UNITED STATES v. BROSNAN

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Argument of Daniel M. Friedman

Chief Justice Earl Warren: Number 137, United States, Petitioner, versus William Brosnan.

Mr. Friedman.

Mr. Daniel M. Friedman: Mr. Chief Justice and may it please the Court.

This case which is here on a writ of certiorari to the Third Circuit and the case which immediately follows it bring before this Court the questions whether a Government tax lien, which is admittedly junior to a previous mortgage on real property, may be divested from that real property, when the mortgagee follows state foreclosure proceedings to which the United States has not been made a party.

In each of these cases, what happened briefly was that a mortgage was given subsequently federal tax lien is attached to the property.

In this case, the mortgage was foreclosed under state procedures pursuant to a power of mortgagee to confess judgment and in the next case pursuant to power of State.

It is conceded in each case that in carrying out the foreclosure, the mortgagee fully complied with the provisions and requirements of state law.

And then under state law, the effect of this foreclosure would be to eliminate private junior liens that had attached to the property.

The Government's position simply stated in these cases is that whatever maybe the effect of this procedure on the elimination of private liens, it cannot operate to eliminate the federal tax lien that is attached to the property.

I want to emphasize here that this case has presented no question with respect to priorities of liens.

This is not a conflict basically between the Government and other groups as to which lien has priority.

The Government concedes in these cases that it has no claim against this property unless and until the prior mortgage has been fully satisfied.

Our claim basically is that when the prior mortgage is fully satisfied, we are entitled to satisfy our tax claim out of any excess that maybe produced over and above the amount of the first mortgage and as I will develop, the Congress has provided certain specified procedures designed to ensure that.

Justice William J. Brennan: And this decision cuts you often times, doesn't it?

Mr. Daniel M. Friedman: This does Mr. Justice Brennan.

Justice William J. Brennan: Under the State Law, was there any equity of redemption?

Mr. Daniel M. Friedman: As I understand not under Pennsylvania law, under California law in the next case, there will be, there is.

Now, I will refer briefly in my argument of three rather detail provisions relating to the elimination of tax liens, and I would like to just summarize it at the outset.

The first provision in Section 7403 of the Internal Revenue Code 1954, under which the instant case was brought, and this basically authorizes the United States to file a preceding to foreclose the tax lien with respect to real personal property.

In addition to that, another provision is Section 7424 of the Internal Revenue Code.

Now that is a simple matter, it gives someone who holds a prior lien prior to that of the United States or someone who purchases at a sale to foreclose that lien the right to institute himself a suit to determine the interest in the real property after going through a request to the Commissioner of Internal Revenue and that has to request to institute the other type of suit, and it's denied.

The last provision is Section 2410 of Title 28 of the United States Code.

That is a provision which authorizes the institution -- I am sorry, authorizes the United States to be made a party to a proceeding to foreclose on mortgage or the client title.

And I would like to emphasize at the outset something very significant.

Now that is the only one of these provisions which specifically provides that if the provisions there and are followed the effect of foreclosure on junior and subsidiary liens is the same as under state law.

In that one case, Congress has said that if you comply with these procedures, you look to state law to see what the effect of foreclosure is.

But in that situation where state law wipes out the lien, it does, the United States is given a year within which to redeem.

Now, the basic facts in this case are not disputed and are relative simple.

In 1948, some people in apartment purchased some real property and gave that a bond and mortgage.

The bond on defendants laying a practice is the equivalent of a promise to pay.

The bond and mortgage were properly recorded and the bond authorized the mortgagee to enter a confession of judgment.

After that time, the various federal tax liens attached to this property and the tax liens were properly recorded.

In 1955, there was a default under the bond, and on June 7th of 1955, a surviving mortgagee entered a confession of judgment in accordance with the authority under the bond and mortgage.

At that point, they filed the Pennsylvania practice of issuing a writ to the Sheriff to sell the property.

But, proceedings would delay while they procure it from the state court a rule to show cause why the United States should not be made a party to these proceedings.

The United States did not answer this rule, and thereafter, the Pennsylvania State Court issued an order purporting to make the United States a party to the proceedings.

I say purporting because the District Court subsequently held that that attempt to make the United States a party had failed because it have been begun too late.

Justice Felix Frankfurter: Mr. Friedman, to whom was this part of show cause against the United States, you said against to whom was that issue directed?

Mr. Daniel M. Friedman: It was served upon the United States Attorney and the Attorney General in accordance with the provision of Section 2410.

Justice Felix Frankfurter: And the United States did not answer?

Mr. Daniel M. Friedman: United States did not answer.

Justice Felix Frankfurter: On the theory that they couldn't be summoned into a state court?

Mr. Daniel M. Friedman: Now Mr. Justice, I think on the theory which the court held -- below held that the proceeding permits the United States only to be made a party to a proceeding to foreclose a mortgage.

And then in this case, the judgment had already been entered.

The confession of judgment had been entered and as the District Court held, they merely intended to make us a party to a proceeding in execution of the foreclosure.

Justice Felix Frankfurter: Is it -- I am just curious.

If the Government or its law pursue to serve with any legal proceeding to which they need not, as a matter of law, make a response, is it the custom, is it the practice or -- to disregard it entirely or make some suggestions to the Court why it is improper?

Mr. Daniel M. Friedman: Well, I suppose a better practice would be to indicate why, but I think there are instances where it was taken that since it is improper, we do not have to respond, and responding might, in some way, be construed as a recognition I suppose to the litigation.

Justice Felix Frankfurter: Of course, you save yourself of that.

Mr. Daniel M. Friedman: Now, during the course of this proceeding, the respondents before this Court purchased the confessed judgment and the bond in mortgage.

And early in 1956, the property was sold at a sheriff's sale and the respondents Brosnan and Jacobs who had previously purchased the mortgage, board in the property for slightly better than $6,000, the amount of the original bond and mortgage was $45,000.

One year later, the Government attempted to redeem the property by making a tender to one of the respondents.

This tender was rejected as inadequate in amount and the District Court upheld that ruling that the tender was improperly rejected and the issue is no longer in the case, because the Government abandoned that argument in the Court of Appeals and is not pressing it in this case.

Justice Charles E. Whittaker: What issue that was abandoned Mr. Friedman?

Mr. Daniel M. Friedman: Pardon me, sir?

Justice Charles E. Whittaker: What -- what issue that was abandoned?

Mr. Daniel M. Friedman: The argument that we made a proper tender under the statute when we attempted to redeem the property.

We're no longer contending that.

Justice Charles E. Whittaker: You won't claiming here right now to redeem this property in this -- in this case?

Mr. Daniel M. Friedman: That is correct.

We will rest here solely on the basic question whether the effect of the state court proceeding eliminated the federal lien on the real property.

Now, the instant suit was filed approximately a year and a half after the mortgage had been foreclosed under this provision of Section 7403 of the code which I referred.

It sought an adjudication from the District Court first that the United States had not properly been made a party to the state court proceeding.

Secondly that the federal lien remains an encumbrance on the property.

Third, it requested the Court to determine the relative priorities to the property.

And finally, to have the marshal sell of property and to distributed the proceeds in accordance to these priorities.

Chief Justice Earl Warren: May I ask if -- if you argued this issue that you rely on here in the Court of Appeals?

Mr. Daniel M. Friedman: The mortgage redemption or the other?

Chief Justice Earl Warren: You -- you have -- you've abandoned one that you argued there.

Mr. Daniel M. Friedman: Oh, yes.

Chief Justice Earl Warren: Did you argue both there?

The one --

Mr. Daniel M. Friedman: No.

No, we argued only --

Chief Justice Earl Warren: The one you are arguing here now.

Mr. Daniel M. Friedman: We argued in the Court of Appeals only the issue, which we are arguing before this Court now.

Justice Felix Frankfurter: The survival of the lien?

Mr. Daniel M. Friedman: Yes.

Chief Justice Earl Warren: The -- the survival -- the survival of the lien, yes.

Mr. Daniel M. Friedman: Now, the District Court denied the Government all relief.

First, it held that the United States had not properly been made a party to the proceedings under 2410.

It stated that to properly invoke Section 2410, the United States must be named initially as a the defendant in the state court action, and that all was done here was an attempt to make the United States a party to the execution of the judgment that had already been entered.

At the time, this ordered to show cause was issued and the United States was purportedly made a party but the judgment already been entered several months before.

Justice Felix Frankfurter: May I ask you whether -- whether -- if suggestion had been made to the Court or representation made to the Court that you were -- that the motions of show cause must fall, would there have been power on the part of the state court to amend so as to nunc pro tunc bring you into the earlier proceeding?

Mr. Daniel M. Friedman: I don't know Mr. Justice but I would rarely doubt it since the confession of judgement which -- Mr. Justice, I understand on Pennsylvania practice entered as a matter of form once there is a power to confess judgment.

Justice Felix Frankfurter: That ever doesn't go to court transaction.

Mr. Daniel M. Friedman: I think so.

Justice Felix Frankfurter: To sell it from the -- from the --

Mr. Daniel M. Friedman: I think so.

Chief Justice Earl Warren: -- from the process?

Justice Charles E. Whittaker: But why -- as I understand it Mr. Friedman, there was no contest by the Government over the validity of the first mortgage lien and nothing had been judged that affected any rights that a special execution had been issued but had been stayed for the purpose of bringing you in.

And you have notice and the statute expressly gives you a right to redeem from a sale under the prior lien.

How -- why you couldn't have then perfectly well gone ahead under 2410?

Mr. Daniel M. Friedman: I think -- I think Mr. Justice that Congress in setting up this statute 2410, which provides that If you follow the procedures, the United States lien maybe cut off under state procedures specified certain things to be done.

One of which is that the United States must be made a party to a suit to foreclose.

Now, if we had been made a party to begin with, we might have had some question as to the validity of the mortgage.

And secondly, and I think more significant, if you we were made a party initially, we would have the full opportunity to contest all aspects of the case.

But as in this situation, the State just goes ahead and follows its own procedures.

If the decision below in this case is correct, it wouldn't make any difference whether we had or hadn't been given notice, because the theory of the Court of Appeals in this case, as I read the decision, is that as long as State practice does not require a junior lienor to be made a party before the lien is cut off, United States stands in the same position.

And I believe it wouldn't make any difference.

Generally speaking, what would happen in the case of the United States as long as the provisions of Congress had provided, we are not complied with.

Justice Felix Frankfurter: Mr. Friedman, do I understand -- I want to get this completely into my head as it goes on.

Forgive me if I ask ignorant or stupid questions.

Do I understand you to say that if you had been brought in before the foreclosure said, and I am not making remotely any suggestion about this case or the fact of this case.

But then, you might come in and raise all sorts of question as to the relation between the foreclosure purchase and the mortgage -- and the mortgagee or whatnot?

Mr. Daniel M. Friedman: Yes.

Justice Felix Frankfurter: Do you have some -- are you suggesting some such thing?

Mr. Daniel M. Friedman: We are not suggesting --

Justice Felix Frankfurter: I don't mean in this case.

Mr. Daniel M. Friedman: That's correct, yes.

Justice Felix Frankfurter: I am not talking about this case.

Mr. Daniel M. Friedman: So, we might have a right to question the validity of the prior lien.

That's all I am --

Justice Felix Frankfurter: The validity or the -- the purchase price that -- which it was bought in, et cetera, et cetera.

Mr. Daniel M. Friedman: Any of those factors whether the lien was fully perfected other than mortgage liens and so on.

Justice Charles E. Whittaker: Mr. Friedman I am still having some (Inaudible).

Why could not -- or is it, you tell us, could the Government have waived any defect in the timeliness of bringing -- the notice upon it to bring it in to this case and have sought the right on the 2410 (c) to redeem within a year?

Mr. Daniel M. Friedman: I suppose the Government probably could have waived.

But the problem is Mr. Justice that we don't think that this was the kind of thing anyhow which would have given us the right to redemption, because the statute, we think, speaks in terms of judicial sale.

And we think what is contemplated under 2410 that we have the right -- our right to -- let me -- under 2410, our lien maybe cut off in accordance with state procedures only if there is foreclosure at a judicial sale.

And then the protection that Government is giving in that case is, the lien is cut off but we have the right to redeem.

Now, we think that the judicial sale contemplates something quite different than what was had in this case.

This means, we think it means a sale pursuant to court order with an opportunity to object to the terms of the sales and so on.

So that's --

Justice Charles E. Whittaker: I mean -- I am familiar with the practice that you are making in the statement (Inaudible) depends all mortgages foreclosures by a judicial sale.

And the special execution is issued placed in the hands of the sheriff, publication was had and the property is sold.

Now, that's a judicial sale and there is a creative redemption thereafter.

What happens in the case, and I am thinking about, which is an 18-month statute.

What here I should turn to first, under the Government statute, the Government have the right to the first 12 months.

Isn't that a judicial sale?

Mr. Daniel M. Friedman: Well, we -- we think not Mr. Justice.

There's another proceeding under Pennsylvania practice which the District Court referred to under which foreclosure started by -- without any entry of confession of judgment.

In other words, we think that's the kind of proceeding which started with a complaint, whereas here -- what you have here is just a judgment is entered and the next step is -- is a sale by the sheriff.

We don't believe that that is the kind of thing the Congress had referenced to when it spoke of judicial sale.

But, if -- I might just refer to the finding of the District Court in this case.

In holding that the federal lien was cut off by the state proceedings, the Court recognized that in Pennsylvania a mortgage creates only a lien and not in the State.

And it also found that the Government lien fastened upon a title to real property.

So, there's no question in this case that under local law, the mortgage interest here is that solely of creating a security interest in favor of the mortgagee.

The mortgagor retained the title of the property at all times.

Now, the District Court however held that the state proceedings had the effect or eliminating the federal lien on the real property, and the Third Circuit affirmed.

The Third Circuit held, in effect, as follows.

It said that since under Pennsylvania law, the purchase toward a sheriff's sale takes the same title as the debtor had prior to this execution, and since further under Pennsylvania law, the -- lien the -- execution relates back to the time when the mortgage was given.

This meant that once the execution had taken place, the Government had no interest in the property at all.

It goes back, it cuts off the mortgagor's interest and therefore, the United States had no remain -- no interest to -- there was no interest to the mortgagor to which the Government lien for the time.

Justice Felix Frankfurter: Mr. Friedman, may I ask as that your brief would tell us that I am reading.

May I ask whether the answer to our problem as to the survival or the extermination or the decapitation of the -- or the evaporation of the Government lien, would that turn on what the local law is as to the nature of the interest -- of a mortgage whether it's in a state or a lien would --

Mr. Daniel M. Friedman: Well, I wouldn't --

Justice Felix Frankfurter: The answer to the question we are now before would vary from state to state?

Mr. Daniel M. Friedman: Well, I don't think it would vary from state to state.

I think --

Justice Felix Frankfurter: Assuming different states have different conceptions of --

Mr. Daniel M. Friedman: I -- I think this Mr. Justice that in the first instance, you have to look at the state law if you see if there was any interest in the mortgagor which remained after the mortgage had been given.

That was -- was there some interest to which the federal lien could attach.

To start, I think there has to be something to which the federal lien attaches it after the mortgage --

Justice Felix Frankfurter: Do you mean whether the first mortgage would completely absorb everything that the mortgagor has so that there was nothing to which a junior, so called, junior lien could attach?

Mr. Daniel M. Friedman: That is right, but once we overcome --

Justice Felix Frankfurter: Are we going to -- I am very rusty on that almost 50 years of rust.

You have to go into a lot of niceties of property law in different states for the answer to that question, wouldn't you?

Mr. Daniel M. Friedman: We might, but I don't think there's any problem in this case.

Justice Felix Frankfurter: All right.

Mr. Daniel M. Friedman: And I think also that --

Justice Felix Frankfurter: I know but we're construing of general statute and the Government is -- this is a general position of the Government.

Mr. Daniel M. Friedman: I think Mr. Justice --

Justice Felix Frankfurter: My interest in the case is very much less if I just have to decide into the obscurities or perhaps shall I say the mysteries of the Pennsylvania property law.

Mr. Daniel M. Friedman: No, Mr. Justice.

If that were all that were involved, the Government would have not brought this case here.

I think that in most states at least, today and mortgages generally is only a security interest, and our basic position in this case is that as long as the mortgagor retains the property interest, as long as it's secured -- the mortgage is given only a security for a debt.

When that happens, the federal tax lien attaches to that interest.

In other words, here, you have a property subject to a security lien.

And in effect, what has happened is really the mortgagor has said to the mortgagee, “I am going to give you the right to sell this property if I don't pay my debts, and you may then apply the proceeds to the payment of my indebtedness to you.”

Now, the State of course may and properly does determine what the effect of that kind of proceeding that sale the property to satisfy the interceding debt.

What effect this has on the junior lien that it creates?

But we believe that the State cannot purport to say that because state interest has cut off to this proceeding, the federal interest similarly can be cut off in situation where the United State has not been made a party.

Now, we have set forth in our brief the various provisions which Congress has enacted dealing with this difficult subject of federal liens.

To begin with, Congress itself has provided the duration of the liens.

The statute says that unless another day the specifically fix by law of the tax lien arises when the assessment is made and it continues either until the liability for the tax is satisfied or becomes unenforceable by reason of lapse in time.

Then, the United States has given the power under Section 7403 itself to bring a suit to foreclose its lien and to have all the interest in the property determined.

There's another provision, Section 6325 of the code which provides for the administrative release of liens in a situation where as a practical matter, the Government's lien has no value and application maybe made for administrative discharge, and even the whole lien can be discharged or the lien maybe released from specific property.

And finally, there's this general statute, Section 2410, which permits the United States to be made a party to any civil action either in the District Court or in a state court having jurisdiction of the subject matter to prior title or to foreclose a mortgage or other lien on real or personal property.

And in discussing this Section, one other point should be mentioned is that under this Section, not only are there various provisions provided for the protection of the United States, such as the lien of the Government must be described by particularity, appropriate notice and so on, the Government is also giving the right to remove the case to the Federal District Court.

And I want to reiterate again --

Justice William J. Brennan: (Inaudible) statement as the practical matter or the Government prevails exist to say then that whenever there's a federal tax lien, junior to a mortgage in any State, the only thing the mortgagee can do safely is to bring a proceeding under this 25, whatever it is.

