consideration of those instances in which a properly recorded real estate mortgage created by the debtor is involved as compared to any situation in which such a mortgage is not present. In the first in- stance, the lien for unpaid state taxes has first priority. The lien of the mortgage would be entitled to the second priority in the dis- tribution of the fund, and the lien for delinquent unemployment com- pensation contributions would be the last to be satisfied. In a judicial sale in which a real estate mortgage created by the debtor is not in- volved, liens for unpaid state taxes and delinquent unemployment com- pensation contributions are both of first priority. The general rule between such liens is that the .first in time to be perfected is the first in right. Portneuf-Marsh Valley Canal Co. v. Brown, 274 U.S. 630, 47 S. Ct. 692, 71 L. Ed. 1243 (1927). The problem of when these liens are perfected is of major im- portance. Under § 1401 of The Fiscal Code, liens for unpaid state taxes are perfected when the tax is settled, assessed or determined. In the absence of any litigation on this point, the statutory provision is binding. The problem of when the lien for delinquent unemployment compensation contributions becomes perfected has been before the court in the case of Commonwealth v. Lombardo, 356 Pa. 597, 52 A. 2d 657 (1947), in which it was held that the meaning of § 308.1 of the Unemployment Compensation Law was controlled by the subsequent phrase: "' ... upon which record it shall be lawful for writs of scire facias to issue and be prosecuted to judgment and execu- tion in the same manner as such writs are ordinarily em- ployed.'" The court held that because of this phrase, the rules governing ordinary liens on personalty are controlling and that until the writ of fieri facias is handed to the sheriff, the lien is not so perfected as to prevent a transfer of personal property to a bona fide purchaser for value free and clear of the lien. The time of the perfection of the lien is also of great importance when, in addition to Commonwealth liens, there are liens against the same personal property entered on behalf of the United States for delinquent taxes under § 6321 of the Internal Revenue Code of 1954. The rule of the United States Supreme Court is that the priority of a lien of the United States for unpaid taxes, relative to other liens, always involves a federal question whiph is to be determined by the federal courts. United States v. Security Trust and Savings Bank, 340 U. S. 66 OPINIONS OF THE ATTORNEY GENERAL 47, 71 S. Ct. 111, 95 L. Ed. 53 (1950). Under § 6321 a perfected federal lien on personal property is created which is valid against any mortgagee, pledgee, purchaser or judgment creditor from the time notice of the lien is filed pursuant to § 6323 in the office of the pro- thonotary in the county in which the property is situated. But under § 6321, [or any predecessor statute], Congress did not confer any priority upon the federal tax lien, United States v. New Britain, 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954). In spite of the failure of the federal statute to provide for a special priority for federal tax liens, the Supreme Court of Pennsylvania in the case of Littlestown National Bank v. Penn Tile Works Co., 352 Pa. 238, 42 A. 2d 606 (1945), held that no lien perfected after a federal tax lien is recorded can receive a priority in distribution ahead of the federal lien. The lien for federal taxes arises out of the con- stitutional power of the United States to "lay and collect taxes,'' Article I, § 8 of the United States Constitution; and the laws of Con- gress enacted pursuant thereto are "the supreme Law of the Land," Article VI, § 2. Therefore, as the United States Supreme Court held in the case of State of Michigan v. United States, 317 U. S. 338, 63 S. Ct. 1302, 87 L. Ed. 312 (1942), "a priority in favor of the United States which arises from priority in the date of its lien cannot, without the consent of Congress, be impaired or superseded by state law in favor of subsequent liens imposed by authority of any law or judicial decision of the state." Having established the principle that except when a real estate mortgage created by the debtor is involved2 liens for delinquent federal and state taxes as well as unemployment compensation contributions are of equal rank, their relative priority in the distribution of the funds available from a judicial sale is determined by their relative dates of perfection. However, we find serious conflict in two lower court cases as to when the lien for unpaid unemployment compensation con- tributions actually is perfected where a federal tax lien is involved. The Lombardo case, 356 Pa. 597, received close scrutiny in the Com- mon Pleas Court of Lackawanna County in the case of Ferbro Trading Corp. v. Jo-Mar Dress Corp. et al., 78 D. & C. 337 (1947), where the court was involved in distributing the fund from a judicial sale. The federal tax liens were recorded after the unemployment compensation contribution liens, but before the writ of fieri facias had been handed to the sheriff. The United States argued that since the 2 In such a case, the lien for delinquent unemployment compensation contribu- tions is subordinated to the lien of the mortgage. OPINIONS OF THE ATTORNEY GENERAL 67 federal lien is perfected when recorded and under the Lombardo de- cision the Commonwealth's lien is not perfected until the writ of fieri facias is handed to the sheriff, the United States had first priority. The court rejected the Federal Government's argument and held that the Lombardo case was not relevant in a contest between lien holders. Limiting the Pennsylvania Supreme Court case to its partic- ular factual situation, the common pleas court stated that the Lombardo case merely held that the lien on personal property is not self-executing and may be cut off by a transfer to an innocent