U.S. v. DURHAM LUMBER CO.

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Argument of Howard A. Heffron

Chief Justice Earl Warren: Number 23, United States of America, Petitioner, versus Durham Lumber Company, et al.

Mr. Heffron, you may proceed.

Mr. Howard A. Heffron: Mr. Chief Justice, may it please the Court.

This case is here on certiorari to the Fourth Circuit.

It involves another facet of the same general issue which was before the Court in the last argued case, Aquilino from the New York Court of Appeals.

The statutory scheme in North Carolina whose laws are involved in this case is somewhat different from the scheme of the New York statutes, but its purpose is the same.

And I will attempt to relate the North Carolina statutes and their effect as I discuss the facts of this case.

The taxpayer here, as in Aquilino, is a general contractor who completed work on a construction contract with the owner.

The contract was completed and the proceeds are now due under the contract.

The federal tax lien preceded here the assertion by the subcontractors of their rights under North Carolina law.

Under the North Carolina statutory scheme, the subcontractors, they give notice to the owner of any liability which they claim owes to them from the general contractor.

As of that time, they have a right to sue the owner for the balance of any funds in the owner's possession which are owed to the general contractor.

In this case, the subcontractors gave their notice to the owner subsequent to the time the federal tax lien arose and the subcontractor's claimed that as a result of their action, the affect of North Carolina law was to give them an independent statutory right against the owner for the proceeds of the construction contract which were had yet been unpaid.

The Fourth Circuit agreed with the subcontractors and held that their right was to be preferred to that of the Federal Government under the tax lien.

Now, under the provisions of North Carolina law, the rights of the subcontractors do not arise until they do something -- until something affirmative is done.

In this instance, that was the act of furnishing the owner with the notice required under North Carolina law.

It is from that time that their rights date so that unlike the New York statute where the subcontractor's rights to the trust fund arose just as soon as their debt was unpaid by the contractor.

Under North Carolina law, that is not the case.

The arising of the contractor's liability to the subcontractor is not the date from which the subcontractor's rights spring.

The effect of date under North Carolina law is the date they supplied the affirmative act required of them by statute, which is to serve the notice upon the owner.

Now, when that notice is served upon the owner under North Carolina law, the owner is directed by statute to hold the proceeds aside.

He may not pay the proceeds to the contractor on the construction contract.

If he does so, he will nevertheless have to settle with the subcontractors so that he faces the threat of double liability in that instance.

The North Carolina cases have said that the owner holds the proceeds in -- in what is in essence a trust fund and that the subcontractors derive a right after they furnish the required notice to have an accounting in an ordinary civil action, the accounting for the trust fund, so that in that respect the North Carolina scheme is similar to that which was before the Court in New York.

Justice Charles E. Whittaker: Mr. Heffron may I ask you please two things; first, did -- do the North Carolina cases mentioned any trust in your view?

Mr. Howard A. Heffron: Yes, they do.

Justice Charles E. Whittaker: Expressly mentioned the trust.

Mr. Howard A. Heffron: Yes.

The North Carolina cases do, the statute does not, but the North Carolina cases have construed the effect of the giving of notice by the subcontractor as creating a trust fund in the hands of the owner of any funds he has which is not yet dispersed to the general contractor.

Justice Charles E. Whittaker: And secondly, did -- as you read it, the Fourth Circuit's opinion make any mention of the requirement of the service of notice by the mechanic?

Mr. Howard A. Heffron: Yes, I believe the Fourth Circuit relied on the service of the notice by the mechanic as the act which gave right for their independent right to payment from the owner under North Carolina law.

Justice John M. Harlan: Is there a provision also in the statute that requires the general contractor the condition precedent to the right to receive what anything that is owing to him by the owner to serve a notice or statement on the owner as to what if any amounts are due to general contractor?

Mr. Howard A. Heffron: Yes, there is such a requirement.

Justice John M. Harlan: What's the effect of that on the --

Mr. Howard A. Heffron: Well --

Justice John M. Harlan: -- so-called trust or property interest?

Mr. Howard A. Heffron: Well, I take it that under North Carolina law, the same interest would arise on the subcontractors if the contractor himself had furnished this notice to the owner.

Some --

Justice John M. Harlan: Does the record show whether he did or didn't?