2410.

Mr. Daniel M. Friedman: 2410, well, he has a choice, he could do that.

Well, the first instance he may speak administrative discharge of the federal lien.

Justice William J. Brennan: Well, to work that out.

Mr. Daniel M. Friedman: Then, he has a choice of either bringing a proceeding under 2410 or a fall in this, somewhat more cumbersome proceeding under Section 7424 in which he in effect asked the Government to bring a foreclosure.

Justice William J. Brennan: Well, that's what it means.

This is then to say that he can't resort any state procedure other than a 2410 procedure maybe brought to a state court.

Mr. Daniel M. Friedman: That is correct.

And we think that is what -- that is precisely what Congress intended that federal liens are not to be discharged to leave many different and varying state court procedure.

Justice William J. Brennan: Now, to what federal taxes and what federal tax liens that this construed?

Not only income would construe of the state taxes, federal state taxes.

Mr. Daniel M. Friedman: Well, I think so.

Justice William J. Brennan: How would that satisfy it?

Mr. Daniel M. Friedman: I would think so because the tax lien statute speaks in very broad term.

In this -- in this very case, there are all sorts of taxes involved, they're unemployed -- federal unemployment insurance taxes, old age assistance tax as well as income tax.

Justice Potter Stewart: Well, a look to 2410 might take over most of the mortgage foreclosure businesses of the country, doesn't it?

Mr. Daniel M. Friedman: Well, I -- I think Mr. Justice that the Congress recognized the far reaching effect of this because it specifically provided that this is the one instance, 2410, when you may look to the state law to determine what the effect is of the state foreclosure proceedings on the federal law.

And I -- as I say, I think that it's Congress which has created this liens and it's Congress and not the State which are to be determined how they are to be removed, we think --

Chief Justice Earl Warren: When -- when was 2410 enacted Mr. --

Mr. Daniel M. Friedman: 2410 was originally enacted in 1931 and it was amended in 1942 to add the provision permitting the bringing of a quiet title suit.

Chief Justice Earl Warren: Well, is it no -- I just -- may I apologize for one more -- what has been the practice since that time with relation to matters of this kind?

Mr. Daniel M. Friedman: Well, I am not clear as to your question Mr. --

Chief Justice Earl Warren: Well, there must -- there must have been enumerable cases of this kind occurs since 1931.

And I am wondering what the practice of your department was in -- in insisting upon the right to the Government to be joined as you claim; it should have been joined here?

Mr. Daniel M. Friedman: Well, we have, as my understanding is we have insisted on that, we have taken the position that you must comply strictly with these provisions in order to have the effect of discharge in the lien.

There's been some litigation -- in many cases involving peripheral points and there two previous Court of Appeals decision in addition to these two case which have gone --

Chief Justice Earl Warren: What -- what I am trying to get at, has your practice been so uniform that -- that people have had knowledge of this thing and have generally conceded that that is the practice of the Government to -- to require joining, to joining the Government in actions of this kind?

Mr. Daniel M. Friedman: I -- I don't know that I could fairly make that statement Mr. Chief Justice but I think the statement is that generally speaking, it's recognized that it is necessary to join the Government, because I think the legislative history of these provisions itself shows that these provisions, the provision originally in Section 7424 and then this provision Section 2410 were enacted because of the various real-estate interest that complaint, there was no way they could get rid of this Government lien.

In other words, if you have a Government lien, you had a prior mortgage and there was no way to get rid of it and that was the purpose of these things.

Chief Justice Earl Warren: Well, if the title insurance companies throughout the country recognized that this is essential --

Mr. Daniel M. Friedman: I -- I wouldn't think this so --

Chief Justice Earl Warren: I do, I am not questioning you, I just don't know, I have no knowledge at all.

Mr. Daniel M. Friedman: All I can say Mr. Chief Justice is I would think so, I can't --

Chief Justice Earl Warren: I see.

Mr. Daniel M. Friedman: -- state that affirmatively but I'd say they were the leaders in urging this legislation.

Justice Felix Frankfurter: Mr. Friedman, the question that I wanted to ask to carry it on Chief Justice's question, an answer to -- and you said it originated in 1931 but I want to know if that on the original origination or was there no statutory healing with the subject prior to 1931?

Mr. Daniel M. Friedman: Prior to 1931, originally in 1924, they had passed these two provisions giving the United States the right to foreclose its lien and also giving a person -- who had -- an interest in real property the right to -- himself go under the District Court but 1931 was the first time that this provision permitting the United States to be made a party to a mortgage foreclosure suit.

Justice Felix Frankfurter: Well, what -- what happened before 1924, the United States had an interest like this, how would it assert it as against a -- a lien prior with mortgage?

Would it go into the state court?

What would it do?

What would -- what was the -- this problem didn't begin with 1931 or 1924, did it?

Mr. Daniel M. Friedman: No, it didn't.

Justice Felix Frankfurter: It couldn't have.

Uncle Sam must have had some lien prior thereto --

Mr. Daniel M. Friedman: Well, as --

Justice Felix Frankfurter: -- precise liens or whatnot?

Mr. Daniel M. Friedman: Well, the -- the United States did have this precise liens and the -- as I understand that prior to that time, there was no way that the Government's lien could be wiped out except -- in other words, a mortgage would be foreclosed and there was --

Justice Felix Frankfurter: And there was still an Uncle Sam to just (Inaudible)

Mr. Daniel M. Friedman: That's right, because the legislative history states that there was no way in which these liens could be wiped or should pay them off, and that -- that was the complaint of the -- the lien was worth perhaps.

The value of the property --

Justice William O. Douglas: Well, that -- that might be true in many states where they would have to bring the United States in as a party, but you have to the consent of the Government to bring them in.

Justice Felix Frankfurter: That is (Inaudible) bring them in except by consent as Mr. Justice Douglas suggests.

Justice William O. Douglas: No.

So this takes care of as I read the committee reports on 2410 that it would take care of that situation and they weren't aiming to particularly the situation for the Government lien could be disposed of without bringing the Government in.

Mr. Daniel M. Friedman: Well, except Mr. Justice that the need to bring the Government in, we think rest not only on the fact that under State practice in many instances, the junior lienor must be brought in but also on the broader ground that the federal lien on the property gives the United States a property interest.

The United States has an interest in the property and under settled principles, the United States must be made a party to any suit involving property in which it has an interest.

I'd like to read, refer to --

Justice William J. Brennan: Mr. Friedman may I just get this clear?

In my own home State, there is provision made under our foreclosure procedures for bringing the United States in for junior lien.

Although I understand you say that that procedure is not operable that the only procedure that maybe operative, effectively the deal with the United States and the junior lienor is the 2410 procedure.

Mr. Daniel M. Friedman: Mr. Justice, I think that unless the state procedures specify -- comply with the requirements if 2410 or these other provisions, they're not operative to this --

Justice William J. Brennan: What do you mean by comply?

As 2410 sets up its own procedures as you prescribed to the Court.

Mr. Daniel M. Friedman: That's right.

Justice William J. Brennan: Now, what can the New Jersey legislature do to make it comply, to make its own state procedures comply?

Mr. Daniel M. Friedman: Well, there's nothing that it -- it can do except that -- if the New Jersey legislature provides a provision, suppose for the sake of argument, the New Jersey legislature provided a provision for foreclosure and said that the lien of the United States maybe eliminated upon giving 10 days notice to the Attorney General.

And the congressional statute says 60 days notice, I don't think the New Jersey --

Justice William J. Brennan: Suppose the procedure of the New Jersey legislature adopted a procedure identical in form and terms with the 2410 procedure.

Mr. Daniel M. Friedman: Well, then it would be -- then it would be -- then 2410 would be net, and then they would be complying with 2410.

There's nothing to prevent the State from adopting a procedure which fully complies with the requirements of the federal procedure.

Justice Potter Stewart: And then the United States would agree that in the state court and under the state procedure its lien could be cut off.

Mr. Daniel M. Friedman: Yes.

2410 explicitly so provides subject to the right of redemption of course which is very important and subject to the further fact that the United States has given the right to remove --

Justice Felix Frankfurter: Where is that provision?

I have been looking for that and can't find it.

Mr. Daniel M. Friedman: It's the right to remove --

Justice Felix Frankfurter: Is that in 2410?

Mr. Daniel M. Friedman: Yes, Mr. Justice.

That's at the very beginning of 2410 on page 33 of our brief under Subsection (a) under the conditions prescribed and Section 1444 of this title which is the provision for removal.

Justice Felix Frankfurter: (Inaudible)

Chief Justice Earl Warren: Are there States that have made their law to conform?

Do you know Mr. Friedman?

Mr. Daniel M. Friedman: I -- I don't believe explicitly in those terms.

I don't believe that States attempted to make their law to meet the standards of the federal, but our point is that you can't -- you can't comply with these federal things, and there's nothing to prevent the State prescribing a form of procedure.

Indeed, in this very case we think that if the other procedure which Pennsylvania will allows, the initiation of a complaint prior to the entry of a -- the flow of judgment and the giving of notice in the foreclosure pursuant to the order of the Court that that would meet the standards of 2410.

Justice William J. Brennan: Mr. Friedman, where -- there's nothing I gather explicit in 2410 which says what you said to me earlier namely that the New Jersey legislature can adopt in terms a procedure which satisfies 2410, which would permit an action in a New Jersey Court which could have the effect of cutting off the United States liens.

Mr. Daniel M. Friedman: No, Mr. Justice, I think I didn't make myself clear.

The question as to the effect we think of cutting off federal liens must depend on the congressional provisions relating to such liens.

Now, New Jersey can of course adopt whatever procedures it wishes.

New Jersey can adopt whatever procedures it wishes to discharge private liens.

And all that I was suggesting is that there is nothing to prevent New Jersey from adopting a procedure which will satisfy the standards of 2410, and thus by complying with it, have the effect which Congress has permitted under 2410.

Justice William J. Brennan: Well concretely, will that have the effect of clearing the title of the federal lien?

Mr. Daniel M. Friedman: Yes, Mr. Justice.

Justice William J. Brennan: All right. Now, what about the removal?

May such a case then be removed by the United States?

Mr. Daniel M. Friedman: Yes, specifically under the 1440.

That's one of the rights that Congress gave for the protection of the United States.

Justice William J. Brennan: Now, that actually then the termination will not be made under New Jersey courts but will be removed in the United States District Court if the United States wants to do that.

Mr. Daniel M. Friedman: That is correct, because that is what Congress has provided in the case of federal lien.

Justice William J. Brennan: I just want to get clear of what -- what --

Mr. Daniel M. Friedman: Yes, yes.

The United States would have the right to remove.

That's given explicitly.

Now, I think this discussion has also pointed up the fact that there's a real and serious danger here of conflict between the federal procedures and program for the discharge of liens on the one hand and the state proceedings on the other.

One instance that's already been developed here in many States including the State of Pennsylvania, a junior lien maybe discharged without making the junior lienor a party.

But under the various federal statutes, the United States must be made a party to any proceedings seeking to discharge its lien.

And similarly, there are various conflicts dealing with the right of redemption.

Here, the United States has given a year within which to redeem.

Some States attempt to give the mortgagor the exclusive right to redeem.

Other states provide a greater or a lesser period.

Indeed, we have in this case what I think is the anomalous situation.

And then under the Pennsylvania Law, state liens fair better than federal liens in the foreclosure proceedings followed here, because under Pennsylvania law, the state lien for taxes will be discharged at a foreclosure sale only if they amount realize at the foreclosure sale is sufficient to pay off the state liens.

And in fact, in this very case, the amount that was bid at the foreclosure sale by the purchasers who were the, in effect, the successes to the mortgagees was an amount sufficient to pay the cost of the sale and pay off the local taxes.

That was what -- that was what happened.

If the local taxes were paid off and yet at the same time the state procedure has the effect of cutting off the federal lien in this situation where the Government gets not a single penny, the State is paid in full, the United States gets not a penny.

Justice Charles E. Whittaker: Well, the State (Inaudible), but a second mortgage lien would be extinguished even though (Inaudible).

Mr. Daniel M. Friedman: Yes.

If it were a mortgage lien, it would but this -- the statute says the lien of all taxes now or hereafter to be levied.

This is page 36 of our brief.

Against any real estate within the commonwealth shall be divested by any judicial sales such land provided the amount of the purchased shall equal the amount of the state taxes.

But I was just pointing out that the conflicting situation here if federal tax liens maybe eliminated through this bearing in different state procedures.

Now, Congress has adopted as one of its cardinal canons of taxation the idea of equality that it should not vary from State to State.

And we think that what Congress has done in this situation is to say that there is to be one procedure, the various forms of it administrative discharge, suit by the Government, suit requested after request to the commissioner or proceeding under 2410, that those are the ways in which the federal liens are to be discharged.

And we do not think that Congress ever intended in this area, important area of federal taxation, to permit the States by their own procedures fully proper with respect to their own local liens to wipe out the federal tax lien in a proceeding where the United States --

Justice John M. Harlan: Can you point anything in the (Inaudible) history of the statute that says that?

Mr. Daniel M. Friedman: Well, we've said forth in our brief at pages 15 to 19.

I see, I can't point to anything specifically that speaks that this being exclusive in that.

But what we do think is that this comprehensive system has been set up by Congress involves an occupancy of the field.

Justice John M. Harlan: That's what I was pointing to the question.

You really derive that from the scheme rather than anything that you can put --

Mr. Daniel M. Friedman: From the scheme, and as I say the fact that under 2410, there is the specific reference in one situation that the validity of the federal lien continued existence will be determined by state law.

In one situation they say that if you follow these procedures, the effect on the junior lien is to be the same as that under state law, and we think that is the only exception and unless that is followed, the federal lien continues even though under state law the junior lien is released from the property.

Justice Charles E. Whittaker: I am coming by this, could you answer that?

I know you're not raising the question here about a right to redeem under 2410, but from my mind that's still in this -- tell me, how much you tendered the amount of the bid, that's $6,203.

Mr. Daniel M. Friedman: That's correct.

Justice Charles E. Whittaker: And that involves only court costing in the judicial proceeding and ad valorem taxes against the property, and didn't involve anything for application on the mortgage itself, did it?

Mr. Daniel M. Friedman: That's correct.

Justice Charles E. Whittaker: Now then, you sought to redeem simply by the payment of the $6,000 --

Mr. Daniel M. Friedman: Correct.

Justice Charles E. Whittaker: -- which would destroy and defeats entirely the mortgagee's interest in the first mortgage, wouldn't it?

Mr. Daniel M. Friedman: Yes.

And I -- as I say, we're not attempting at this -- we're not arguing at that tender was adequate at this point.

But as I say -- I say, since we're not arguing -- we're not claiming here that any right to redeem any mortgage.

Justice William J. Brennan: Now I gather, if you had -- if you had to prevail, this means although a junior lienor, you get paid in the mortgage you get nothing.

Mr. Daniel M. Friedman: Well, I think we had -- first that we probably would not have prevailed and second that's the reason we didn't press it.

Justice Charles E. Whittaker: And so, as a matter of fact, wouldn't you in equity action -- isn't it true what action in mind -- what resembles that the amount that gets equaled, the amount of judgment plus the $6,000.

Mr. Daniel M. Friedman: My --

Justice Charles E. Whittaker: And that the redemption price that you have to pay would be the judgment plus the $6,000.

Mr. Daniel M. Friedman: I would suspect though, Mr. Justice.

Justice Charles E. Whittaker: Now that would be (Inaudible), wouldn't it?

Mr. Daniel M. Friedman: I think so.

I am -- I am not attempting to suggest here that -- there is some indications, some -- under some of the statutes that where a junior lienor redeems, he satisfies the standard by paying merely what was bid at the foreclosure sale.

But as I understand Mr. Jacob states and I am questioning the practice in Pennsylvania as the first bid that is made at a foreclosure is for cost and local taxes.

If there's another bid, it's then jump up to $50,000 or whatever it is.

We're not attempting to argue here, so to say that our tender was valid.

Chief Justice Earl Warren: Mr. Jacob.

Argument of William L. Jacob

Mr. William L. Jacob: Mr. Chief Justice and members of the Court.

In order to fully appreciate the situation in which we find ourselves, I think that we're going to have to refer a little bit to the testimony and to the facts of this case, which are peculiar to this case, and as such, we tried it on that basis.

Apartments owned a piece of a property which say is purchased from Berts and in the purchase of that property they gave back a mortgage of $45,000 in 1949.

Now, it went to default and seven years later a foreclosure was had on that mortgage.

Accompanying that mortgage was a judgment bond.

The bond was the real debt, the mortgage is collateral for the debt for the obligation.

The plaintiff in that writ had the choice of remedy.

The plaintiff could file, enter a judgment on that bond or could institute fieri facias proceeding on the mortgage.

He went on the bond; he had to pursue on them judgment against that defendant, meaning that he had a judgment against anything and everything that that defendant owned.

If he went on the fieri facias proceedings, he was limited and restricted to the piece of property that was described in that mortgage.

That choice of remedy is a very valuable asset that belongs to the mortgagee.

This plaintiff --

Justice Potter Stewart: And is that in Pennsylvania, is that a choice, you have to choose, you can't pursue both?

Mr. William L. Jacob: No, no.

It would be quite improper and confusing on the record to have to do both, you just couldn't.

But you wind up the same result because you wind up with the share of sale.

On the fieri facias, you relieved the obligor of that bond from any personal liability and you limit -- restrict your self to recovering on that mortgage against the mortgage premises on them.

Justice Potter Stewart: So you end up with the same result only that he doesn't have any (Inaudible) property.

Mr. William L. Jacob: The terminal result.

The share of sale is identical.

The same officer will make the sale and for the same amount of money.

Justice Potter Stewart: Right.

Justice Hugo L. Black: You are --

Mr. William L. Jacob: (Inaudible)

Justice Hugo L. Black: You're saying that the bond -- that the mortgagee don't rise to go into Court, confess a judgment in favor of himself and against the mortgagor without knowing?

Mr. William L. Jacob: Oh, yes.

That's the -- that's common practice in Pennsylvania on a judgment bond.

I think that's quite common in many, many states of the union.

Justice Hugo L. Black: Yes.