pur- chaser for value who is not charged with constructive notice by the filing of the lien in the prothonotary's office. But the lien is a com- pleted and perfected charge on the property and, when prior in time in recording, is prior in right to the liens of the United States under the Internal Revenue Code. In the most recent case on the subject, Ersa v. Dudley, 234 F. 2d 178 (3rd Cir. 1956), the Court of Appeals accepted the Federal Gov- ernment's argument. Without any mention of the Ferbro case the opinion adopted the statements of the Lombardo case and extended them to conclude that until the writ of fieri facias has been delivered to the sheriff, the Commonwealth lien for delinquent unemployment compensation contributions is inchoate and unperfected. As a result a federal tax lien recorded after the entry of the state lien was held prior in time of perfection and therefore entitled to a first priority. This conflict in interpretation of § 308.1 of the Unemployment Com- pensation Law as it affects the relative priority of federal and state liens is between two lower courts of independent jurisdiction. Both are merely persuasive authority and neither is binding upon the Penn- sylvania Supreme Court3 . Therefore, in the absence of a clearly de- fined rule of law enunciated by the Supreme Court, this department is of the opinion that the Commonwealth's position as upheld in the Ferbro case should be followed by the Department of Revenue and the Department of Labor and Industry. As between the Common- wealth of Pennsylvania and the United States of America, the liens for delinquent unemployment compensation contributions are perfected when recorded in the prothonotary's office and their priority as against federal tax liens dates from this point in time. The Fiscal Code, the Act of April 9, 1929, P. L. 343, §§ 1 to 1804, as amended, 72 P. S. §§ 1 to 1804, contains no specific provisions grant- •The decision of a lower Federal Court on a Federal question is not binding upon Commonwealth of Pennsylvania Courts. It is merely persuasive authority: Hangelias v . Dawson, 158 Pa. Super. 370, 45 A. 2d 39 (1946). 68 OPINIONS OF THE ATTORNEY GENERAL ing the Department of Revenue authority to enter into a blanket agree- ment with other taxing bodies for the pro rata distribution of funds available resulting from judicial sales. Nor can any section of that act be held implicitly to cover this situation. Section 1410 which permits the Department of Revenue, under severe restrictions, to com- promise debts due from individual taxpayers is confined by its terms to a case by case procedure. But a single agreement to cover all sales on a standard formula, to be entered into with parties other than the taxpayer involved, does not appear to be contemplated by this or any other section of The Fiscal Code or any other act defining the rights and duties of the Department of Revenue. The Unemployment Compensation Law, the Act of December 5, 1936, P. L. (1937) 2897, §§ 1 to 510, 43 P. S. §§ 751 to 875, contains neither in its express language nor by implication any authority to enter into an agreement with any other taxing bodies for the pro rata distribution of funds available as a result of judicial sales. Section 309.1 of the Act, as amended, 43 P. S. § 789.1, which permits the de- partment to enter into compromise agreements, limits that right, except in cases of bankruptcy, receivership or death of an employer, to a re- duction of delinquent interest and penalties only. But as in The Fiscal Code, an agreement to cover all cases on a standard formula, to be entered into with parties other than the taxpayer involved, does not appear to be contemplated by this section or any other section of the Unemployment Compensation Law or any other act defining the rights and duties of the Department of Labor and Industry. An examination of the pertinent provisions of the Internal Revenue Code of 1954 also reveals no express or implied authority on the part of the Internal Revenue Service to enter into such an agreement. Therefore, this department is of the opinion, and you are accord- ingly advised: (1) That except when there is a real estate mortgage properly recorded prior in time to the lien for delinquent unemployment com- pensation contributions, the liens for delinquent state corporation taxes, delinquent unemployment compensation contributions and de- linquent federal taxes are of equal rank. Their relative priority in the distribution of the funds available as a result of judicial sales is determined by the rule that the first in time is first in right. In the event that there is such a mortgage involved, then the lien for de- linquent unemployment compensation contributions is subordinated to the lien of the mortgage. Liens for state corporation taxes are OPINIONS OF THE ATTORNEY GENERAL 69 deemed to be perfected on the date of settlement, assessment or de- termination. Liens for unemployment compensation contributions are deemed perfected as of the date they are recorded in the office of the prothonotary in the county in which the property is located. Liens for federal taxes are deemed perfected as of the date they are recorded in the office of the prothonotary in the county in which the property is located. (2) That the Department of Revenue and the Bureau of Employ- ment Security, Department of Labor and Industry, do not have the authority to enter into an overall agreement for the pro rata distribu- tion of the funds arising from judicial sales and available for dis- tribution. (3) That the Department of Revenue and the Department of Labor and Industry do not have the authority to enter into an overall agree- ment with the United States Government for the pro rata distribution of the funds arising from judicial sales and available for distribution. Very truly yours, DEPARTMENT OF JUSTICE, SIDNEY MARGULIES' Deputy Attorney General. THOMAS D. McBRIDE, Attorney General.