Mr. Howard A. Heffron: He did not in this instance.

Justice John M. Harlan: Did not.

Mr. Howard A. Heffron: The record shows that the only notice which was furnished here, was that furnished by the subcontractor and that was -- and that came after the federal tax lien had arisen.

Now --

Justice Felix Frankfurter: Mr. Heffron, may I ask you.

I haven't read any of the North Carolina cases and I rely on you to tell me what they stand for.

Today, it is the trust fund in a loose sense the way the assets of a corporation or sometimes called a trust funds of the creditors or do they needed technical conventional garden, common garden variety trust?

Mr. Howard A. Heffron: I -- I would say it is not regarded as a garden variety trust.

Although I don't believe the question was ever put to the North Carolina courts in those terms, but if we analyze the incidents of this trust, I think we can -- we would submit that it is not the garden variety trust.

Justice Felix Frankfurter: May I ask you whether there are any decisions of that you and I are not calling a common garden variety trust, arising under this lien statute.

Take -- take an arrangement which is unquestionable, which everyone would agree was an ordinary conventional trust, what law would have called it a trust in the technical sense.

Have cases arisen as to the applicability of this lien statute when the taxpayer is a trustee, a non-beneficiary trustee?

Mr. Howard A. Heffron: If you mean in the garden variety situation --

Justice Felix Frankfurter: Yes.

Mr. Howard A. Heffron: -- I believe there have been cases in the lower courts.

Justice Felix Frankfurter: And what -- what are their holdings or what is the Government's position regarding these conventional trusts that I call a (Inaudible) trust.

Mr. Howard A. Heffron: Well, I believe that that if the transfer of the property interest indisputably occurred prior to the federal tax lien that the Government has not asserted that it would come prior to such a transfer.

Justice Felix Frankfurter: If the trust was in existence, you mean before the Government interest arises?

Mr. Howard A. Heffron: Yes.

Justice Felix Frankfurter: And would you make a distinction where the statute brings in to being such as a trust by a prior existing statute but the actual eventuation of the trust is -- is later?

Did I put my question clearly?

The statute --

Mr. Howard A. Heffron: Yes.

Justice Felix Frankfurter: -- under certain circumstance gets what you could recognize as the conventional trust but the actual incident of coming into being of that trust under such a settled statute is later, but the statute is not -- not fairly be called -- suppose it antedates this lien provision, what's the date of that originally?

When did this provision come into the federal legislation?

Mr. Howard A. Heffron: Well, this provision dates over 100 years, I believe.

Justice Felix Frankfurter: But suppose the state statute is the -- is 10 years earlier than the federal statute so it couldn't be called an evasion except by anticipation, what would you -- what would be the Government's position?

Mr. Howard A. Heffron: Well, I would say first, that we -- we would submit that the statutes which we are involved here in North Carolina and New York and the other case are not the garden variety --

Justice Felix Frankfurter: You (Voice Overlap) --

Mr. Howard A. Heffron: -- conventional type trusts.

Justice Felix Frankfurter: But I'm trying to get some leg on that.

Suppose it were one of those, is there -- would you care to state the Government's position or is there one or has there had been one?

Mr. Howard A. Heffron: Well, I don't think that any position has been developed.

Justice Felix Frankfurter: In the situation it has arisen that all these statutes are, what you call last week, an -- an essential's devices for evading the lien provision, that's the way you conceive them, don't you?

Mr. Howard A. Heffron: Well, I wouldn't say they are devices for evasion so much as that --

Justice Felix Frankfurter: For avoidance, I don't care what they are thinking.

Mr. Howard A. Heffron: They are -- they are designed to prefer the mechanics to those of any other claims which are asserted against the general contractor.

Justice Felix Frankfurter: That would be true of an honest to God trust too, wouldn't it?

Mr. Howard A. Heffron: It might if the circumstances were such as to justify that inference.

Justice Felix Frankfurter: I mean the mere -- the mere objective result that in once that the Government would loose or the Government would win can't determine the nature of the respective interest or the nature of the respective policies which come into clash, can it?

Mr. Howard A. Heffron: No, it cannot.

I would -- I think we would say that where the said law of the trust had an existing property interest which was indisputably his and the tax lien arose prior to that time that even by operation of law, a trust could not be created to benefit a creditor by the taxpayer.