I know it, but --

Mr. William L. Jacob: And it's -- and our courts have said that that is just the same as if a suit had been brought in (Inaudible) on debt and a judgment recovery.

It's just a shortcut is what it -- what it really amounts to because one there recognizes abd submits himself to the jurisdiction of the court, and in fact, that's what it is.

Now, in this case, that procedure was adopted.

Judgment was confessed.

And then before the sale was had, the proceedings were stated and a petition was filed in the common pleas court and a rule was granted on the United States Government in compliance with 2410 to upraise them with a situation.

There was a sheriff sale of this property and that they had tax liens on there and giving -- and asking them to commend an answer or to state their position.

And that was done in accordance with the requirements of 2410.

We waited not for 60 days that the statute requires.

We waited for 89 days and the Government completely ignored that.

And then the Court said, “Well, you go ahead and sell.”

So then, we went ahead and sold.

And then, in -- that sell was made on January 3rd, 1956.

On January 3rd, 1957, the Government recognizing that sale, (Inaudible) out to these purchasers at that sale and tendered them $6,203 which represented only the amount of the approximate taxes at the sheriff sale.

These men had in that property over $55,000 and the Government wanted to get that property back from them for $6,200 and some and the testimony here will bear out every word I am saying.

Justice Felix Frankfurter: I should have asked these questions earlier.

Forgive me.

The confession of judgment, is that an -- is that an automatic thing or is that a proceeding or contested and adversary proceeding?

Mr. William L. Jacob: It is not a contested and an adversary proceeding.

It is an admitted proceeding.

Justice Felix Frankfurter: An admitted?

Mr. William L. Jacob: Yes.

Justice Felix Frankfurter: Well now, maybe I am ahead of the game, but would you say that that proceeding set comes within 2410 (a) and equivalent of tax liens?

Mr. William L. Jacob: Yes, that's -- that --

Justice Felix Frankfurter: That it requires to deprive title for -- for the foreclosure of a mortgage.

Mr. William L. Jacob: For the foreclosure of the mortgage.

Justice Felix Frankfurter: That is not deprive title, is it for the foreclosure of a mortgage.

Mr. William L. Jacob: That's the foreclosing on a mortgage.

That's how accepted procedure in Pennsylvania for foreclosing on a mortgage.

Justice Felix Frankfurter: But your earlier answer, would you make some clear, if I may say so, that you just file a piece of paper and automatically, there is a judgement.

Mr. William L. Jacob: No, it isn't that simple.

Justice Felix Frankfurter: Now, what is it?

Mr. William L. Jacob: You file what is generally characterized as a narr or a declaration.

Justice Felix Frankfurter: What?

Mr. William L. Jacob: A narr, N-A-R-R or a declaration.

And on that, you set forth that that who the plaintiff is and who the defendant is and then have set forth your allegation of default and make reference to you mortgage.

You tie in that judgment with your mortgage, so that there's a record in the (Inaudible) office of that judgment and a cross reference made to the mortgagor as recorded over in the reporter's office.

Justice Felix Frankfurter: Is that served on anybody?

Mr. William L. Jacob: That is not necessarily be served on any person.

And then from there, you issue your execution, your writ of fieri facias.

Justice Felix Frankfurter: So that, in effect -- would it be unfair or inaccurate to go to the next part in proceedings?

Mr. William L. Jacob: It -- it could very properly be turned down, it could be ex parte, until the purchaser -- until the mortgagor then has notice of it through posting of the premises and the advertisement which is necessary under our sheriff selling.

Justice Felix Frankfurter: Now, if you'll help me to follow you argument if you are to answer this question.

Do you conceive that proceeding as you described it to be a proceeding -- a proceeding “for the foreclosure of the mortgage”?

Mr. William L. Jacob: Yes, sir.

Yes, sir, and the Government --

Justice Felix Frankfurter: And that's the foundation of your argument?

Mr. William L. Jacob: Yes.

And the Government so recognized that.

The Government so recognized that because the Government filed a petition saying we want to redeem under the 2410, because you have the tittle.

Why would they try to buy the property back from us if we didn't have the tittle?

Justice Felix Frankfurter: But you already have it.

You have it and why didn't piece of paper --

Mr. William L. Jacob: Oh, no, no.

I don't get title a by that piece of paper.

I only get a judgment and on that judgment, I have to issue an execution, and have the property advertised for sale.

Justice Felix Frankfurter: So you've got a judgment for the title, is that right?

Mr. William L. Jacob: No, I only get a judgment.

Justice Felix Frankfurter: Do you mean you got a judgment for the -- for the principal amount, which is defrauded?

Mr. William L. Jacob: Right.

I get a judgment for the amount that's stated in the bond and the amount to that is usually double the amount of the debt, like I got a judgment for $90,000.

But the sheriff would be directed to collect the exact amount that is due on that.

Justice Potter Stewart: And it's like out of the mortgage property or any property --

Mr. William L. Jacob: Right.

Justice Potter Stewart: -- a judgment (Inaudible) is that it?

Mr. William L. Jacob: That's right.

Justice Charles E. Whittaker: Is this not -- to see if I understand.

What you really do is file a plenary suit by a plaintiff against the defendant.

Mr. William L. Jacob: Right.

Justice Charles E. Whittaker: And then you put a notice, a formal entry of appearance, consent to judgment executed by the defendant and he waives process and agrees to the -- and to your judgment?

Mr. William L. Jacob: That's exactly by (Voice Overlap)

Justice Charles E. Whittaker: Judgment is thereupon entered.

Just as no process had been issued in a normal case and an adversary trial that was all in the judgment.

Mr. William L. Jacob: Yes.

And I have so referred to that in my brief to give you authority for that.

Justice Charles E. Whittaker: Now then, from that judgment special execution issues for the sale of this mortgaged land.

Mr. William L. Jacob: Right.

Justice Charles E. Whittaker: It was at that point that the Government was given notice and asked to come in.

Mr. William L. Jacob: Yes.

The Government is given notice before any violence was done to its so-called lien at all.

Justice Felix Frankfurter: May I ask you this question, I must trouble you some more.

Mr. William L. Jacob: Go ahead.

Justice Felix Frankfurter: Suppose notice had been given, suppose that it served this -- what do you call this piece of paper Mr. Jacob, which you --

Mr. William L. Jacob: This declaration?

Justice Felix Frankfurter: This declaration.

Suppose you'd serve this declaration on the Government, could the Government then come in and contested the entry of a judgment on to follow that declaration?

Mr. William L. Jacob: The Government had a right to commend and do anything that it wanted.

The Government could have contested --

Justice Felix Frankfurter: But it didn't know that you filed -- But it didn't knows you filed that document which is -- that was ex parte.

Mr. William L. Jacob: Well, in a way, but that was ex parte, but nothing was done on that.

Justice Felix Frankfurter: Except the judgment was entered on the --

Mr. William L. Jacob: That's all, just the judgment entered, which does no harm because of mortgage was entered and that was noticed to them.

Justice Felix Frankfurter: No, but the -- where could it contest the validity of that judgment?

Mr. William L. Jacob: By coming in the rule that we granted and served upon them.

They could have come right into our common pleas court and --

Justice Felix Frankfurter: Open any judgment.

Mr. William L. Jacob: Open it up, transfer it down to the federal court, they can do anything that they wanted with it.

Justice Hugo L. Black: (Inaudible)

Mr. William L. Jacob: Yes.

But our judgment didn't mean anything because we already had a mortgage and what was a difference is whether we had a mortgage or whether we had a judgment.

Justice Felix Frankfurter: Except the mortgage wasn't executed and the judgment was there and they have to open it up.

I am not saying that it's a legal differences to 2410.

Mr. William L. Jacob: It would make a particle of difference.

But the Government recognized the fact that we did go through with the sheriff's sale and that they had a right to redeem.

And we conceded that because in the testimony here, these purchasers were asked.

Did you know anything, that the Government had a right to redeem this.

Yes.

And did you -- what -- what happened?

Well, we conceded that if they want to buy the property back, they would come around and pay us what we had in it.

But mark you this, they say, it was January 3rd, 1956.

On January 3rd, 1957 is when the Government agent came around and offered $6,200 and some dollars and not to both of the purchasers but only to one.

Now, in Pennsylvania, when two purchasers that acquire a title of the property, each owns and then divide a one half interest or tenants in common, and one isn't the agent for the other.

But the Government assumed that they were.

Chief Justice Earl Warren: May I ask you -- may I ask you a question.

And this without any reflection of course, but suppose an action such as you had here was collusive and suppose that a fictitious amount was put in this declaration, and the ex parte judgment was given and then you notified the United States Government of that occurrence.

Would the United States Government then, under your Pennsylvania practice, have a right to come in and contest the amount of that judgment?

Mr. William L. Jacob: Yes.

Anytime --

Chief Justice Earl Warren: How would -- how would it do that?

Mr. William L. Jacob: Simply by coming in and -- because our judgments are all controlled by the court and they are on what we call the equitable side of the court, not on the legal side.

And anything that's addressed to the conscience of the court can be set forth in that petition to open that judgement, and that there was any -- any fraud or any element of fraud or any element of collusiveness, that could be set forth in that petition there by the Government and testimony would have to be taken on that and the matter would be decided by the court.

Justice Hugo L. Black: Is that bond in the record of the judgment, state court judgment?

Mr. William L. Jacob: I doubt it.

Justice Hugo L. Black: Did it contain a attorney's fee?

Mr. William L. Jacob: Yes.

Justice Hugo L. Black: As I understand it, what to do under that, I think I used to know about it in Alabama, a small loan company.

What you do, you take a note authorizes the -- it's not -- the person is (Inaudible) if it's not paid to go into Court, file a suit against the first (Inaudible) confess judgment for that person --

Mr. William L. Jacob: That's right.

Justice Hugo L. Black: -- without any notice.

If it provides an attorney's fee, it included attorney's fee without the (Inaudible) and what you did here was the mortgagee on the bottom of the one end, test the judgment without notifying anybody, it got a judgment for how much?

$60,000?

Mr. William L. Jacob: $90,000.

Justice Hugo L. Black: $90,000.

Mr. William L. Jacob: Condition upon the payment of just the exact amount that was due on that --

Justice Hugo L. Black: What was -- what was the amount of the bond?

Mr. William L. Jacob: The bond was $90,000.

The mortgage is $45,000.

Seven years later, they still load 43,000 some hundred dollars.

And all of those taxes.

So, they're about $49,000 when we get --

Justice Hugo L. Black: Well if -- if that's a valid judgment, how could anyone attack it if it's confessed by the party?

Mr. William L. Jacob: Any person can attack any judgment in the -- in the State of Pennsylvania who has any interest in it or who was a party to the proceeding.

And when this case -- the United States Government was made a party to the proceeding by the order of our Court because we --

Justice Hugo L. Black: Where -- where is that order?

Mr. William L. Jacob: Page --

Justice Hugo L. Black: That was after the judgment was obtained?

Mr. William L. Jacob: Oh, yes.

But before any execution was issued, that would be a vain thing to give notice to the United States Government and say --

Justice Hugo L. Black: It's sort of way (Inaudible).

Mr. William L. Jacob: I've waited a year.”

Well, then, it wouldn't do any --

Justice Hugo L. Black: Of the judgment, I am talking about the judgment for the mortgage for the moment.

Mr. William L. Jacob: Yes.

Justice Hugo L. Black: Could the Government come in and tax judgment?

Mr. William L. Jacob: Anytime at all after it's given notice.

You see it was served in this case with a petition to show cause why it should not be joined to the party defendant.

And it ignored that petition.

And at 60 days under the law in which to file an answer to it.

But it didn't seem fit to put in on appearance, it didn't seem fit to answer and didn't seem fit to attend the sheriff's sale.

Justice William J. Brennan: But Mr. Jacob, there is nothing in the Pennsylvania law that required you to give this notice to the United States but --

Mr. William L. Jacob: No -- no, but --

Justice Potter Stewart: And, you might have proceeded -- have proceeded to the sheriff's sale and bought this in and years might have elapsed before the United States have to learned anything about it.

Mr. William L. Jacob: That's true.

That could have happened.

Justice Felix Frankfurter: So the real -- do I always simplify the controversy when I say that by having giving notice for the execution of judgment entered ex parte, you brought yourself within 2410 (a).

Mr. William L. Jacob: Yes.

Justice Felix Frankfurter: And the Government says that 2410 was satisfied because they weren't in on the -- on the proceeding which resulted in the entering of that judgment.

Mr. William L. Jacob: That's true.

Justice Felix Frankfurter: That's the case.

Mr. William L. Jacob: That's our contention there.

Justice Felix Frankfurter: That's the controversy.

Mr. William L. Jacob: But now wait a minute.

They -- they have abandoned all of that now.

They're saying they are staying here, and they're saying we're not going under 2410.

We're going under 7403, and under 7403, we say that we have a right to have that property sold again now by the United States marshall.

That's their contention, but there is no evidence to that at the trial of this case.

You redirected this case, we didn't tried on that theory.

We tried our case on the theory that they had redeemed this property that we were bound to take that $6200 and some, so I showed in the case of Collins versus Riggs of this honorable Court in which you stated by clearly that if one wants to redeem, he has to make the other party whole.

And they didn't do that.

They didn't seem fit to do that.

And our testimony showed here that if the Government wanted to redeem these members worthy and willing to give them back the property, if they wanted to pay the $55,000 which they have invested in.

But this is in the evidence.

And now I am arguing my case from the -- from the evidence as produced at the trial.

Justice Hugo L. Black: What did the property sell for?

Mr. William L. Jacob: The property.

Justice Hugo L. Black: I am not talking about that sale, that -- under execution sale.

Mr. William L. Jacob: On the execution sale, nobody did honor.

Justice Hugo L. Black: Didn't settle at all?

Mr. William L. Jacob: We -- we bought it in.

The plaintiffs in the writ --

Justice Hugo L. Black: For how much?

Mr. William L. Jacob: Bought it in for the cost and the taxes.

Justice Hugo L. Black: What was that?

Mr. William L. Jacob: $6200 and some and then we had to pay $400 and some stamps on the deed before we could get a deed by the United States Government some taxes on that, stamps on the deed and the local taxes and the State of Pennsylvania taxes.

Justice Hugo L. Black: Do you say that if the Government have to pay you $55,000?

Mr. William L. Jacob: Yes, because that was the amount of our debt interest in --

Justice Hugo L. Black: And that's the amount of your debt, and they say they want to get a hearing under 7403.

That's what it gets to --

Mr. William L. Jacob: No.

Justice Hugo L. Black: -- so that you can resettle it and see if it's a bona fide sale?

Mr. William L. Jacob: No.

What they want to do is have this Court -- this is so noble and so new and that it's shocking.

They want this Court to tell the United States marshall to sell this property again.

Now, I like to devote a little of my time here to the reason why that is such a lie.

Justice Hugo L. Black: Is the -- is the theory of that that it sold for too little and therefore the Government is losing its lien?

Mr. William L. Jacob: No.

Justice Hugo L. Black: What is --

Mr. William L. Jacob: The Government -- the Government has -- under the Pennsylvania law, equality is equity.

That means that any -- every person has the right to come in and bid on that property and you had equal opportunity to come in and bid on it.

If these people paid too much money for it, that's their problem.

If they buy it for less, the mortgagor can't object to it.

Justice Hugo L. Black: What about the lien holder who wants to come in here?

Mr. William L. Jacob: The lien holder had his day, had his right to come in here.

He was given his 60 -- given 89 days in which to come in, put an answer or attend the sheriff's sale.

He didn't do anything at all, he just ignored it completely, and therefore he's out.

But the Court said he was out for this reason that they only tendered an insufficient amount of money to get back this property and they did it on the last day of the year.

So the year has gone by now, several years have gone by, and they have no right of redemption.

Justice Hugo L. Black: There has never been an adjudication has there, contested adjudication of how much it was owing?

You say they are owing $55,000?

Mr. William L. Jacob: Well, that's in the record and there's no -- there's no doubt about that.

Justice Hugo L. Black: That was in the bond, wasn't it?

Mr. William L. Jacob: Yes, that was the --

Justice Hugo L. Black: That was in the bond?

And sometimes bond is paid or one thing or another, there might be a defense to it?

Mr. William L. Jacob: Well, the -- there was no -- there was no defense.

Justice Hugo L. Black: I know there wasn't because there had been no lawsuit.

Justice Felix Frankfurter: Except that you say that -- that when they were given notice of the execution to follow, they then could've come up -- come in, I am just trying to --

Mr. William L. Jacob: At any time --

Justice Felix Frankfurter: -- they then come -- could have come in and your Court of common plea would have given --

Mr. William L. Jacob: Anytime --

Justice Felix Frankfurter: And said that we challenge the amount of the judgement as I understand it?

Mr. William L. Jacob: That's right.

At any time up until the Sheriff knocks that down and when they do -- when the Sheriff knocks that down at that auction sale, then their rights are cut off.

Justice Felix Frankfurter: Are you saying that's the Pennsylvania law might, it might not be Idaho law?

Mr. William L. Jacob: That's true.

I am not quoting Idaho law.

Chief Justice Earl Warren: What has been the practice in the State of Pennsylvania in real estate in transactions of this -- of this kind where -- where the Government has a junior lien as -- they power the practice that -- that you're trying to sustain here or -- or is there a practice?

Mr. William L. Jacob: In many, many instances -- in many -- in talking with other lawyers, they have followed this and other ones have just ignored it entirely.

Justice Felix Frankfurter: Meaning by that?

Chief Justice Earl Warren: (Inaudible) Mr. Jacob.

Mr. William L. Jacob: Meaning by that that here -- and this gets to the gist of my argument.

A deed and a mortgage is a property right and that property right is governed by Pennsylvania law and Pennsylvania law in that sphere is supreme.

And this Court has said that in the case Erie Railroad versus Tompkins.

Property rights are creatures of state law and the remedies are creatures of state law.

And in this case, the apartments had a property right.

It was a defeasible one, because they had a mortgage on there or a purchase money mortgage.

And their title was subject to being defeated when they defrauded in that mortgage.

They defrauded in that mortgage and that sheriff's sale, which was regular in every respect, that sheriff's sale took away from them their property right in this property.

7403 can only be invoked to the Government if the Government -- it has to say that that property right is still in apartments and from the time of 1701 to this day, it's a law of Pennsylvania that by that sheriff's sale all rights of that mortgagor in that real estate are cut off.

Now, when they're cut off, then the lien which the Government had which attached to that property right to give it any sustenance or any vitality or any (Inaudible), it was cut off and when it was cut off, there is that lien hanging in there in a vacuum you might say.

But we don't destroy the lien.

We don't extinguish the lien.

They still have that lien, and they can collect it from those people that they have to look through another asset.

Justice Felix Frankfurter: Mr. Jacob, may I insert into that, sheriff's sale cut off the lien so far as you are concerned.

That's your position, isn't it?

Mr. William L. Jacob: No, that isn't --

Justice Felix Frankfurter: You're saying cut off all property interest in the mortgagor and thereby his interest, the total interest of the mortgagor went into the purchaser at the day of sale.

Mr. William L. Jacob: That's right.

Now, we have to be technical about this because we are dealing with a technical subject.

Justice Felix Frankfurter: I am not hostile to the perspective here.

Mr. William L. Jacob: All right.

Now, they had a lien, and the lien rested here on this property right.

We take away that property right.

There hangs their lien but their property right is gone.

Justice Felix Frankfurter: Yes, but they flow in between your right hand and your lower low hand, your lower left hand Mr. Jacob.

They say that wasn't operating your illustration because in between where debt -- neglect of their right to have come in on your judgment as -- ascertainment.

Mr. William L. Jacob: Now --

Justice Felix Frankfurter: That's where the difficulty is.

Mr. William L. Jacob: Didn't Mr. Friedman stand here and tell you that he abandoned his argument about redemption?

Justice Felix Frankfurter: He -- yes, he said that, but I didn't know that he abandoned that.

You can't get a judgement ex parte without any given notice to the United States.

I didn't hear him abandon that.

Mr. William L. Jacob: Well, he has no -- he can't raise that issue here now.

Justice Felix Frankfurter: Why?

Mr. William L. Jacob: Aren't you suppose to raise here what's raised in the court below?

Justice Felix Frankfurter: But I've got to see what is -- what is the question that he wants to raise.

Mr. William L. Jacob: Here's another thing, let me point out this to the Court --

Chief Justice Earl Warren: Mr. Jacob, he already has.

Mr. William L. Jacob: -- that in -- at the trial of this case, if the Government was really sincere about wanting to have -- wanting to resell this property and thinking that they had -- they argue in their brief talking about windfall.

Well, there wasn't one since -- until the evidence produced at the trial of this case to determine the value or to establish the value of this real estate.

Now, if the Government was sincere in the beginning that they wanted to resell this in order to recapture their money out of it and pay us off, wouldn't they have established the value of the real estate?

Justice Felix Frankfurter: Mr. Jacob let me read you the question which brought this case here and with your entirety and insisting that the Government should argue what it brought here and the basis on which we granted the certiorari.

Whether a sheriff's sale of real property and execution of a judgement confessed by mortgagee in a state court extinguishes a union federal tax lien on the property where the United States have not been joined as a party to the proceeding assured the federal statute.

Until I am corrected, I will see this case as turning on what is meant by the proceeding.

Mr. William L. Jacob: Well, that's a classical question but it isn't based on the facts of the case and it isn't based on the issues that were developed by the facts in this case that -- that developed at the trial.

Chief Justice Earl Warren: Mr. Jacobs I don't want to -- I don't want to labor the practice of your statement.

But I wonder if you tell me this.

You said that the -- that the rights become final when the -- when the sheriff says so, isn't that right?

Mr. William L. Jacob: That's where the property right of that mortgagor is taken away from him.

Chief Justice Earl Warren: Yes.

Mr. William L. Jacob: And transferred into the purchasers of that real estate.

Chief Justice Earl Warren: Yes.

Now, may I ask you this, would a title insurance company guarantee the purchaser's title on this record as you have it here?

Mr. William L. Jacob: Well, on the record that I have it here, I would say that they would.

Chief Justice Earl Warren: That they would not?

Mr. William L. Jacob: That they would.

Chief Justice Earl Warren: I --

Mr. William L. Jacob: That they would insure.

Chief Justice Earl Warren: They would insure?

Mr. William L. Jacob: They would insure.

Chief Justice Earl Warren: Yes.

Mr. William L. Jacob: They would insure, because the Government did nothing here.

Chief Justice Earl Warren: Yes.

Mr. William L. Jacob: And in looking into this and looking in to the record, I think our title companies would say that we have complied.

We have done everything.

The prime purpose of that 2410 was to give the Government notice and can they say that they didn't get notice when we gave them or everything that was in the case?

Justice John M. Harlan: Under your view, could you have proceeded to destroy the Government's lien without proceeding under 2410 at all?

Mr. William L. Jacob: We did not destroy the Government's lien.

I want that distinctly understood.

We didn't interfere with it.

We didn't touch it.

Justice John M. Harlan: Well, so far as this property is concerned?

Mr. William L. Jacob: So far as this property is concerned, our property stood out under that lien.

Justice John M. Harlan: Could you have obtained the property ex the Government's lien without resorting 2410 under your view?

Mr. William L. Jacob: I think we could.

Justice John M. Harlan: That's what I understood your provision was.

Mr. William L. Jacob: But in order to -- and my argument is premised on that.

Justice John M. Harlan: In other words, your -- I thought your position was that basically, state procedures governed here?

Mr. William L. Jacob: That's right.

Justice John M. Harlan: That in proceedings as you did under 2410, you were doing something more than the Government -- than you were required.

Mr. William L. Jacob: Now, we were required to do.

We -- we went to that --

Justice John M. Harlan: Do I understand that correctly?

Mr. William L. Jacob: That's right, that's exactly right.

Justice Felix Frankfurter: Now, I think Mr. Jacob if I may say so, my brother Brennan and my brother Stewart calls my attention to your statement of the collection, and I accept that, but I may say that Mr. Friedman has a more accurate statement as I understand it.

Whether sheriff's sale et cetera, there that's the junior federal tax lien, where the United States was not originally made as a defendant in the confession of judgemental proceeding but was subsequently joined by the state court of the party defendant before the execution.

Mr. William L. Jacob: That's right.

Justice Felix Frankfurter: So that your -- if I may think your upper and (Inaudible) within which you make property decline with the Government.

If they object to this second part because they say we should have been in on the original judgment proceeding and you yourself, as you presented the question, acknowledged that to be the issue before this Court.

Mr. William L. Jacob: But isn't that rather moot? Now when they abandoned their proceedings under 2410.

Justice Felix Frankfurter: If Mr. Friedman has any time, he will tell me what he did or didn't abandon.

Mr. William L. Jacob: I thank you very much.

Chief Justice Earl Warren: Mr. Friedman.

Rebuttal of Daniel M. Friedman

Mr. Daniel M. Friedman: Just very, very briefly Mr. Chief Justice, we didn't abandon this position.

What happened was we said that -- what have been done here did not operate to divest our lien because we hadn't made a party initially.

Justice Felix Frankfurter: To what, a party to what?

Mr. Daniel M. Friedman: We had not been made a party to a proceeding to foreclose a mortgage under 2410.

Justice Felix Frankfurter: Now, be more specific since there are several proceedings here.

There was a proceeding in which Mr. Jacob is trying, put in the confession of judgment, which they were authorized to do out of the bond.

Now, do you mean you were not a party to that proceeding?

Mr. Daniel M. Friedman: That is precisely correct Mr. Justice, because the statutes speaks in terms of a proceeding of jurisdiction of any civil action to -- for the foreclosure of a mortgage.

And we think as the District Court held in this case that that means we must be made a party to that proceeding at the very --

Justice Felix Frankfurter: Ab initio.

Mr. Daniel M. Friedman: Ab initio precisely.

Chief Justice Earl Warren: But their state procedure doesn't provide for -- for any notice to anyone on the first point.

Mr. Daniel M. Friedman: That is correct.

Chief Justice Earl Warren: But does require on the second part and you do that what was required under the second part and had an opportunity to -- to establish your -- your right?

Mr. Daniel M. Friedman: Well --

Chief Justice Earl Warren: Where's the Government been injured?

Mr. Daniel M. Friedman: For one thing --

Chief Justice Earl Warren: And -- and where is your - where is it violated there?

Mr. Daniel M. Friedman: One thing Mr. Chief Justice is under 2410, we are given the right of removal into the federal court and it seems to me when we remove is the suit for the foreclosure of the mortgage.

We can't remove to the federal court a proceeding -- a sheriff's sale.

What is contemplated we think here is a basic proceeding.

Chief Justice Earl Warren: Well, if you removed it, wouldn't you remove it with whatever -- to the federal court with whatever rights the Government might have?

And he says that you have the right to -- to question the -- the amount that is due, the amount that was in that ex parte order, and that you could not, in any way, be prejudiced because you have a right to bring in all those things, even in the state court.

And if you took the federal court, why couldn't you -- why couldn't you have the same rights there?

Mr. Daniel M. Friedman: Well, I think -- removal -- what -- the only thing we could remove at that stage of the proceedings would be execution proceeding and we think what Congress is contemplated here that the -- for the protection of the United States, it has the right to remove the whole thing to have in the first instance before any judgment has entered, which has the effect and interest of the United States to have itself be given an opportunity to participate in those things.

Justice Hugo L. Black: Could you have (Inaudible) that, we have a judgment?

Mr. Daniel M. Friedman: I wouldn't think so Mr. Justice.

Justice Hugo L. Black: I suppose he did have a judgement?

Mr. Daniel M. Friedman: He had a judgement.

Justice Hugo L. Black: But if you reopen the judgment, would you then remove?

You made it there, there in state court.

Mr. Daniel M. Friedman: I don't know whether if we reopen the judgment we could remove.

Justice Hugo L. Black: Reopen, if you havent' joined in the state court.

Mr. Daniel M. Friedman: Into the state court.

Justice Hugo L. Black: (Inaudible)

Mr. Daniel M. Friedman: I would -- I would think that the removal would require initially before there's been any final determination.

I would if I -- just like to say one other point which I think is important.

The fact that we attempted to redeem a year later, it doesn't seem to me to indicate that we conceded that we had been properly made a party to the state court proceeding.

And it seems to be perfectly consistent common practice for litigants to try alternative remedies.

We thought that we would not -- had not been properly joined, but nevertheless, we did attempt to redeem later to protect ourselves.

Justice Charles E. Whittaker: May I ask Mr. Chief Justice before we close this one question?

Is this clear under the law of Pennsylvania that a redemption where it's proper to be been made, maybe made at a sum equal to the bid at the sale or not?

Mr. Daniel M. Friedman: Mr. Justice, Pennsylvania does not permit redemptions under Pennsylvania law.

Once the Sheriff has set sold, there is no right of redemption.

There is no right of redemption under Pennsylvania law to my understanding nevertheless.

Chief Justice Earl Warren: We'll recess now.

Print this transcript Transcript: 

Argument of Samuel B. Stewart

Chief Justice Earl Warren: Bank America National Trust and Savings Association, Petitioner versus the United States.

Mr. Stewart?

Mr. Samuel B. Stewart: Mr. Chief Justice, may it please the Court.

This case is here on writ of certiorari to the Ninth Circuit.

It is an action pursuant to Title 28 of the United States Code, Section 2410, about which the Court heard something in the argument of the Brosnan case yesterday.

It is an action by The Bank of America, a National Bank, doing business in California against the United States to quiet title of the bank in and to certain land and chattels, specifically a sawmill and the equipment of it, in Calaveras County, California.

The action was started in the Superior Court of the State of California as permitted by California law and was removed to Federal District Court on the motion of the United States.

Both sides moved for summary judgment.

The District Court granted the motion of the plaintiff bank, denied the motion of the defendant Government and decreed that the bank is the owner of the land, the buildings, and the equipment in question and that the Government is barred from asserting any adverse claim.

The Ninth Circuit Court of Appeals reversed and this Court last October granted certiorari.

The bank's title was acquired by purchase at a foreclosure sale held pursuant to a power sale of in a first deed of trust on the land and the power of sale in chattel mortgages on the personal property.

The Government was made a defendant because it holds tax liens against the former owner of the land and chattels and the Government claimed that its tax liens attached to the land and chattels and are still effective in spite of the fact that the taxpayer no longer held a free and unencumbered title to the land and chattels at the time when the tax lien attached.

The deed of trust, and I may from this point on refer simply to the deed of trust without elaborating to include the chattel mortgage because I think the principles are the same on both types of documents, the deed of trust given in connection with the bank loan and the chattel mortgages had been executed by the taxpayer or a predecessor in title some time before the tax lien attached.

Legal title to the real-estate was actually in the trustee under the deed of trust when the government acquired its tax lien.

When the taxpayer defaulted in the payment of his indebtedness, the land and chattels were sold at public auction in accordance with the contract powers of sale and the bank became the purchaser at that sale at public auction.

All notices required by California law were given, but these did not include in a special notice to the Government which had failed to request special notice as it might have done under California law.

The primary question presented here is --

Justice John M. Harlan: How does the Government (Inaudible)

Mr. Samuel B. Stewart: Well if Your Honors please, the Government initiates its proceedings by filing a notice of tax lien.

Presumably with due diligence it would investigate the assets of the taxpayer to see what the means of collection might be.

It would discover that the property was subject to an outstanding lien and could then request the notice even though no default had occurred, in the event of default or in the event of sale and it would then receive the notice automatically.

Also these things are recorded in the public offices and there are any number of services and publications which most people subscribe to, which reveal them.

Justice John M. Harlan: It would be a kind of a telling what you (Inaudible)

Mr. Samuel B. Stewart: Yes sir.

In fact you don't even have to send it to the holder of the first lien.

You merely filed with in the -- in the Registrar of Records Office and this takes care of the situation.

The primary question here is --

Justice William J. Brennan: Excuse me -- if you knew the meaning? Merely they filed a notice of tax lien, is that it?

Mr. Samuel B. Stewart: Well they filed a notice of tax lien and then if they want a special notice of any further proceeding, they file a request.

Justice William J. Brennan: Well where is the notice of tax lien filed?

Mr. Samuel B. Stewart: In the County where the property is located, sir.

Justice William J. Brennan: And then in addition to that there is --

Mr. Samuel B. Stewart: There is this proceeding, this optional procedure which may or may not be valid and was not valid here of requesting special notice.

Of course the general notice is given by publication in the usual legal publications which are followed by most people interested in these things anyway.

Justice William J. Brennan: At this time that -- at the time that -- the contract right for sale that you described for us, is executed was there a notice of record of the Government's tax lien --

Mr. Samuel B. Stewart: No sir, no sir that came in subsequently.

Justice Charles E. Whittaker: Is this special statute Mr. Stewart that you referred to one applicable to any junior lien or -- or just the Government?

Mr. Samuel B. Stewart: Any junior lien or sir.

Justice Hugo L. Black: But if --

Mr. Samuel B. Stewart: -- Yes Mr. Justice?

Justice Hugo L. Black: Where is it in your brief?

Mr. Samuel B. Stewart: The statute -- the state statute, I think we have cited and I think we did not quote it sir.

It is cited just below the middle of page three of our brief, its California Civil Code, Section 2924 (b), just at the end of the first full paragraph on page three of our main brief.

The primary question presented to the Court is, does the purchaser of land and chattels that a foreclosure sale held pursuant to a power of sale and the first deed of trust and chattel mortgages, acquire title free of subordinate tax liens of the United States?

There's no question about these liens being subordinate and then there is the secondary question, may such a purchaser establish his clear title by a quiet title suit against the United States?

The Government has stated the question somewhat differently and I pause here momentarily to emphasize the correctness of the question as we have stated it because as Mr. Justice Frankfurter said in the events in the Vanston Committee case in 329 United States, “putting the wrong questions is not likely to beget right answers even in law.”

The Government says that the question is whether a junior federal tax lien maybe extinguished through a non-judicial sale of the property by a mortgagee under a contractual power of sale.

It is my view that there is no issue in this case about extinguishment.

No suit was brought to extinguish.

The statute, Section 3670 of the Internal Revenue Code, says that the Government's lien is, “Upon all property and rights to property, whether real or personal, belonging to such person” that is the taxpayer.

In our view the taxpayer's right out or to which the Government lien attached was a defeasible right which subsequently dissolved or evaporated.

Justice Hugo L. Black: I don't quite get your distinction there between you and the Government.

Mr. Samuel B. Stewart: This is --

Justice Hugo L. Black: It's my fault but I don't --

Mr. Samuel B. Stewart: But I know Mr. Justice I sympathize with you because it's -- it's one that has caused trouble all the way in this case and if -- if you'll bear with me just a few moments, I -- I'm going to address the next few minutes of my -- my argument right to this point and -- and then if I don't clarify it I'll try to do it again.

This suit assumes that the Government lien against the taxpayer is still just as valid as it ever was as to any property and rights to property belonging to the taxpayer.

But it asserts that the taxpayer no longer has any right to property insofar as the land and chattels in this action are concerned.

And --

Justice Hugo L. Black: And that -- pardon me, but I don't see the -- quite the difference.

It seems to me this is vague -- maybe it's a difference in the use of the word, they're saying that it extinguished that lien on this particular piece of property.

Mr. Samuel B. Stewart: If you say it that way sir there is no difference in practical results at all.

The importance of the point is that you do not extinguish a general federal tax lien by this method because the tax lien is applicable to all property of the taxpayer.

We're dealing here only with specific property and we say this specific property is no longer subject to the lien although the lien may still be in effect as to all the properties that the taxpayer may own.

Justice Hugo L. Black: But does the Government differ from that?

I -- I don't gather that that's the difference.

Mr. Samuel B. Stewart: Well they stated differently and I think that difference in statement has caused confusion in the fact.

Justice Hugo L. Black: You used the word extinguished and you read that as meaning extinguish the lien it would have to be nothing else.

When in reality I -- I gather it correctly, they're saying it is extinguished, that lien is drawn so far as that particular piece of property is concerned.

Mr. Samuel B. Stewart: And if you --

Justice Hugo L. Black: Under these proceedings.

Mr. Samuel B. Stewart: If it is stated that way sir, we have no disagreement.