Justice Felix Frankfurter: (Voice Overlap) would set laws property which he subsequently puts into a trust, is that what you mean?

Mr. Howard A. Heffron: Yes.

Justice Felix Frankfurter: Well, that's a very different situation from the one I put to you.

Chief Justice Earl Warren: Mr. Heffron, is there any -- any distinction between the two statutes, the New York statute and the North Carolina statute as when the trust -- as to when the trust comes in to being?

Mr. Howard A. Heffron: Yes, there is.

Chief Justice Earl Warren: Would you state -- would you just state that for us?

Mr. Howard A. Heffron: Yes.

Under the North Carolina statute, the subcontractor must perform an affirmative act.

He must supply a notice to the owner which states how much is due and owing to him.

And from that time, the trust stated under New York law no affirmative act is required of the subcontractor to the extent that at anytime, he has owed sums for his work.

At that time, the trust would arise with respect to any funds in the hands of the owner which are still due on the contract to the contractor.

Now, if we examine this trust, the so-called trust under either New York law or North Carolina law, I think it fails of one of the prime incidence of a conventional trust.

It is not the present transfer of a property right.

The so-called beneficiary here still has yet to prove his -- that the contractor is liable to him.

He still must meet the ordinary requirements of showing that he shows an action against the contractor has validity.

He must plead and prove that he's performed his contract with the contractor and that this sum is due and owing to him.

In that respect, we would submit that the -- the transfer of the property interest which -- which is implicit in the notion of trust has not yet occurred in the conventional sense.

Here, the beneficiary still has various conditions which he must meet.

He must show compliance with his contract with the contractor here.

He must prove his cause of action.

We would submit on the other hand that the situation of the owner here after the notice has been given to him and after the so-called trust arises is really no different from what his situation would be if an attachment had been served on him.

For example, under New York law and I believe under the law of most jurisdictions, when an attachment is served on a party, that party is under direct order of the Court not to dispose of the funds allegedly owing to the taxpayer.

If he does dispose of them in anyway inconsistent with the attachment, he is not relieved of liability.

He may still incur a liability.

He is formally directed by the writ of attachment to hold the funds.

The funds await the disposition of the action brought against the taxpayer.

So here, we would submit that the effect of the notice which was served upon the owner was also to put the owner under order of state statute, not to dispose of the funds and if he did so, to dispose of them under pain of future liability to the subcontractors.

But while he was under this order not to dispose or deal with the funds in anyway, nevertheless, the subcontractor's rights were just as contingent as the rights of an attaching creditor or a garnishing creditor or a landlord under a distraint warrant.

His rights were still subject to being tested by the outcome of the lawsuit.

He still had to prove the validity of his cause of action.

And we would submit that therefore, the subcontractors in this case, even though their rights be termed trust for some purposes under state law, have no greater rights vis-à-vis the custodian of the funds here, the owner than the attaching creditor had in the Acri case in the garnishing creditor had in the Liverpool and London case and on the landlord had under distress lien.

In the Scovil case, in all of those cases, this Court held that although it is conceded the effect of the attachment or the paper which had been served on the third party was to place that party under order of state law to refrain from disposing of the funds and to hold those funds pending the outcome of the litigation against the taxpayer, this Court held in all of those cases where the rights of the contending party had attached under state law prior to the tax lien that the Government would prevail.

Now, here, of course, under our facts, the rights of the Government precede those of the subcontractors because the paper which set the force of state statute in motion had not been served until subsequent to the attaching of the federal tax lien.

Similarly in the mechanics' lien cases, the effect of serving the mechanics' lien and filing it and recording it, which was done in the White Bear case, for example, under state law, was to make the owner of the property require to hold it pending the outcome of litigation.

It was under direct order of state statute to do that.

If he disposed of it, he could -- he could not discharge his liability.

He had to hold the property.

We submit that in essence as the effect of the trust in this -- under New York law and under North Carolina law.

Justice Felix Frankfurter: You must hold -- you must hold that there was a period of time in which there was what we call property belonging to the taxpayer as to which the Government attached the lien before the State, before the subcontractor or somebody else's interest arose, is that right?