Justice John M. Harlan: If the taxpayer had no other property; it would be extinction in every sense of the word.

Mr. Samuel B. Stewart: That's correct, sir.

Now, the same federal statutes are involved in this case as were involved in the Brosnan case, which was argued to Your Honors yesterday.

However, as this Court reaffirmed in the Best case in 357 United States, Section 3670 of the Internal Revenue Code creates no property rights.

All it does is attach consequences to such right as are created under state law.

I think it maybe worth a few moments without over emphasizing it therefore to discuss the nature of a deed of trust under California law, as well as to go into a little more detail about the alternative procedures that are available both to lienholders such as the bank and lienholders such as the Government.

The clearest statement that I have found of the nature of a deed of trust in California is found in a 1933 case of the California Supreme Court entitled Bank of Italy against Bentley and I'd like to read just a sentence or two from that opinion which states it, I think quite clearly.

The Court there said “Although this State, California, at an early date adopted the lien theory of mortgages, it adopted the title theory in reference to deeds of trust.”

In the early case of Koch against Briggs it was held that the mortgages and deeds of trust were fundamentally different in that, in a mortgage, only a lien was created while in a deed of trust, the title actually passed to the trustee.

This distinction although frequently attacked by counsel and often criticized by the courts has become well settled in our law and cannot now be disturbed.

Justice John M. Harlan: What's the citation to that case, Mr. Stewart?

Mr. Samuel B. Stewart: That is 217 California 644, Your Honor and certiorari was denied in 290 U.S.

Justice John M. Harlan: That's in your supplemental brief.

Mr. Samuel B. Stewart: That is -- that is in our -- our supplemental memorandum, yes, sir.

The deed of trust given as here in connection with a bank loan conveys legal title to the trustee for the benefit of the bank.

It also contains the power of sale which authorizes the trustee to sell the real-estate in the event of the default.

Now the trustor borrower retains certain rights.

He retains the right to possession and he retains the right to reacquire the legal title, if he pays his debt when due.

And of course this bundle of rights has been called by various names, but I think there is no dispute that whatever you call it.

This bundle of rights retained by the trustor is -- is clearly not a free and unencumbered fee title.

The trustor-borrower cannot convey to any third party, any greater right than those he retains.

And if he has an attempt -- if he attempts to convey to a third party, X let's say, such a conveyance subtracts nothing from the rights of the trustee under the deed of trust and the power of sale.

On default by trustee, may sell, free and unencumbered title, fee title and no one claiming under the trustor-borrower may attack that title of the purchaser at such a trustee sale and that's California property law, and there's no dispute about it.

It's been reaffirmed in the subsequent Carpenter against Small Claims Committe in the California Supreme Court which is cited in our brief and it was recently restated by the Federal Court in California, in the Northern District of California and the Higley case against the City of Sacramento cited in our brief.

One sentence there may be worth repeating.

The Federal Court said the “The general rule in California is that a sale by the trustee under the power of sale and the deed of trust has the effect of vesting the purchaser with title as of the date when the trust deed was executed”, which results in the extinguishment, if I may use the word extinguishment, results in the extinguishment of all liens on the property attaching subsequently to the trustee.

Justice Potter Stewart: There's no equity of redemption thereafter or anything --

Mr. Samuel B. Stewart: Not on the sale pursuant to a trust deed Mr. Justice.

Now, yesterday inquiries were made in the course of the Brosnan argument as to state procedures which were available and how the Government might protect itself and I'm anticipating Your Honors' interest in similar questions as to California, I'd like to take a few moments just to outline those.

There are several loan alternatives, some of which maybe initiated by the Government and some by the holder of the deed of trust.

The first step as I said a moment ago is that the Government files notice of its tax lien.

Then exercising reasonable prudence presumably it investigates the taxpayer's assets.

I -- it's a matter of public record of which I assume this Court can take judicial notice that the Internal Revenue Service has a budget of $128,000,000 a year for tax audits and $18,000,000 a year for investigation of tax frauds and do special services and if this isn't enough to cover it they can get a title report for $25 which will show them the entire status of the -- of the property.

So having determined this, if the taxpayer is shown to be trustor as this one was of a real-estate deed of trust, the Government records a simple request or notice of default and notice of sale in the event that there is one.

This may happen before default.

It will thereafter receive notice and be able to protect its interest by bidding it to public auction or by a suit if one should be indicated to enjoin any sale under of the power of sale, this is if the Government questions the validity of the deed of trust which of course it does not do in this case.

Now, alternative, the Government may sue under section 7403 of Title 26 U.S. code which was mentioned yesterday to foreclose its lien.

That is to subject the taxpayer's property whatever it may be, whatever he's interest in property maybe to the payment of the tax.

It doesn't have to wait for action by the holder of the deed of trust; it can take this action itself or a third alternative, if it does not choose to follow either of those two, the Government may levy and (Inaudible) for taxes under Section 6331 in following of Title 26.

This is an administrative procedure which results in a sale of public auction at the instance of the Government.

So there are at least three methods which the Government may pursue to protect its rights or if it chooses not to do that, it may wait as it did here, for a prior action by the prior lienholder and in that event the holder of the deed of trust has at least three alternatives.

In the first place, he may request an administrative partial discharge of the Government lien from the property in question.

And this is normally accompanied by appraisals of value of the property showing the amount of the equity, if any, and offering to pay to the extent that any equity is shown, tells the -- this excess and then go through the normal procedures.

And this I might say, it's not in the record but if Your Honors are interested in the practical procedures that are followed, this is what's normally done.

This is one reason we don't have any more of these cases.

At least it's -- it's what the Bank of America normally does -- it does and I'm sure a great many others do the same thing and that this results in the -- in the disposition of a good many of the cases where this problem arises.

However, where this doesn't work, if there's a disagreement about values and or for some other reasons the Government doesn't choose to give it's administrative consent and of course it's free to do this, if there is no way of compelling it then the holder of the prior lien has two more alternatives.

He may sue to foreclose the deed of trust as a mortgage.

This is effective, it's cumbersome, it's expensive.

It normally takes two to three years to clear a title when this procedure is followed.

It is not warranted in a practical business world unless there is a need and desire for a deficiency judgment.

Under state law you -- you have to go through this procedure if you seek a deficiency of judgment against the -- the borrower, but you don't have to do it if you don't care about the deficiency of judgment and this brings us to the third alternative which is the one followed in this case.

The holder the deed of trust may sell under the power of sale.

A sale of public auction which there is a 90-day notice filed of default followed by 21 days of publication in the legal newspapers of the county where the -- where the property is situated and normally the whole procedure is finished in 120 days.

It is simple, it is inexpensive, it makes possible prompt liquidation which is for the benefit of all concerned because you don't run up a lot of costs to depreciation the value.

If there is likely to be any excess, it -- it develops better this way and it leads to results in a discharge of the obligation without the possible deficiency of judgment which might lead them to further assets of the borrower.

Then if the Government still after this procedure has gone through, if the Government still is stubborn about its lien, still stubbornly asserts its lien as it did here, having it ignored its numerous other means of protecting itself which I've outlined the purchaser of the deed of trust sale may sue as this purchaser, the bank did here to quiet title.

Now --

Justice Hugo L. Black: Is there any dispute between you about the propriety of that remedy?

Mr. Samuel B. Stewart: Yes, sir, yes, sir, indeed.

This -- this is the real issue in this case whether this remedy is an appropriate one and although it has come up for adjudication in the lower courts, this is the first time I believe that it has reached this Court.

And this is the main reason we're here, to determine the effectiveness of -- of this remedy, this simple inexpensive remedy as against Government tax liens.

Justice Felix Frankfurter: How could --

Justice William J. Brennan: And you've got 2410?

Mr. Samuel B. Stewart: That is correct, sir.

Now one thing I noticed in yesterday's argument, I think I might turn you to right now.

I planned to bring it up later but this is probably as good a time as any.

The 2410 was spoken off yesterday as if it offered a single procedure for obtaining a clear title against Government tax liens.

This is not correct.

Section 2410 offers two alternative procedures.

The first is by a suit to quiet title.

The second is by a suit to foreclose the mortgage.

Now many procedural details to be followed in such suits are spelled out in Subdivision (d) and (c) of that section, but there is nothing in the language of that section to indicate that a suit to foreclose is essential or whether the suit to foreclose is a prerequisite to a suit to quiet title or that a quiet-title action is dependent in any way upon the prior completion of a foreclosure action and the legislative history of this amendment is quite interesting.

It is totally inconsistent in my judgment with any notion that a foreclosure is necessary if the quiet-title procedure is followed.

It is -- it seems to me that it shows quite clearly that the purpose of the amendment was to provide an expedient procedure for clearing the title (Inaudible) Government's claim in respect the property of which no valid lien is attached in lieu of the complex, expensive, dilatory procedure by action to foreclose.

And I would like to direct the Court's specific attention to the most important element of that legislative history.

It is set out on page 10 of petitioner's main brief.

This amendment was adopted in response to a request made by the then Attorney General Jackson in a letter which the relevant part of which I've quoted at the bottom of page 10 and I think that's worth reading.

Attorney General Jackson said, “It should be observed in this connection that under existing law”, this is back 1942, “Under existing law there is no provision whereby the owner of real-estate may clear his titles in such real-estate of the cloud of a Government mortgage or lien.

In many instances persons acting in good faith have purchased real-estate without knowledge of the Government lien or in the belief that the lien had been extinguished and then this important language, in other instances mortgagees have foreclosed on property and have failed to join the United States.

It appears that justice and fair dealing would require that a method would be provided to clear real-estate titles of questionable or worthless Government liens.

Accordingly I suggest that the bill be amended by inserting the phrase “to quiet title or” between the words matter, “and for the foreclosure of” in line 4 in phase II of the bill and the Congress did it.

And it is our view, that that set up a completely independent alternative procedure in which the Congress specifically intended to approve the procedure which has been followed in this case.

It is here of Your Honors' interpretation for the first time.

Now this brings me to --

Justice Felix Frankfurter: When the -- was the second --

Mr. Samuel B. Stewart: Yes Mr. Justice Frankfurter.

Justice Felix Frankfurter: -- of the disjunctive quiet title or I haven't yet addressed the technical connection --

Mr. Samuel B. Stewart: Yes sir --

Justice Felix Frankfurter: Or 2410 for the --

Mr. Samuel B. Stewart: Yes sir.

If the --

Justice Felix Frankfurter: Or --

Mr. Samuel B. Stewart: It appears at page two of the appendix Your --

Justice Felix Frankfurter: I believe that you ought to read but that the course of your plan that I had in mind --

Mr. Samuel B. Stewart: Yes.

Justice Felix Frankfurter: Or --

Mr. Samuel B. Stewart: To -- to quiet title to or for the foreclosure of a mortgage or other lien.

Justice Felix Frankfurter: Now the problem that we had in -- in the prior case or the foreclosure of those mortgages is not present in your case, is it?

Mr. Samuel B. Stewart: Not -- not in this technical interpretation because that was not a suit to quiet title in the Brosnan case.

Justice Felix Frankfurter: No, no, but that -- leave that out for the moment.

Go for the foreclosure of the mortgage, that is not the present in your case, does that commission not have to be satisfied?

Mr. Samuel B. Stewart: That is my view, sir.

My view is that the title effectively passed by the power of sale which is a foreclosure sale but a different procedure for it than a foreclosure suit and that therefore no further foreclosure is necessary but all that is now necessary is a decree quieting the title and the purchaser.

Justice Felix Frankfurter: But if that is to be regarded as a foreclosure of the mortgage, then they would have the same problem we have in the prior case namely you noticed that the Government and it's present in the procedure, what other proceeding may be?

Mr. Samuel B. Stewart: Well you have the same problem to those extents Mr. Justice Frankfurter.

If you read that 2410 as providing only one procedure instead of two alternative procedures, then obviously we would have to comply with all of the conditions that set forth in 2410 with respect to a foreclosure suit.

But it is our view that if that were the interpretation, the 1942 amendment would be utterly meaningless.

There would have been no point in putting it in because if you go through all that complicated foreclosure proceeding you have clear title anyhow and there is -- but with no quiet-title action is needed.

Justice Felix Frankfurter: No, but you have to get in to the -- the protection to the Government which was sought to be accomplished I don't know what it is by the -- for the foreclosure of the mortgage, the consideration which require the Government's earliest participation in any aspect of the proceeding which is a foreclosure of a mortgage would be equally applicable to whatever the proceedings maybe, to whatever steps there may be to what eventually is a quiet quieting the title proceeding.

In other --

Mr. Samuel B. Stewart: I'm not -- I'm not sure of it --

Justice Felix Frankfurter: In order words -- in order words, a state provision for the change of property interest can't make a difference so far as the protection of the Government is concerned in being in, in the proceeding from the very beginning, whatever the nature of the proceeding maybe?

Mr. Samuel B. Stewart: Well it seems to me sir that it may make a difference if the Congress has specifically said that it does make a difference and it seems to me that that is the effect of the 1942 amendment.

Justice Felix Frankfurter: Because it described as to quiet --

Mr. Samuel B. Stewart: “To a quiet title or.”

It seems to me there would have been no point in that amendment if you still had to go through the same old procedure anyway.

Justice Felix Frankfurter: No I'm not suggesting that you have to go through the same old procedure, but I am suggesting that the Government might have to be a participant in the alternative procedure in each of them --

Mr. Samuel B. Stewart: Oh, oh well then to that extent Your Honor, I -- I would agree with you that the Government is entitled to be a participant in the alternative procedures to be -- the same -- same extent as any other junior lienholder entitled to be and I've outlined the various --

Justice Felix Frankfurter: May -- maybe not.

It was the same as any other junior title -- junior lienholder, maybe not and there maybe a different view of the Government.

In other words if the Government is out of it, the State has large powers of cutting off interest or deeming it unnecessary to give even notice of the cutting of interest if the consideration that satisfied you cut through if you cut them off as to caps later --

Mr. Samuel B. Stewart: I think that is (Inaudible) yes and I --

Justice Felix Frankfurter: But the question is -- the question is whether the State has the same power with reference to -- if junior lienholder, who is the lienholder, decided you are a lienholder that is held in against the Government in the -- in light of that statute depending upon its construction of course.

Mr. Samuel B. Stewart: I would make this observation on -- on that comment by Your Honor.

If the Government knew that -- the Federal Government has adequate power through the Congress to protect its tax -- its tax liens.

The sole purpose of putting in this procedure for quieting title was a recognition by the Federal Congress that this was an alternative means which would provide adequate protection for the Government and I think I have indicated by the various proceedings which are available that there is more than adequate means of protection for the Government.

Justice Hugo L. Black: Well if that's it -- might it not be construed as required -- if notice was required for you to extinguish the lien whether you do it by attempted foreclosure or by an action to quiet title?

Mr. Samuel B. Stewart: Well I think they might have required that sir but I don't think they did.

Justice Hugo L. Black: But you say this statute doesn't do this?

Mr. Samuel B. Stewart: I say this statute doesn't do it in the light of the legislative history as to the meaning of the amendment, and as to the purpose of the amendment.

Justice Hugo L. Black: I confess I haven't been able to get from the legislative history that the -- you find that in that part.

In other words if -- if they wanted to amend it by giving them the right to quiet title, it might have wanted them to have -- do a way with the Government lien by -- build a quiet title or by foreclosure?

Mr. Samuel B. Stewart: May I just call Your Honors' attention again to the italicized language on page 10 in Attorney General Jackson's letter which requested this amendment.

In which he referred to other instances in which mortgagees have foreclosed on property and have failed to join the United States.

It appeared --

Justice Hugo L. Black: What was the object to that have failed to join, so that the United States would get notice?

Mr. Samuel B. Stewart: That would be the only purpose sir of joining.

I say this expressly contemplated a procedure in which they would not be notice and in which there would not be a judicial proceeding on it.

Justice Hugo L. Black: Why does it -- I -- I don't quite get why you have to -- go, quite go that far in inference.

Why did they give opportunity here to bring a suit against the Government if not in order that there might be someway the Government can get notice whatever title proceeding there was.

Mr. Samuel B. Stewart: Now the only rationalization of course -- I -- I have to speculate about this because this is all the records shows Your Honor, the only rationalization I can give you is that it was a matter of common knowledge that this simple inexpensive procedures for quieting of title by a prior lienholders are available in many states of the United States and a feeling that -- this procedure should be recognized by the Federal Government that it had adequate means to protect itself in these procedures and that it would be advantaged by the adoption of a simple procedure as well as what others subsequent liensholders.

That's the only rationalization I can give --

Justice Hugo L. Black: You are -- you're inferring from the fact that the Congress saw fit to give the right to sue the Government, make them a party of this case, means that Congress intended to leave open to this day the procedures whereby they could extinguish the lien without or at least on that company, without notice.

Mr. Samuel B. Stewart: Yes sir.

Justice Potter Stewart: Further now in this suit to quiet title, this was brought under section 2410, was it not?

Mr. Samuel B. Stewart: Yes sir, under the first alternative procedure, the quiet title.

Justice Potter Stewart: Right what you understand to be the first alternative procedure.

Mr. Samuel B. Stewart: That's correct sir.

Justice Potter Stewart: And actual notice was given to the Government.

Mr. Samuel B. Stewart: Oh in the quiet-title suit, yes sir.

Justice Potter Stewart: That suit and the government removed it to the Federal Distinct Court.

Mr. Samuel B. Stewart: That's right.

Justice Potter Stewart: Had notice from the word go about this suit, is it not?

Mr. Samuel B. Stewart: That's correct.

The suit is against the Government.

The government is the only defendant in this quiet title actually.

Justice William J. Brennan: But Mr. Stewart, what -- what' the -- what is this that the Government now in a position to vindicate after, as I understand -- the foreclosure or whatever those procedures are that's been described for us is having second place here that is the sale pursuant to the contract or probation?

I thought you told us that this has the effect under California law of releasing the property from many junior lien.

Mr. Samuel B. Stewart: That's correct sir.

Justice William J. Brennan: Now when you bring this quiet-title action, what proof does the Government -- what position is the government in, in that circumstance to vindicate any claim it may have in the quiet-title action that its lien still attaches to the property which you now say has by reason of the sale has been released from mortgage.

Mr. Samuel B. Stewart: They claim I'm wrong sir.

They claim --

Justice William J. Brennan: Well let's suppose you're right --

Mr. Samuel B. Stewart: -- in that procedure, if this were procedure, it had the effect of clearing title of everybody else's lien but not our lien.

Justice William J. Brennan: Now, that's suppose you're right on your approach to it, what is -- what --

Mr. Samuel B. Stewart: If -- if I'm right then all this proceeding does is give me a judicial declaration that what I say is totally so.

Justice William J. Brennan: And that you have a --

Mr. Samuel B. Stewart: That we have clear title.

Justice William J. Brennan: That you perfected under California procedures --

Mr. Samuel B. Stewart: That's correct.

Justice William J. Brennan: -- the method by which you could acquire the title free of any junior liens, including the Government.

Mr. Samuel B. Stewart: That's correct sir.

Justice Felix Frankfurter: In proceedings during the -- I am not sure if I can call this proceeding you can correct me, in proceeding in which -- to which the Government was not a party and for which it was not brought before the determining body, is that right?

Mr. Samuel B. Stewart: That is correct sir.

Justice Felix Frankfurter: It's good for further understanding --

Mr. Samuel B. Stewart: Yes.

Justice Hugo L. Black: As I understand it that – here is what I would have like to have an answer to -- on -- as I read this, it shows the purpose of Congress on its face to get -- allowed the suit to be filed and I would assume so if they would get notice.

And of course you could have filed to build the quiet title before this state procedure would you say extinguished the lien.

There's no reason you shouldn't have filed it before, isn't it?

Mr. Samuel B. Stewart: Well I think we could not have successfully maintained it before.

Justice Hugo L. Black: Why?

Mr. Samuel B. Stewart: Because the lien was still effective and we didn't have a clear title then.

Justice Hugo L. Black: What you're saying is that you have a right to take away any defense the Government has after it's made a party about proceedings of which it never has notice before.

Mr. Samuel B. Stewart: That is correct, it's really a proceeding to remove the cloud on time, and anytime the Government has filed a lien, this is the cloud which bothers the purchasers.

It impairs the marketability of the property.

And that is the purpose of -- of this quiet-title proceeding, it's the purpose of quiet-title proceedings of the country over.

I think it may clarify our position -- just a bit if I may run quickly through some chart of the --

Chief Justice Earl Warren: Mr. Stewart, before you get to your charts may -- may I ask you this question?

Mr. Samuel B. Stewart: Yes, Mr. Chief Justice.

Chief Justice Earl Warren: You were, in the bank you must have had many thousands over a period of the years of sales of this kind, sales of the deeds of trust.

Is this a normal procedure that you have followed in that regard or is this -- is this a novel procedure that you are -- are trying to establish in the law?

Mr. Samuel B. Stewart: I have to answer this -- that question this way Mr. Chief Justice.

There have not been so many thousands in the period since this -- well went on the books in 1942.

There were some thousands back in the Depression Years.

Chief Justice Earl Warren: Yes.

Now the foreclosure --

Mr. Samuel B. Stewart: The foreclosure -- there -- there have not been too many foreclosure proceedings in the year since 1942.

The normal procedure which is followed is the one I mentioned first of seeking by negotiation with the Government an administrative partial discharge of this property supported by appraisals indicating that there is no equity and that when we go through our procedure we will have the whole thing anyhow.

The -- t

Justice William J. Brennan: Is that the federal statute?

It is, isn't it?

Mr. Samuel B. Stewart: There is authorization under the federal statute; I don't have that citation readily available, may be Mr. Friedman can give it to me, but -- now this is a -- a I recognized -- yes, it's -- it's in the -- it's in the Government's brief on page 22, Section 6325 authorizes release through in and by administrative procedure, and they've been quite cooperative on this, we have no complaint about that at all.

But human beings do disagree at times, and where you disagree you have to have some other procedure.

Now, we have sometime, brought the procedure to -- to foreclose the long way.

We -- we've tried our hand at it and found it a very poor hand because of the time that's consumed by it and frankly we have attempted this in civil cases.

We've never gotten up here with it before and there's been uncertainty about it because the -- the lower courts have disagreed about it and that's the reason we're here, to have a -- a conflict of the Circuits resolved as to the effect of it.

Chief Justice Earl Warren: What is the general practice in the -- in the State, in this regard, do -- do you know?

Is just this a -- is this a novel procedure that you're trying to establish or -- or is it in such circumstances, the circumstances of this case the normal procedure that is -- is used in such effect?

Mr. Samuel B. Stewart: I think Mr. Chief Justice that -- I could hardly say it is the normal procedure because people have been afraid of it, because the Government hasn't recognized it.

I know there is a -- a wide-spread hope that it will be the normal procedure for the number of requests and telephone calls I've had about this case.

Everybody is -- is much interested in having this procedure available, but I can only judge from the -- the record which does not indicate a large number of cases in which it has been tried and the fact that it has just now reached this Court.

Chief Justice Earl Warren: But the reason -- reason I was asking you was because if this was the practice, I was going to ask what the attitude of the Government has been when it was used.

Have they taken an exception to --

Mr. Samuel B. Stewart: Yes sir.

Chief Justice Earl Warren: -- always or, always or -- they've just done it occasionally?

Mr. Samuel B. Stewart: No, they -- they have not recognized it as well.

Chief Justice Earl Warren: They never recognized -- never recognized it.

Mr. Samuel B. Stewart: Not to my knowledge, sir.

Chief Justice Earl Warren: Yes.

Mr. Samuel B. Stewart: Except as a threat that may have induced them to give us an administrative partial discharge in some case.

Chief Justice Earl Warren: Yes.

Mr. Samuel B. Stewart: It may have been effective there.

I can't judge their mental operations on that.

Chief Justice Earl Warren: Yes.

But did you seek partial discharge here?

Mr. Samuel B. Stewart: This is not in the record, sir.

The -- the fact is that there -- there were discussions of it.

Chief Justice Earl Warren: There were discussions of it.

Mr. Samuel B. Stewart: Yes, but the record does not show --

Chief Justice Earl Warren: Yes.

Mr. Samuel B. Stewart: -- what that was.

Justice William J. Brennan: Mr. Stewart, may I get one other thing clear in my mind?

I gather that if the Government had filed this request for notice, before you exercise the contract rights, now the Government would have participated in something, what would that something have been in the state courts?

Mr. Samuel B. Stewart: They would have received notice of the default.

They would have received notice of the sale.

They would have had the right to appear at the sale and bid and if they thought there was an excess value to pay us off and take the property.

Justice William J. Brennan: Now suppose they challenged the validity or wanted to challenge to validity of the trustee?

Mr. Samuel B. Stewart: Then they could have brought a proceeding for an injunction to restrain the sale and this is done when -- we don't have it done too often frankedly -- frankly but this -- this is done, where people do challenge that.

Justice William J. Brennan: Well now suppose -- suppose that without their filing a request for notice, you had decided voluntarily to give them a notice, you could have done this I take it?

Mr. Samuel B. Stewart: Yes.

Justice William J. Brennan: And then would all of the things you've just described have occurred?

Mr. Samuel B. Stewart: They would all have been available to them, yes, sir and we would then be in the same posture that we are now.

Justice William J. Brennan: I see.

Mr. Samuel B. Stewart: I see my time is running short.

I think we can charge any help that -- just clarify the situation.

As I see we have four successive -- five postures here.

In the first situation the taxpayer holds unencumbered legal title to his (Inaudible).

Then the taxpayer borrows money from the bank and executes a (Inaudible) which is duly recorded.

This creates situation number two which the trustee under the deed of trust holds legal title and a power of sale.

The taxpayer has a right to reacquire if he pays his obligation when due, but that right is subject to dissolution by the trustee if exercised of the power sale.

Then we have situation number three, this being chronologically indicated in which the Government acquires a tax lien on the taxpayer's right to reacquire but no lien on the legal title if the taxpayer does not default.

But if the taxpayer defaults on his deed of trust obligation, the trustee (Inaudible) his legal title then you have the contract right to do under a state law and this preempts our fourth and final situation in which the buyer of the deed of trust sale has unencumbered legal title to the real-estate, the taxpayer's right to reacquire had expired by the term and no property right exists to which the Government lien can attach.

And then to summarize the whole thing in a few words as I can put it in, in the first place the taxpayer is entitled to a house.

Then the trustees they're entitled to a house for the benefit of the bank.

The taxpayer has the right to reacquire.

The Government acquires a lien on the taxpayer's right to reaquire but the Government has no liens against the trustee or the bank.

If the taxpayer defaults, the trustee sells, the bank buys the trustee's title, the taxpayer's right to reacquire dissolves, is gone forever, and the Government lien remains firmly attached in that.

Justice Charles E. Whittaker: May I ask you Mr. Stewart in that hypothesis, sir.

Mr. Samuel B. Stewart: Yes Mr. Justice Whittaker.

Justice Charles E. Whittaker: Is it possible to make this, or might desire to convey and create a second lien junior to the first one?

Mr. Samuel B. Stewart: Yes sir.

Justice Charles E. Whittaker: Didn't it then completely encumbered his right to reacquire?

Mr. Samuel B. Stewart: Yes sir, if -- he encumbers whatever this bundle of rights is that he has left and as I analyze them, the legal effects of it is, it's a right to possession until he's in default and it's a right to reacquire if he faces debt.

Now you can call it anything you want.

Some people have called it illegal estate.

Some people have called it an equity of redemption.

It's been called all kinds of things.

But --

Justice Charles E. Whittaker: What does it convey if he sells he conveys subject to both the first and the second deed of trust?

Mr. Samuel B. Stewart: He conveys whatever he has left after that sir.

Justice Charles E. Whittaker: But not, isn't that to fee?

Mr. Samuel B. Stewart: No, sir.

Justice Charles E. Whittaker: Beg your pardon?

Mr. Samuel B. Stewart: No, sir because the legal title is in the trustee.

The legal title is in the trustee under the deed of trust and he conveys the right to reacquire that legal title by paying off his debts.

Justice Charles E. Whittaker: (Inaudible) equity (Inaudible)

Mr. Samuel B. Stewart: That's right, sir.

Justice Hugo L. Black: By accepting all that as being an absolutely valid law as between people and the State of California, do you challenge the power of the Government to say that before a lien -- had its liens of the (Inaudible) that it must be given notice by being made a party to an action either to quiet title or foreclosure?

Mr. Samuel B. Stewart: Oh not quiet title.

No, no, sir I do not challenge its -- its right to be made a party to some action but I say there are alternatives in the statute and maybe either an action is required.

Justice Hugo L. Black: I'm not saying that these are all fixed in the State laws.

The Government we will assume now has (Inaudible) saying before you take away our right under that state law, you must make us a party.

Do you challenge its power, Constitutional power of Congress pass such a law?

Mr. Samuel B. Stewart: No sir.

My time is about to expire, I would like to reserve -- whatever few minutes I have left for the rebuttal.

There are numerous situations in which this problem has been dealt with in the lower courts.

I believe they're all set out in our briefs and if I may reserve the remainder of my time.

Chief Justice Earl Warren: Your time has just expired Mr. --

Mr. Samuel B. Stewart: I'm sorry, sir.

Chief Justice Earl Warren: Mr. Friedman.

Argument of Daniel M. Friedman

Mr. Daniel M. Friedman: Mr. Chief Justice and may it please the Court.

At the outset I would like to advert to a question which the Chief Justice asked yesterday and which was reiterated today which is the extent to which Section 2410 has been used in situations where the Government claims a lien on the property.

And I've gotten some statistics together, they -- I cannot vouch completely for their accuracy, they're obtaining in a hurry, but I think they will demonstrate quite clearly that the general practice appears to be to use Section 2410 in situations where in fact the Government does claim a lien or an interest upon property.

Now the cases are broken down into two categories because of the fact that 2410 is not limited to tax liens.

It also covers other Government liens and the tax lien figures are available from the tax division and the other lien figures from the other divisions and they're both civil divisions.

They're broken down some what.

Now in the fiscal year 1959, our statistics show that the Government was named as a defendant in proceedings under Section 2410 in tax cases, in 2939 cases.

In other words there are almost 3,000 cases during the last fiscal year in which in one form or another a suit was brought against the Government under Section 2410 either for foreclosure of a mortgage or to quiet title in which the Government claimed a tax lien against the property and a number of those cases has been ascending back in 19 fiscal, 1956 was 1808.

Now I also have some figures from the civil division.

Of course as I indicated in the civil division cases, they entail not only tax liens but a wide variety of other Government liens and those figures show that during fiscal year 1958, there were 737 cases in which the United States was named as a party defendant in a proceeding under Section 2410 either to quiet title, or their foreclosure and mortgage.

Now the majority of those cases were cases which were determined in the state courts.

I want to emphasize this that these proceedings do not flood the federal courts because the United States has the right to removal and then the majority of cases, the right to removal is not exercised.

Justice William J. Brennan: Well do you have the figure showing how many have been removed?

Mr. Daniel M. Friedman: No I'm afraid I don't have that Mr. --

Justice William J. Brennan: Can you give us any idea of the percentage?

Mr. Daniel M. Friedman: I don't, except to say that's a very small percentage, I will endeavor to obtain those figures.

I'm not sure if they are available.

So that we think this indicates clearly the large number of this cases -- one -- one further figure that -- in the civil field, the non-tax field, since this statute was first passed in 1931, I have a slight breakdown as to some judicial districts.

For example Mr. Justice Brennan, in the District of New Jersey, in the civil field there have been 2758 cases in which suits were brought against the United States.

Justice William J. Brennan: And those should be in the New Jersey State Court?

Mr. Daniel M. Friedman: Those would be in the New Jersey State Court.

There may have been a few that were tried initially in the District Court.

The vast majority have been in the state courts.

And we think this wide-spread practice indicates quite clearly the understanding both by now is that the bar and by the real-estate community that if there is a situation where the Government has a tax lien on the property or claims a tax lien, the procedure generally followed is to proceed under 2410.

Justice Potter Stewart: But why does --

Justice Felix Frankfurter: As a matter of curiosity --

Justice Potter Stewart: Well I don't follow that at all because -- that is I don't follow your conclusion at all because this very suit was brought under 2410 in a suit of quiet title and the Government was given notice and yet you opposed this all the way, this is what your -- there's no community of understanding here.

Mr. Daniel M. Friedman: Well we -- we have previously below (Inaudible) but we now do not question the right of the bank to maintain the quiet title acts and we do not question if this is an appropriate way for the bank to have determined whether or not the Government's lien was extinguished from this property as a result to the state court proceedings.

Our position is basically, and if we think this is what the Court of Appeals held here that the bank's title was not quieted.

The bank couldn't quiet its title because the theory on which the bank filed was a complaint, why that the previous state nonjudicial sale had the effect of wiping out the Government's lien on this property.

That was the theory and they came in and said, “Quiet the title because the Government's lien is out” and as we understand and it's our position, the Court of Appeals said, "No your title is not quiet because the Government's lien is has not been wiped out."

Justice Felix Frankfurter: But you would have taken the same position if the state Court -- if the court had found that -- that under California law this was a good action to the quiet title and title was quieted, wouldn't you?

Suppose -- suppose there had been a controlling state court decision, Mr. Stewart says there is, and suppose the federal court had followed the state court's decision, you would have taken that you would still be here, wouldn't you?

Mr. Daniel M. Friedman: Yes we would Mr. Justice because we don't think that the State even though it may quiet title with respect to private entities and quiet title as to the Government.

Justice Felix Frankfurter: Those are the facts that a particular decision says the title wasn't quieted.

It doesn't deal with the problem.

There may be other reasons why state courts are interpreting the state law, you may not allow an action for quiet title.

Mr. Daniel M. Friedman: Yes, but I would --

Justice Felix Frankfurter: But the real grievance is the one that you've stated back.

It couldn't quiet title.

Mr. Daniel M. Friedman: That's precisely --

Justice Felix Frankfurter: And so when it comes into the Court to quiet title that is merely to formalize something as to which you have no say

Mr. Daniel M. Friedman: Precisely.

Justice Felix Frankfurter: I mean that's your position.

Mr. Daniel M. Friedman: That -- that is our position that the -- the proceedings which were followed in the California -- under the California law, the sale of the property under the deed of trust --

Justice William J. Brennan: Lock the barn door, and (Inaudible) rest of the horses, though.

Mr. Daniel M. Friedman: That's precisely, and therefore, while they can maintain this action to have ascertained whether or not the Government lien had been wiped out the fact is that the Government lien had not been wiped because California cannot through those procedures eliminate the federal lien.

Justice Potter Stewart: You don't differ with Mr. Stewart, do ask to what the California law is with respect to private junior lienholders?

Mr. Daniel M. Friedman: No, but we -- we do differ with -- with respect to Mr. Stewart on one point which is on this question of notice.

We don't think that the state can say to the federal government, if -- if you want to protect your lien you have to come in and file a notice in the state court.

And indeed the federal statute was recent, was specifically amended to make it clear that the most that the federal state court could do would be to provide under section 2410 the place where a lien maybe filed in order that the state could not impose conditions but not state what information is required to be included in the lien that the Government filed.

Justice Felix Frankfurter: It's definitely excuse me --

Justice William J. Brennan: Is the -- is the Government in a habit of filing a tax lien so that a mortgagee which has to be or the case maybe will know that there is an outstanding tax lien --

Mr. Daniel M. Friedman: Oh yes --

Justice William J. Brennan: -- of some kind?

Mr. Daniel M. Friedman: -- that is the general practice.

The lien is received.

Justice William J. Brennan: Well isn't there a special fact that if you don't do it is that there's another one of these types of in special to the --

Mr. Daniel M. Friedman: Yes to the statute, Section 6323 of the code which provides that in the event it has not been recorded, it's not valid as against mortgagees, pledgees, purchasers and judgment credit.

The general practice is to file these liens and that was done in this case the -- at least the two first liens were filed approximately few months or two after they have been received in the collector's office.

Justice Felix Frankfurter: Mr. Friedman, I'm still bothered by the opaque history that we have of this legislation and let me ask you this specific question.

Prior to the existence of 2410 or prior to the act of 1924, was it?

Mr. Daniel M. Friedman: 1924.