Mr. Howard A. Heffron: Yes, under -- under our federal statute.

Justice Felix Frankfurter: I suppose by state statute, there was a moment that the property was in the taxpayer that instantaneously a trust came in to being.

Mr. Howard A. Heffron: That is for example under New York law.

Justice Felix Frankfurter: Well, I don't whether -- I --

Mr. Howard A. Heffron: Of course --

Justice Felix Frankfurter: -- I don't know yet what the New York law might be.

Mr. Howard A. Heffron: Yes.

But there -- there's no such instantaneous result under North Carolina law.

Justice Felix Frankfurter: But suppose there is, so that you cannot say there's a period of time during which part of the interest are in the taxpayer because at the very moment that a claim against the contracting agent would come into being instantaneously trust shoots for the benefit of the subcontractor, would you have a different situation or not?

Mr. Howard A. Heffron: Our answer would have to be the same.

Justice Felix Frankfurter: And why?

Mr. Howard A. Heffron: This Court has construed the federal tax lien as reaching after acquired property of the taxpayer.

We would submit that in this case --

Justice Felix Frankfurter: Well, I --

Mr. Howard A. Heffron: -- if that after acquired holding is to be given effect, it must apply to the shows-in-action which the contractor has obtained by performing his contract with the owner, and that the result should not be different when we're dealing with property which is in existence at the time of the tax lien.

Justice Felix Frankfurter: Well, that acquired property, to me, is a very different story from nonexisting property because it wants -- it -- it's in use of the benefit, wholly to the benefit of somebody else.

Mr. Howard A. Heffron: Well, if -- if it in use solely to the benefit of someone else, I think it would be a harder case.

In this case, as we conceive it, it inures to the benefit of the taxpayer because when the net result of all the transactions is totaled up, we find that the contract a taxpayer has discharged his indebtedness.

He is no longer liable to the subcontractors.

He doesn't -- whereas before the trust arose, he owed money to subcontractors after the trust has arisen and the requirements of state law are carried out, the taxpayer no longer owes any money to the subcontractors.

His obligations are discharged.

His balance sheet looks different.

He suffered -- he has obtained, rather, an economic gain.

These claims which were admittedly in existence against him prior to the serving of notice under state law have been wiped out.

Now, we submit that when those claims were wiped out, they were wiped out with something which the contractor had, and that's borne out by the result under state statute that if the owner pays the subcontractors after the trust has arisen, he is discharged of all indebtedness to the owner.

So that when the transactions are worked out, we find that the owner who had to show his action against the -- I'd rather, I beg your pardon -- the contractor who had shows-in-action against the owner prior to the serving of notice no longer has such shows-in-action and on the other hand, the -- the contractor taxpayer who had a debt owing to the subcontractors, when the transaction is completed, no longer he's under such a liability.

The result has been, we submit, no matter how the State labels the transaction, that the contractor shows an action has been used to pay the subcontractor's claim against the contractor.

Now, it -- it's true that one --

Justice Felix Frankfurter: But you don't -- but you don't attach a lien to the shows-in-action for the abstract, been called the shows-in-action, would attach a lien to the money which the owner gave to the -- was put on deposit for the contractor.

Is that right?

The liens are attached to the leases it were.

Mr. Howard A. Heffron: Well, the lien is attached to the intangible of the shows-in-action.

This Court has held that the federal tax lien reaches intangibles as well as tangibles.

Justice Felix Frankfurter: I don't trouble with that.

Mr. Howard A. Heffron: Now, at a point in time here before the owner segregated the fund, there was simply a shows-in-action which the contractor held against the owner.

Now, up until that time under North Carolina law, prior to the time the notice was given by the subcontractors, the owner could have paid the contractor and the subcontractors would have no rights.

For example, he's been held in --

Justice Felix Frankfurter: Well, it make a lot of difference, to me, at least, if the owner couldn't have paid to the -- to the contractor that the money --

Mr. Howard A. Heffron: Well --

Justice Felix Frankfurter: -- the money which he -- which is allocated to satisfy the contractor and which the contractor in turn may owe the subcontractor, suppose that's -- suppose that's a reason -- suppose that's deposited in the bank or in -- in the trust company, all I'm saying is that -- that I, myself, can't paint with a large brush in this regard all such arrangement, if in fact, they are conventional trust like money deposit in the form only trust company in New York.