Justice Felix Frankfurter: Alright, so prior to that no statute was dealing with the problem at all.

Mr. Daniel M. Friedman: That's correct.

Justice Felix Frankfurter: California could have created its own property law cutting off junior lienors in the way it does cut them off and that do they apply it to the United States?

Mr. Daniel M. Friedman: I don't believe so Mr. --

Justice Felix Frankfurter: Well then how and why not if you have no -- you couldn't -- now you can go out with this statute, what would you have resorted to then?

Mr. Daniel M. Friedman: Well I think it's -- it's clear.

The -- the legislative history indicates that the reason for these provisions was because there was no other way of dealing with this problem.

Justice Felix Frankfurter: Well when you say you don't think so, you mean there was no way of --

Mr. Daniel M. Friedman: Deriving it, there was no other way.

Justice Felix Frankfurter: -- there is a local property law the local law dealing with enforcement of lienor rights, or mortgagee rights, or mortgagor rights was controlling as against any interest of that United States could have said.

Is that right?

The local law, the local property law what interest were conveyed by a mortgage whether it is or not conveyed, how to enforce them, apply to interest of the United States.

Mr. Daniel M. Friedman: Well now I would think -- think --

Justice Felix Frankfurter: Prior to 2410.

Mr. Daniel M. Friedman: Prior to 2410, I don't believe that the State could do anything.

Justice Felix Frankfurter: The State couldn't touch him.

Mr. Daniel M. Friedman: Couldn't touch the federal lien and in 2410, Congress stated in one specific instance where a proceeding to foreclose is brought and where there has been a judicial sale at that foreclosure then the effect of that sale upon the junior lien is to be determined by state law but it does --

Justice Felix Frankfurter: Now did some -- usually legislation likes that is a consequence of some -- some decision which adversely affect somebody that some acts of Congress solution, is that what happened?

Mr. Daniel M. Friedman: Well I don't know that the specific decision but we -- what have --

Justice Felix Frankfurter: But usually that's the way -- but I'm not saying it all has it happened that way.

Mr. Daniel M. Friedman: We have some history here that as early as 1913 the American bar --

Justice Felix Frankfurter: I see the dark ages, doesn't it?

In 1913 of the known --

Mr. Daniel M. Friedman: That the -- I don't know of any specific decision but at least as far back as 1913.

Justice Felix Frankfurter: And what happened in those dark ages?

Mr. Daniel M. Friedman: The American Bar Association urged that legislation should be passed to permit the elimination of these federal liens.

But it was always in the context of eliminating a federal lien that was worthless.

The very quotation from Attorney General Jackson that has been read to this Court, spoke in terms of eliminating worthless liens.

This means the situation where the Government has a lien but for one reason or other the lien is not worth anything.

Justice Felix Frankfurter: You mean in dollars and cents it isn't worth anything?

Mr. Daniel M. Friedman: In dollars and cents or --.

Justice Felix Frankfurter: But how can you tell that it is or it isn't.

You can't have law depend on that kind of a guess work.

Mr. Daniel M. Friedman: Well it maybe more than dollars and cents.

It may be that the tax is no longer collectible.

The period of the tax has been voided.

There are variety of situations but the critical case in all of those situations is that it was unfair that the people having the real interest in the property that even though the Government's lien was valued there was no way they could get rid of it.

It was a cloud on title would hang over the property, they couldn't sell it.

Now this is a different situation.

This is not a situation were the lien is worthless in the sense of a tax can't be collected.

This is a situation in which the claim is that the lien has been wiped out, it has been wiped out because of the state proceeding and in that situation, we don't think they can come in and say, "Quiet our title, quiet our title merely because we've going through this previous state proceeding."

It seems to us the quiet title action is a method for testing the effect of the state sale but it is not a means of itself wiping out the lien.

Justice William J. Brennan: Well, what -- what do you concede in the present posture of these facts the government could do in -- in this 2410 proceeding that was (Inaudible)

Mr. Daniel M. Friedman: Well the Government specifically, and we requested in an alternative that the property, that its lien be foreclosed and that the property be sold and the proceeds be distributed in accordance with its lien.

In other words it will result, and if a greater amount were obtained in the amount of the first mortgage the -- that would be paid off on our lien, if nothing more where it can.

Justice William J. Brennan: In other words this is the relief which had you been made party to that the original proceeding, whatever that proceeding was you could (Inaudible)

Mr. Daniel M. Friedman: Yes, and of course the original proceeding in this case wasn't a court proceeding at all.

All that is done on the California law if you have a power of sale under a deed of trust is to file a notice in the recorder's office indicating that there has been a default and after 90 days --

Justice William J. Brennan: Yes, my point is that if -- if I understand it, if I understand Mr. Stewart had notice been given you whether pursuant to a request for notice or otherwise you then would have done what you're now asking be done in this proceeding namely that the property be sold under some proceeding that you would then have brought in the California courts, isn't that true?

Mr. Daniel M. Friedman: Well I think it would have been more likely we might have brought a proceeding in the federal court under 7403 to foreclose our lien.

The fact of the matter is the first notice we had of this proceeding was when we were served in the quiet title action with a --

Justice William J. Brennan: Well my hypothesis is that -- if notice had been given you before that sale under contract, what would you then have done?

Probably you say bring in 7403 Act in the federal court.

Mr. Daniel M. Friedman: I would have assumed that we would have done that rather than going --

Justice William J. Brennan: But you would not have had to do that.

I take it you could have gone into the state court.

Mr. Daniel M. Friedman: We might have, yes.

I -- I'm not -- I don't know what we would have done in that situation.

Justice Felix Frankfurter: But you could give them any -- could you have given notice to these administrative procedures to proper -- is recorded, where is it filed?

Mr. Daniel M. Friedman: In the county clerks with the county clerk records for the (Inaudible)

Justice Felix Frankfurter: With the county clerk at recorder's office, could you -- suppose you have and tried to give me notice we got a -- we are filing this.

So there it is.

Doesn't it become effective for what 90 days?

Mr. Daniel M. Friedman: 90 days.

Justice Felix Frankfurter: And you've go in there before the 90 days on the 60th day, as the California -- would that have stopped anything?

Mr. Daniel M. Friedman: No we would have had to initiate it as Mr. Stewart said we would have had to bring to suit to enjoin the sale or something.

This is -- this is the proceeding merely to give notice and I take it basically to give the people an opportunity to bid on this property.

And I might mention that the United States, if we have been given notice in this situation we have no power to bid in this kind of a foreclosure sale in that situation where foreclosure is sought by other party.

Justice Felix Frankfurter: You mean there's no statutory power?

Mr. Daniel M. Friedman: That's correct.

Chief Justice Earl Warren: Mr. Friedman, suppose you prevail in this case and you go back to the district court, under your present argument there will be a trial on that quiet title action, would it not?

Mr. Daniel M. Friedman: No Mr. Justice, I think if we prevail in this action the complaint to quiet title would be dismissed.

There were -- there were of course motions for summary judgment.

I think if we prevail in this action what happens is that the bank now owns the property subject to our tax lien and at this point whatever further proceedings are appropriate may be taken.

We may initiate the proceeding.

They may wish to initiate a further proceeding under section 7424.

We --

Justice Charles E. Whittaker: Do we, what for?

Why would the bank give -- you -- I understood you say that if you win here the result would be that the bank would own the property, but subject to your lien.

Mr. Daniel M. Friedman: Yes.

Justice Charles E. Whittaker: Which would then be a first lien, isn't that right?

Mr. Daniel M. Friedman: Correct.

Justice Charles E. Whittaker: And that means that the bank though it's foreclosed at the first lien and that as a matter of fact, assumed and bound itself to pay the second one, is that right?

Mr. Daniel M. Friedman: That is correct Mr. Justice because at the time of the foreclosure the interest which the bank had has already with the bank received was already encumbered by this federal lien, junior admittedly to the bank claim, but nonetheless a valid lien.

And that I'd like to repeat what I said yesterday emphasizing this situation, all we're contending for is that we want an opportunity to protect our rights so that if -- if in fact this property is worth more than the amount of the mortgage we will have the right to apply the excess to our lien.

Justice Charles E. Whittaker: But don't you realize that what that means is that the bank's act in foreclosing is admittedly first mortgaged is simply to release it so far as the Government's tax lien is concerned, wouldn't it be?

Mr. Daniel M. Friedman: I'm not sure that I understand your question Mr. Justice.

Justice Charles E. Whittaker: If what is the first lien by foreclosure of it makes the second tax lien of the government a first one, the effect is to satisfy the bank's first lien, isn't it?

Mr. Daniel M. Friedman: Yes, the bank's first lien would be satisfied, but that would not eliminate, we don't think the federal lien on the property.

Justice Charles E. Whittaker: Where did the bank get for its first lien which is foreclosed in this way?

Mr. Daniel M. Friedman: But it would get whatever the property is worth over the first or second lien in the -- in the same way that in any situation I think if there is a first lien which is foreclosed and it's subject to a prior lien.

In other words as far as the bank is concerned what it received at the time of this foreclosure, it took subject to the Government's lien because the State while it may create the interest in the bank when it creates the junior lien and it says how they can be eliminated, we don't think the State has the power to say that a federal lien created by an act of Congress can be eliminated from real property merely because you follow certain state procedure.

In other words Congress has decided the way in which federal liens maybe released from real property.

Justice William J. Brennan: Well Mr. Friedman the way I thought is that as the bank was the lender here was it not?

Mr. Daniel M. Friedman: That's correct.

Justice William J. Brennan: Let's do some figures.

Suppose the bank had loaned $25,000.00 and the government junior lien was for $5,000.00.

They've gone through this proceeding and the property has never been worth more than $15,000.00.

Do I now understand you to say that because the bank's gone through this, it now has a first lien on the property which means that the bank collect -- or the government collects its $5,000.00 out of the property?

Mr. Daniel M. Friedman: Oh no if there -- if there were another foreclosure and the property is worth only $15,000.00 that would wipe our lien out.

Justice William J. Brennan: Well that's --

Mr. Daniel M. Friedman: And furthermore, if the property were worth only $15,000.00 and owes the $25,000.00 debt, I'd feel certain that in that situation there would be an administrative relief.

Justice William J. Brennan: Oh I thought -- I thought --

Mr. Daniel M. Friedman: Oh no, we're not fining a penny until the first mortgage has been fully paid.

Justice William J. Brennan: Not -- not in this case either.

If this case now goes back, if you prevail and this goes back but as you said this bank's title encumbered with the Government's lien nevertheless accept as the property would you bring more than the bank's original loan with the expense and everything else without it -- the Government gets nothing.

Mr. Daniel M. Friedman: That's precisely correct.

Chief Justice Earl Warren: And if on the -- on the second sale the property brought more money than -- than the original lien plus your lien the surplus would go back to the first lienholder.

Mr. Daniel M. Friedman: To the -- yes -- (Voice overlap) -- to the -- to the owner of the property, to the owner of the property.

Chief Justice Earl Warren: Well I thought you recognized that the State had the right to wipe out the -- to wipe out rights of the -- of the owner of the property under -- under state law.

I thought you were only interested in your lien.

Mr. Daniel M. Friedman: Then they write -- wipe out the rights of the owner in the state law but as I understand state law if there is any excess over and above the amount necessary to satisfy all the prior claims that then goes back to the owner of the property.

That's --

Chief Justice Earl Warren: But I -- I did not understand -- at least Mr. Stewart -- I'm -- I'm going to give Mr. Steward five minutes to -- to respond.

When this is over and you make take five minutes more too Mr. Friedman --

Mr. Daniel M. Friedman: Thank you.

Chief Justice Earl Warren: -- because I think there are some things that we'd like to hear from him.

Mr. Daniel M. Friedman: To my understanding --

Chief Justice Earl Warren: But I thought that when one may when -- on the original sale I -- I thought so far as private lienholders were concerned that those were wiped out and the State according to the state's procedure and you -- you agreed to that.

It's only your -- your only objection as to wiping out the government's lien.

Now if you come in and have a second -- a second sale, are you going to reestablish the rights of the junior lienholders?

Mr. Daniel M. Friedman: Well I'm not clear to your question Mr. Chief Justice.

Chief Justice Earl Warren: Well let me put it -- let me put it this way, take the -- the case that -- that Mr. -- Mr. Justice Brennan submitted to you.

Suppose that the -- the bank loaned $25,000.00.

The tax due is $5,000.00.

They first foreclose the -- the property and wiped you out.

Then they bring this action to quiet title as against the -- the Government.

On the -- on the resale of the property, there is a bid of $50,000.00.

That would give you back or give the bank back its $25,000.00, it would give the Government its $5,000.00 and make $30,000.00 -- where would the other $20,000.00 go?

Mr. Daniel M. Friedman: I would think it would go back to the original owner Mr. Chief Justice because the whole purpose of these interests are security interest.

Chief Justice Earl Warren: Well -- But --

Mr. Daniel M. Friedman: Now if the property were sold for less than the principal amount --

Chief Justice Earl Warren: The interest I -- it's clear too.

Mr. Daniel M. Friedman: That's not -- there's nothing left.

I would think that if there was -- and the property would sell to more than the principle amount of the indebtedness plus all liens, any additional amount would revert to the owner of the property.

Chief Justice Earl Warren: Yes.

Well I do not want to prolong it but I -- my -- my only confusion was this.

I thought -- I thought that you recognized that through this power of sale and the -- and the sale itself that the state had the right to wipe out the interest of the owner and -- and all junior liens with the exception of the United States Government and -- and because the Government is the Government they can't do -- do that, but now, if -- if that is true and if they didn't wipe out those rights, why should you, through this kind of an action, reestablish their rights?

Mr. Daniel M. Friedman: Well we -- we're -- whatever effect this would have on their right under the state law is a matter which is not a concern of ours.

Chief Justice Earl Warren: Well -- well that's the point that I'm trying to put before this Court in respect of lien.(Laughter)

Mr. Daniel M. Friedman: When I -- I think -- trying to ask you a question -- when -- when --

Chief Justice Earl Warren: But you're always trying to get a --

Mr. Daniel M. Friedman: Your Honor --

Justice Felix Frankfurter: It's not -- not your worry.

Mr. Daniel M. Friedman: Yes but --

Justice Felix Frankfurter: Although I have it the Chief Justice is understanding of what Mr. Stewart told us or told me in regards to California law.

Mr. Daniel M. Friedman: Well it -- I may be in error in California law.

Mr. Stewart knows more about it than I do.

Justice Hugo L. Black: They're not a part of this suit are they?

You only represent the United States.

Mr. Daniel M. Friedman: That's correct.

Justice Charles E. Whittaker: May I ask you one more question?

Mr. Daniel M. Friedman: Yes.

Justice Charles E. Whittaker: Is it your position that this exercise of the power to sale (Inaudible) and what it did not satisfy or displace any liens.

Now they have to go back and start all over under Section 7424 or 7403 to foreclose, is that your idea?

Mr. Daniel M. Friedman: No -- no, Mr. Justice.

We don't claim that the exercise of the power to sale under state law is void.

We claim that the exercise of the power of sale whatever its effect maybe as between the private parties does not have the effect of eliminating our lien on the property.

Justice Charles E. Whittaker: But it didn't eliminate the lien foreclosed and all other liens?

Mr. Daniel M. Friedman: That is as far as state law provides, yes.

Justice Charles E. Whittaker: And that's then you say leaves your lien (Inaudible)

Mr. Daniel M. Friedman: That is correct.

Justice Hugo L. Black: But you don't -- I think that you declared that as a -- did that sound like you are saying that if you win this lawsuit, the bank is going to lose money and can't collect its mortgage and debt, you don't mean that.

Mr. Daniel M. Friedman: Of course not Mr. Justice.

Justice Hugo L. Black: What you mean as I understand is that the Government is that you're right on the statute, it authorizes a suit to quiet title, you say that they're authorized to file that the procedure that in the merits they shouldn't win because that you interpret the federal statute, they can't take away the Government's right without a notice, by making it a party to a lawsuit.

Mr. Daniel M. Friedman: Precisely.

Justice Hugo L. Black: And so if you get it back and nobody else try to litigate but you and them that you -- that you're engaged, you said a while ago that you have no interest in them – (Inaudible).

What you want is a chance to see whether or not the Government has been injured by having it foreclosed without notice.

Mr. Daniel M. Friedman: Precisely.

Justice Hugo L. Black: As you say the statute requires.

Mr. Daniel M. Friedman: And --

Justice Hugo L. Black: And is there anything else in it except whether the statute requires it.

Mr. Daniel M. Friedman: We don't think so we -- and I want to emphasize that the bank cannot possibly be hurt financially because we don't claim a penny until the mortgage has been fully satisfied.

If there's not enough in this property to produce anything more than the amount of the bank's indebtedness, we don't get anything.

No one is hurt.

All that we say is we'd like to have an opportunity as Congress has provided to give us a chance to make that determination.

Justice Hugo L. Black: But you don't say that by their attempting to display surely and as you say wrongfully they thereby forfeited their mortgage or any part of it.

Mr. Daniel M. Friedman: Oh no, of course not.

Justice Felix Frankfurter: On the other hand you mustn't -- you mustn't belittle their claim because they don't lose anything.

The point is that they have certain interest which they think they have acquired under state law on which they stand and the right to the property is also -- maybe allowed by state law and that maybe a right which is what they are asserting here.

Mr. Daniel M. Friedman: Surely.

Justice Felix Frankfurter: It has nothing to do with your claim.

All I'm saying is you -- you must have been to appear that the act -- Mr. Stewart here is representing an abstract proposition of law.

Mr. Daniel M. Friedman: No I -- I -- all I was suggesting is that there is no -- in -- unfairness to the bank.

Justice Felix Frankfurter: So that's it.

This all depends what their rights were on -- what their rights were when (Inaudible)

Mr. Daniel M. Friedman: I was going to suggest there is no unfairness to the bank in holding that the federal lien is not eliminated by exercise of the power of sale since the bank -- since the United States cannot realize any of the proceeds until the bank's prior claim has been paid in full.

Justice Hugo L. Black: I suppose that practically speaking from the Government standpoint or any other there are many instances in which foreclosure sails ahead rather just bring totally and completely inadequate amount and that if it's sold for what they were worth they would pay off the mortgage and pay off the other liens and you are claiming that the federal statute provides that you should be given notice in order to protect your right that you may have.

Mr. Daniel M. Friedman: Yes in any of the -- any access over and above the value.

Justice Charles E. Whittaker: Could I ask you a question at this point?

Supposing the conclusion has come to the federal statutes do not prohibit what was done here, what is your position at that point?

Mr. Daniel M. Friedman: You mean that the federal statute permits --

Justice Charles E. Whittaker: That this federal statute does not make this as an exclusive procedure which is the basis of your argument.

Have you got a constitutional first to your argument then that if the state law governs and if the state law purports to take away the Government's lien hereby extinguish them and then whatever words you want to call it, that -- that violates due process or --

Mr. Daniel M. Friedman: No, we are not making a constitution --

Justice Charles E. Whittaker: You are not making a constitutional argument.

Mr. Daniel M. Friedman: No, because if -- if this Court concludes that Congress determined that the validity to continued existence of federal liens is to be determined by state court procedures that's the end of our position.

And indeed Mr. Justice I want to repeat once again that Congress specifically so decided in one provision of 2410 where it said, that in the event there is a judicial sale, a foreclosure at a judicial sale then the effect of all liens will be determined as they are under local law, but for that to happen there must be a -- the United States must be made a party to a foreclosure suit and there must be a judicial foreclosure.

Justice Charles E. Whittaker: So your -- your whole position as it stands on the – stems from your argument that the federal statutes are the exclusive means of destroying a Government lien.

Mr. Daniel M. Friedman: Precisely that.

Justice Charles E. Whittaker: That's all there is.

Mr. Daniel M. Friedman: That -- that is our basic claim.

Justice Felix Frankfurter: Mr. Stewart is going to say yes to that proposition too?

Mr. Daniel M. Friedman: Well I'd like --

Justice Felix Frankfurter: Because you're constructing what -- construing what the federal statute says as any question exclusiveness.

Mr. Daniel M. Friedman: Its -- it's exclusiveness in the sense that Congress has determined the procedures for the discharge of federal liens and has not permitted the States by the exercise of their own procedures affecting State interest also to wipe out federal --

Justice Felix Frankfurter: I could sense that answer of yours and not answer your problem at all because you have to go on to the next step what is it that Congress has provided?

Mr. Daniel M. Friedman: What Congress has provided --

Justice Felix Frankfurter: Because how big your argument -- I know what it is.

All I'm saying is you're speaking -- maybe answered yes I believe by Mr. Stewart and come out just the opposite.

Mr. Daniel M. Friedman: Well I think the -- the answer in the following --

Justice Felix Frankfurter: In other words it means that the question of what 2410 means and what it is saying is it's quite within the statute is whether to choose to quiet title etcetera, etcetera and you say that a suit to quiet title can -- can start with the answer which Congress only to have answered by the litigation.

Mr. Daniel M. Friedman: The suit if I may suggest Mr. Justice, the suit to quiet title cannot prevail because the title isn't quieted that the Congress had said that you cannot use these state procedures to eliminate the federal lien.

Justice Hugo L. Black: You're saying in effect that 2410 means if they can't take away the Government's title to that lien without notice to the Government making it a party under 2410?

Mr. Daniel M. Friedman: Precisely and I cannot --

Justice Hugo L. Black: Whatever else they can do if they can't do that.

Mr. Daniel M. Friedman: That's precisely --

Justice William J. Brennan: Well now one other thing so if this gets back to the question I asked you yesterday, the discussion you and I had yesterday.

I gather and may I use the example I did yesterday the foreclosure of the suit so you've got my own state policy to know what I'm really familiar with I gather is in a New Jersey foreclosure procedure the government is given notice and is made a party in circumstances like this.

Then except for that the procedure is there's the notice for the Government must be those described by 2410.

Mr. Daniel M. Friedman: Yes.

Justice William J. Brennan: And the Government will have the right to remove that action to the federal court --

Mr. Daniel M. Friedman: Yes.

Justice William J. Brennan: -- if they desire but the judicial sale which eventually then satisfies 2410.

Mr. Daniel M. Friedman: That's right.

Justice William J. Brennan: But it's -- and where they have different forms of procedures as apparently California and the one we heard yesterday, Pennsylvania have, are not there the lienholders the prior lienholders almost forced into bringing a procedure under 2410?

Mr. Daniel M. Friedman: They may well be and I think that for that -- that as I've indicated the statistics show that this is a usual form in which that is done.

That's right, that the -- the prior lienholder cannot hope to eliminate the federal lien merely by going through the state procedure.

Justice William J. Brennan: Well this bank for example could not under this kind of contract arrangement any longer protect its rights under the trust deed by the existing procedures for that it would have to bring the -- a litigation either in the California court or in the federal court to accomplish it, would they not?

Mr. Daniel M. Friedman: Do you mean at this time after this or before?

Justice William J. Brennan: If you're right, if you're are right in this case, if you're right in this case can Mr. Stewart any longer affect titles under trust deeds for his client and no matter what he did here?

Mr. Daniel M. Friedman: No.

Justice William J. Brennan: It'll mean you'll have to bring a suit either in the California court or in the Federal District Court if he is not to follow the cumbersome foreclosure procedure that the State provides and such a suit will have to bring -- be one under 2410, would it not?

Mr. Daniel M. Friedman: That's right.

You -- you would have to follow these requirements.

You could either bring -- bring suit to foreclose.

Justice Felix Frankfurter: Well, Mr. Friedman there wouldn't be -- there wouldn't be even by the most fanatic of the finder of constitutional question in anything and everything in the law, there wouldn't be a constitutional issue if Congress tomorrow but is there if you taking a little time off and it legislates -- legislative day passed a statute in effect that the state law and state procedure governing the disposition and satisfaction and displacement of junior lien shall apply to junior lien of the United States.

Mr. Daniel M. Friedman: Oh no.

Justice Felix Frankfurter: Is there any -- there couldn't be one?

Mr. Daniel M. Friedman: No.

Justice Felix Frankfurter: So the only question we have here is to interpret, is to define the content for -- what Mr. Stewart insists on quiet -- proceeding to quiet title, is that right?

Mr. Daniel M. Friedman: Well just to put it at how I put it --

Justice Felix Frankfurter: You can put it differently, but isn't that -- isn't that the issue before us?

Mr. Daniel M. Friedman: Well it --

Justice Felix Frankfurter: Whether because this is an honest to God prior to title proceeding cutting off junior lien from California, it governs junior liens of the United States.

Mr. Daniel M. Friedman: If I may that a little differently, Mr. Justice.

I think the question is whether the title can be quieted now because of what happened before.

In other words -- I -- their claim is not that in this suit the liens can be cut off.

Justice Felix Frankfurter: I know I understand that.

Whether this is a quiet title proceeding within the meaning of 2410, you accept that?

Mr. Daniel M. Friedman: No I can't Mr. Justice because this is a quiet title proceeding under 2410.

Justice Felix Frankfurter: It is on the California law but not under 2410 under your argument.

Mr. Daniel M. Friedman: Mr. Justice I think it's a -- an unsuccessful quiet title proceeding.

Justice Felix Frankfurter: You're right.

Justice Hugo L. Black: May I ask you, I think understand what you mean.

What you are saying is that they -- they do have a right to file a bill to quiet title which means that if they can win if it means you have no longer in a lien --

Mr. Daniel M. Friedman: That's right.

Justice Hugo L. Black: -- on the merits.

You say on the merits, you still have a lien because they didn't give you the note -- make you a party as the statute required and therefore they lose their suit to quiet title on the merits.

Mr. Daniel M. Friedman: That's right.

Justice Hugo L. Black: Not because they're not authorized to file a suit, isn't that --

Mr. Daniel M. Friedman: That's right.

Justice Felix Frankfurter: They're authorized to file a suit something that the quiet procedure -- quiet title from the California law may not satisfy the requirement implied or explicit of a federal statute where federal liens are involved --

Mr. Daniel M. Friedman: Well I -- I would equate in terms, Mr. Justice, these terms that the question is whether a quiet title suit may succeed on the basis of what has previously happened.

Justice Felix Frankfurter: Well of course if the United States can not file a quiet --and object to any kind of piece of paper being filed on a California court.

Justice Charles E. Whittaker: You say that the procedure implied here by the bank was alright but it hasn't any substance on merits as such.

Mr. Daniel M. Friedman: That is right.

Justice Charles E. Whittaker: Now, you do admit that they foreclosed their mortgage -- the bank did foreclose its mortgage in accordance with the California law.

Mr. Daniel M. Friedman: Yes.

Justice Charles E. Whittaker: Well, that mortgage then became a spent instrument once that power of sale was exercised, didn't it?

Mr. Daniel M. Friedman: As far as the mortgages, as far as the mortgagor and the mortgagee, yes.

Justice Charles E. Whittaker: Now, you say that while you've argued that your lien is now to become a first lien you don't really mean that in answer to others of my brothers, but I want you to tell me now if you can how the bank's going about to get its money without first paying off what you say is now your first lien.

Mr. Daniel M. Friedman: Well that it could too, the one thing the bank could do is to bring a proceeding under 7424, which will be to have a validity of the Government's lien determined or on this proceeding I suppose, although the Court granted summary judgment, they might go back to the District Court and ask the District Court itself in accordance with alternative prayer for relief to decree a sale of the property, sale under the authorization of the Marshal.

Now if at that sale, if at that sale the property brings no more than the amount of their debt we're out.

We have no claim to anything more.

Justice Felix Frankfurter: Or should the federal court go through a procedure -- same procedure between the central and local authorities even though the Government has an interest.

Mr. Daniel M. Friedman: Well I suppose because Congress has given us the right to move these cases into the federal court.

Justice Felix Frankfurter: But did it -- alright --

Mr. Daniel M. Friedman: Now I just like to very briefly in closing point out that what we had here was the trust deed conveyed title to the trustee, but the California courts have said that this is a security title that's all they said and it's -- as a case it was developed in California.

Now the courts have treated it as a practical matter a mortgage and a deed of trust is very similar and what we really had here analytically I think is what we had yesterday in the Brosnan case that is, the indebtedness was created and in order to secure the payment of this indebtedness the debtor, the mortgagor gave to the mortgagee or the trustee or the beneficiary the power to apply the property, to sell the property and to apply the proceeds to the proceeds towards the discharge of his indebtedness, but they're attached to this property prior to the time of sale, this federal lien and this attached basically to the mortgagor or the taxpayer's interest in the property.

And under well established principles once the lien attaches to property when the property is sold and transferred it passes with the lien unless the act of sale itself operates to discharge the lien from the property.

As I've indicated we think it is clear that Congress has said that except when you -- or comply with the strict requirements of 2410, the State nonjudicial sales to which the United States is a party do not operate to eliminate and wipe out the federal liens on this real property and we therefore believe the judgment should be affirmed.

Chief Justice Earl Warren: Mr. Stewart.

Rebuttal of Samuel B. Stewart

Mr. Samuel B. Stewart: Mr. Chief Justice I thank you for the additional five minutes.

I should like to direct your attention to one reference which it seems to me demonstrates the utter inconsistency of the Government's position here and then I'll devote the rest of the five minutes to an effort to answer some of the questions that that were asked of my friend on the other side.

The reference is to a revenue ruling which is quoted on page 6 of the petitioner's main brief which is rather short and it seems to me feels directly with the question involved here.

It says, "Federal tax liens attach to property only to the extent of the delinquent taxpayer's interest therein where a taxpayer has only an option to purchase real estate" and this deals with an option now but it seems to me closely analogous to our situation here, “where the taxpayer has only an option to purchase real property at the time the federal tax lien arises, the lien attaches to the option, that is, to the interest of the taxpayer not to the real estate.

Where his rights under the option are terminable the Government's right by virtue of its lien upon the taxpayer's interest, are likewise terminable, being no greater than those of the taxpayer.”

Accordingly, when the taxpayer's rights under an option terminate after the federal tax lien has arisen the rights of the United States in the option also terminates since there is no longer any property in the option to which a lien may attach.

It seems to me sir you can apply that word for word, syllable for syllable to the situation here, the Government's lien attaches to the taxpayer's interest, a defeasible interest, something less than a total, free, and unencumbered fee title of the property and when that title is gone so is the Government's tax lien gone with it.

And now to go to the question that was asked of Mr. Friedman I believe by Mr. Justice Frankfurter, what could you do before 1924?

You couldn't do anything except buy the Government off because there was no procedure that was authorized.

Then came 2410, originally in a form, that authorized only a foreclosure suit.

Then we could get rid of them if we wanted to go three years, through three years of trouble and expense to do it.

Then came the amendment in 1942 to 2410 which if Your Honors agree with my contention here has simplified the procedure which was the only excuse for having that amendment, to permit another method not this complicated three-year proceeding but a simple method of going through the simple procedure recognized by most of the States.

Yes sir?

Justice William J. Brennan: If -- if your view does not prevail, getting back to the question I ask Mr. Friedman --

Mr. Samuel B. Stewart: Yes sir.

Justice William J. Brennan: -- your only alternative in the future in cases like this to follow that cumbersome three-year procedure you've described?

Mr. Samuel B. Stewart: Unless we can deal with it administratively, sir, that's the only legal option we have.

Justice William J. Brennan: But I don't quite follow that.

Now this -- this cumbersome procedure I gather is your state foreclosure proceeding.

Mr. Samuel B. Stewart: That's -- that's correct sir.

Justice William J. Brennan: And 2410 doesn't provide a --

Mr. Samuel B. Stewart: Well 2410 is the same thing sir.

All 2410 does is prescribe certain standards of state foreclosure proceedings.

In other words, your state foreclosure proceeding must meet these tests of notice, right to redeem, and all the other things that that --

Justice William J. Brennan: Why does it take three years?

I don't follow that.

Mr. Samuel B. Stewart: I can't tell you why sir except that it does, that this is our experience.

It has been a two years minimum, three years more normal.

Justice Felix Frankfurter: You mean court congestion?

Mr. Samuel B. Stewart: No sir it's the -- it's the -- well this is part of it, yes sir court congestion plus the year of right of redemption on the end of it.

Justice William J. Brennan: Well if this be so if you went -- if you were in the federal court out there?

Mr. Samuel B. Stewart: Yes sir.

Justice William J. Brennan: The same thing.

Mr. Samuel B. Stewart: Of course we have no right to go to the federal court.

Justice William J. Brennan: No I know you have to -- to move.

Mr. Samuel B. Stewart: We have to start on the state court.

It is only when the -- when the Government removes us to the federal court that we get into the federal court.

Justice Hugo L. Black: Why did you say you have to foreclose the statute which specifically authorizes you to file a bill to quiet title?

You don't have to wait until you have sold it without notice.

You can file a bill to quiet title and give -- give a notice to the Government and test out its lien.

Mr. Samuel B. Stewart: But if you'll get --

Justice Hugo L. Black: And if you're saying that they didn't have any remedy and then they give them a remedy to foreclose then they gave them foreclose, but they had to have the title (Inaudible) then they give him a remedy by quieting title and now you say that despite those things although they never had any before you can take the third remedy and let the state foreclose without notice, under the state law.

That's the same --

Mr. Samuel B. Stewart: No Mr. Justice Black I -- I have to think I've not made my self clear, let me try.

The remedy to quiet title is not a procedure for settling liens and for determining who has what rights one against another.

It is a proceeding for determining what has been done heretofore.

Justice Hugo L. Black: Why isn't that they have given you here in this statute where you did have a right to proceed by foreclosing, if they wanted to add to that so that you'd have another remedy, it's a federally created remedy to quiet title that this is in fact attacking this lien.

I -- I've had those kind of cases.

I don't see why you say that's not a legitimate kind of a lawsuit.

Mr. Samuel B. Stewart: Well, Mr. Justice Black perhaps -- perhaps I'm wrong, perhaps -- perhaps the Court can straighten me off, but my interpretation of that is this that the approval of a quiet title procedure was necessarily an approval of quiet title procedure which exists under state law.

This is the only procedure to which we have access.

We could not get jurisdiction in the federal court on the ground that this involved a federal statute or -- or suit against the Government.

We have to sue in the state court we have a quiet title procedure in the State as most States do and our quiet title procedure in the State of California is a procedure to determine that title should be quieted because no rights exist.

Now, this we have followed --

Justice Hugo L. Black: What about 7024?

Mr. Samuel B. Stewart: This again sir is -- is a -- a different proceeding.

It is not a proceeding to quiet title.

It's -- it's a -- an equally complex proceeding with the foreclosure procedure.

The -- you see the issue here is not one of whether we could do something else.

We could do several other things.

The issue here is whether the Congress by adopting this amendment intended to expedite proceedings, intended to make it possible to follow a simple remedy that save the cumbersomeness and the expense and do things in the way that business is ordinarily transacted in spite of the fact that the Government is a party.

That's -- that's our purpose.

Justice Hugo L. Black: As I read -- as l read the statute your issues here I thought (Inaudible) a very simple one as Mr. Justice Franckfruter suggests that this statute to provide that the Government liens are not be destroyed without making it a party, it means some kind of litigation.

It is not the only issue under the construction of the statute and maybe you're right.

Mr. Samuel B. Stewart: If it is --

Justice Hugo L. Black: I'm -- I'm not saying if you're not right.

Mr. Samuel B. Stewart: I -- I think sir that that is the issue except there's a question of interpretation on what kind of litigation.

Now we say the kind we brought here --

Justice Hugo L. Black: Well the --

Mr. Samuel B. Stewart: -- is the only kind that will --

Justice Hugo L. Black: You say the kind of litigation that doesn't require notice to the Government to make them a party.

Mr. Samuel B. Stewart: But not the quiet title, sir.

The quiet title --

Justice Hugo L. Black: I'm not -- I'm talking about the -- the -- if the statute means that the Government's lien shall not be destroyed without making it a party, then you have violated the statute, haven't you?

Mr. Samuel B. Stewart: That's right sir.

Justice Hugo L. Black: And that's if --

Mr. Samuel B. Stewart: If it means the --

Justice Hugo L. Black: That's right.

Mr. Samuel B. Stewart: Then I say it does not make it right.

Justice Hugo L. Black: And I don't say which --

Mr. Samuel B. Stewart: Thank you, Your Honors.