Mr. Howard A. Heffron: And our answer to that would have to be that this is not that type of conventional trust, that it does not effectuate a present transfer of a property interest.

These beneficiaries --

Justice Felix Frankfurter: That would turn on what the state law really is, wouldn't it?

Wouldn't it?

Mr. Howard A. Heffron: Yes.

Justice Felix Frankfurter: Wouldn't it?

Mr. Howard A. Heffron: Yes and there is no dispute as to the effect of -- as -- as to the underlying rights and liabilities created by state law.

The subcontractors must prove their case regardless of the fact that they alleged they are beneficiaries of the so-called trust, and their rights are subject to being attacked first by the contractor --

Justice Felix Frankfurter: Are you not (Voice Overlap) -- with North Carolina?

Mr. Howard A. Heffron: Yes.

By the owner and by any other subcontractors because this --

Justice Felix Frankfurter: Is that as clear -- is that -- does Judge Fuld make that as clear about New York law?

He doesn't to my reading of that opinion.

Mr. Howard A. Heffron: Well, I -- I don't think he states the underlying premises --

Justice Felix Frankfurter: But doesn't --

Mr. Howard A. Heffron: -- in detail --

Justice Felix Frankfurter: -- doesn't it turn in his view as to whether there is any property -- does any thing would you -- I am talking about it.

Mr. Howard A. Heffron: I think --

Justice Felix Frankfurter: Does that turn on what the incidents are under New York law?

Mr. Howard A. Heffron: And I -- and we submit that Judge Fuld held that those incidents under New York law such that he could only characterize the effect of the trust as a security device to prefer one class of creditors to those of another.

Justice Felix Frankfurter: That's because he thought property in the federal statute swept into it certain transactions.

In short, he quickly slid to what he thought was contained by the term property or property rights in the federal statute.

Mr. Howard A. Heffron: Well, I think he had to reach that point ultimately --

Justice Felix Frankfurter: Well --

Mr. Howard A. Heffron: -- because that was the ultimate question in the case.

But certainly, in the first instance, he had to decide what the effects of New York law were, and he had before him the prior decision of the Second Circuit which was referred to on Thursday which first articulated in detail the property and rights to property analysis.

So that he knew precisely submit what he was doing in that case.

He had that analysis before him and he chose to characterize the effect of New York statute as a method of preferring one creditor to another which --

Justice Felix Frankfurter: We don't --

Mr. Howard A. Heffron: -- is frankly what the North Carolina courts do.

Justice Felix Frankfurter: There's no problem then for me if that's so.

Mr. Howard A. Heffron: Well, there is no -- there is no doubt that under North Carolina law, the North Carolina courts themselves have said, this is a method of preferring the subcontractor to the general contractor himself.

This is a method of preferring one class of creditors to those of other creditors.

We submit that inevitably must be the conclusion here because of the result.

The result is that the taxpayer finds himself in a situation he no longer owes money to the subcontractors but he does owe money to the Federal Government on the tax lien.

Whereas if our position were accepted, the taxpayer would no longer owe money to the Federal Government but he would owe money to the subcontractors.

We submit the result inevitably must be that a class of creditors is being preferred to the Federal Government.

Justice Felix Frankfurter: I -- I think I know now what the difficulty with my -- what – why I am having difficulty with you where I maybe wrong.

You go from the result, from the ultimate objective result to determining what the natures of the incidents of the transaction are and I first go to the nature of the incidents of a transaction to find out whether the federal statute applies.

Mr. Howard A. Heffron: And we submit that looking at the transaction from the result, if I may call it that, is -- is the analysis which this Court adopted in other cases in this field.

In -- in the cases where a state law characterized the lien as specific and choate for all purposes.

This Court did not start with that premise and then work back to see --

Justice Felix Frankfurter: I know you can't --

Mr. Howard A. Heffron: -- what happens to the Federal Government.

Justice Felix Frankfurter: Well, you can't do it -- by labels.

Mr. Howard A. Heffron: Precisely.

Justice Felix Frankfurter: I feel that too but you can't do it because the tax law is full of situations where would a stupe mind's constantly bring a thing on this side of a specific line and the mere fact of the objective results are the same do not determine the inherent nature of the transaction.

Chief Justice Earl Warren: Why should those two approaches bring us to a different conclusion in the case?

Mr. Howard A. Heffron: Well, I suppose if one were to accept the position that under state law the rights of the subcontractors had become so fixed that there was no property left in the taxpayer, why, that would terminate the question just as in the New Britain case and in the Acri case and the other cases, one might have argued that the rights of the creditors have become so specific and choate that their rights divest the taxpayer of any interest for the competing lien of the Government to attach to.

If the approach of the taxpayer is adopted here, then the position this Court has taken in a whole line of cases can be undone by waiving the wand of the label because instead of taking the -- the competing creditors have lost the battle over arguing that their lien is so specific and choate under -- under state law that they must succeed against the Federal Government.

Now, they simply shift their ground and say, “Well, our lien is so specific and choate that there's no property in the taxpayer.

How do we know there's no property?

Well, the taxpayer can't get it himself and no other of these creditors can get it.

Well, this is precisely the position which was taken by the competing creditors and all the other cases.

Instead of using the labeled property, they used the label specific and choate under state law.

The results were precisely the same.

Justice Charles E. Whittaker: Mr. Heffron (Inaudible) you do go beyond (Inaudible) question of what (Inaudible) what lien is involved?

Mr. Howard A. Heffron: No.

In this case, that would not be necessary because on our -- on our admitted facts here, the subcontractor's rights did not come into existence under state law until such -- until subsequent to the federal tax lien.

But we would submit that the -- the Aquilino case would not require a different result either because there, the federal tax lien arose even prior to the contract, prior to the shows-in-action which the contractor required.

So we would not distinguish either of these cases.

Justice John M. Harlan: In your point of view (Inaudible) whether this is improved trust (Inaudible)

Mr. Howard A. Heffron: Well, if what has happened here is that a federal tax lien has attached to property of the taxpayer, we would submit that the taxpayer cannot thereafter declare himself the settlor of the trust for the benefit of other creditors and that state law can similarly cannot -- cannot reach that result either.

Justice John M. Harlan: Whether it's a trust (Inaudible) or whether it's a lien?

Mr. Howard A. Heffron: Yes.

In essence, the subcontractors here are like attaching creditors.

Their rights are contingent in the same sense that the rights of all the other creditors who -- who lost in their priority claims --

Justice Felix Frankfurter: I quite agree with your statement that settlor can place a trust.

What I want to know is whether that necessarily mean that the state anticipatorily for its social policy can establish a policy that trust should come into being under these circumstances even though recognition of them supplant -- would -- would not enable it an exercise of Government's lien creating power.

Mr. Howard A. Heffron: We would --

Justice Felix Frankfurter: Which is a very thing from the settlor saying, "I now own this but I now which the Government can attach, I now declare this a trust and get it from under the Government's nose."

Mr. Howard A. Heffron: We would have to reply to that, that the -- the trust is no more anticipated -- anticipatorily created by the State here than the rights of the mechanics under the mechanics' liens in the White Bear and the Colotta and other cases which this Court has decided.

In those cases, the argument could also have been made that the rights of the mechanics under state law were anticipatorily created prior to the federal tax lien.

And for that reason, they should prevail.

This Court has -- has always --

Justice Felix Frankfurter: Mechanics' lien still lives in existence the property on which it is a lien, but an honest to God trust is a different order of animal.

Mr. Howard A. Heffron: Once the mechanics' lien attaches and all of these cases, we've had a battle between the Government and the mechanic over a fund which is insufficient to satisfy both claims.

The practical effect was if the mechanics' lien prevailed, there was no property left for the Government.

On -- in many of these cases, the state courts have characterized the effect of their liens as divesting the taxpayer of property.

We'd submit this is simply another way of arguing the specific and choate point, a battle which was we thought over in this Court a long time ago.

Justice Felix Frankfurter: But it doesn't cover -- it doesn't tell us everything that is or isn't whether anything or everything is or isn't specific of choate.

Mr. Howard A. Heffron: We would submit again that one must look to the rights and liabilities as created by the state statutes.

The objective facts, as Your Honor characterized them a little while ago.

And when you -- when those objective facts are examined, the results would have to be the same because the objective facts are the same here as they were in all the other cases which this Court decided.

It's for that reason that we submit these cases governed by -- by the principles which this Court has laid down in the other cases.

Chief Justice Earl Warren: Mr. Vann.

Argument of Arthur Vann

Mr. Arthur Vann: Mr. Chief Justice and may it please the Court.

I'm delighted that the Government has made the argument that it has because mine is a happy chore today.

I think that on behalf of the respondents, whom I represent, that we have the facts on our side, the laws of the State of North Carolina are on our side, a very dedicated jurist, Judge Johnson Hayes is on our side and the Fourth Circuit Court of Appeals likewise up until this moment.

The question involved in this case appears to me to be whether or not a federal tax lien, the 32 -- 3621 creates any additional authority other than the bank that attaches to property and rights of property or can it divest previously vested state rights under state statutes.

Now, I don't know about the scheme or device that others have referred to in this cause, but it's been the law in North Carolina for more than 85 years that one, once a subcontractor or a material supplier gave notice to the owner, it was against the law for the owner to pay the contractor.

That secondly, the contractor himself is under a legal duty and responsibility to furnish to the owner an itemization or a list of those to whom he is indebted.

Either way once the owner gets notice, it's against the law for him to disgorge himself of the funds.

Now, in this case, there's no question in our mind about the fact that the defaulting contractor bankrupt, as the case maybe, owes the Government some money.

However, we are seeking to ascertain our statutory right against the owner, not against the defaulting contractor and therein lies the distinction between these other cases that the Government has cited.

There's no question in our mind about that.

Chief Justice Earl Warren: Well, Mr. Vann, do you have either of those circumstances in this case that you have just set out?

Mr. Arthur Vann: Yes, if it --

Chief Justice Earl Warren: Which one?

Mr. Arthur Vann: -- if it please the Court.

We gave -- we have the right, Justice Frankfurter mentioned it the other day in arguing the Aquilino case, we have a statutory right in North Carolina six months after you have furnished the last laboring materials to give notice to the owner.

You have that six months period of time to do it.

This contract was completed on or about July the 12th, 1954.

Chief Justice Earl Warren: But when was it finished?

Mr. Arthur Vann: 1954, when the contract was completed.

Chief Justice Earl Warren: Yes.

Mr. Arthur Vann: Notice was given by the respondents in January of 1955.

The tax lien notice was filed sometime in November of 1954.

Chief Justice Earl Warren: Prior to the -- prior to the --

Mr. Arthur Vann: Prior to the filing but within the time allowed by the statute in our State.

Now in addition to that, the subcontractors have a three-year statute of limitations upon which they can go against the owner.

Justice Felix Frankfurter: May I break in?

Mr. Arthur Vann: Yes, sir.

Justice Felix Frankfurter: Before your notice in January 1955, could the owner has paid over to the bankrupt?

Mr. Arthur Vann: No, sir.

He was under a duty to see that the subcontractors and material suppliers were protected.

He could have paid it, yes, sir.

He could have paid it but he would have still been responsible to have likewise pay the material suppliers or subcontractors, I believe, as this the case maybe in the cause of the statute.

When a contractor or architecture failed to furnish to the owner, an itemized statement of some view to everyone of the labors, to mechanics or artisans afforded by him or the amount due for materials before receiving any prior to contract hence he shall be guilty of a misdemeanor.

So he's under a duty, a positive duty.

Now, if he goes ahead and -- and pays that obligation, he simultaneously has to satisfy the subcontractors or material suppliers.

It's our argument, if it please the Court, and if you take the Colotta case, the White Bear case, (Inaudible) and the other, they are different line of cases.

They talk about priorities.

We're not now talking about priorities.

We're not now talking about trust.

We're not now talking about court and in-court things when in this, we're talking about the rights granted by the State of North Carolina to material supplier in our State.

And we say under the state law, that this defaulting contractor, taxpayer had nothing to which a tax lien could have attached, absolutely nothing.

Therefore, it is no question of priority.

We are going against the owner.

We have a statutory right and privilege to proceed against the owner, not against the contractor, against the owner after notice is given.

Justice Hugo L. Black: Is it --

Is that true with reference to all mechanics' liens and every state lien?

Mr. Arthur Vann: Your Honor, I hardly -- know the laws in North Carolina.

Justice Hugo L. Black: -- they have a right -- they have a right [Laughter] -- they have a right to the mechanics' lien, as I understand it, the one which makes it unlawful to pay the -- for the owner to pay to the contractor the -- what he owes his, what he would owe it if he still owes something, if he owe something as -- as the contractor goes to sub-contractor.

I presume they all written up in that form.

It might not be settle your case but I thought it was against the law and he's against it, that's what a lien is formed.

Mr. Arthur Vann: Yes, sir.

Well I don't know what it -- what it -- let me answer it in this way, if it please the Court.

In the case of Schnepp versus Richardson, 222 North Carolina 228, Justice Barnhill has this to say.

“The plaintiff, to recover, must prove, one, his subcontract, two, work done and labor performed and fulfilment thereon, a balance due, noted and fore -- notice to the owners required by the statute tried to the payment of the contract price to the principle contractor and if balance due to the contractor.”

Now, we take it --

Chief Justice Earl Warren: Who were the parties -- who were the parties in that case?

Mr. Arthur Vann: Schnepp versus Richardson involved amount due to a subcontractor and amount due to the owner, I mean to the -- to the prime contractor.

Chief Justice Earl Warren: Yes, but who were the parties to the case?

Mr. Arthur Vann: They were --

Chief Justice Earl Warren: The owner and the -- and the subcontractor or the contractor and the subcontractor or was the Government in that thing?

Mr. Arthur Vann: The Government was not involved in that one, if Your Honors please.

Chief Justice Earl Warren: Yes.

Mr. Arthur Vann: But the point I wanted -- in -- in answer to -- to Justice Black's question, upon such showing, the law required the owner to apply the unexpended contract price due the -- due the contractor to the payments of the amounts due the subcontractors and material men of whose claim the owner has received notice and here is the key.

The claim of the subcontractor or material man supplants that of the contractor and the duty of the owner to pay is an independent and primary obligation created by the statute.

Now, I think that answer is very effectively the Government's argument that we stand in the contractor's shoe.

Justice Felix Frankfurter: Yes, but when you use -- when your North Carolina decision talks about supplanting that implies a power -- of higher supplanting.

In other words, that it implies that the contractor had something there and the Government's argument is it is against that something that a lien was nailed.

Mr. Arthur Vann: Well, he may well have had something there possibly.

We -- we don't concede that he does because this statute upon notice makes the obligation a direct one from the owner to the subcontractor.

Justice Felix Frankfurter: Before that notice, the Government came in and said, “We have a prior right.

We have an interest in this fund to be.”

Mr. Arthur Vann: Well, that may --

Justice Felix Frankfurter: Isn't that right?

Mr. Arthur Vann: That's what the --

Justice Felix Frankfurter: That's the Government position.

Mr. Arthur Vann: -- that's what -- that's their position.

Justice Felix Frankfurter: We have an interest in this fund to be and that fund to be at that time ran from the owner to the contractor.

Mr. Arthur Vann: All right.

Now, if it please the Court, sir, I'm sorry.

In addition to that, we have the right that which the Fourth Circuit Court of Appeals based their decision.

And interestingly enough the same Solicitor General who argued the cases on behalf of the United States in Colotta and White Bear is now the Chief Judge of the Fourth Circuit Court of Appeals.

So I would think he would advertent to these decisions because he sat in that same chair when those cases were argued before this Court.

Now, he concurred in a majority opinion from the Fourth Circuit Court of Appeals which holds directly to opposite.

Justice Charles E. Whittaker: (Inaudible)

Mr. Arthur Vann: That's correct.

I think that's the law.

Justice Charles E. Whittaker: Well, then does not that mean or do I don't directly understand that the rights (Inaudible) are first acquired by means (Inaudible)

Mr. Arthur Vann: Correct.

Justice Charles E. Whittaker: Now, then, If that's all, why was not the antecedent (Inaudible) take precedence over the subsequently acquired property.

Mr. Arthur Vann: We are perfectly willing for the Government to get what's left.

Justice Charles E. Whittaker: No.

That issue here (Inaudible) that if the subcontractor acquires no right until he has learned his notice on (Inaudible) has already inferred (Inaudible) to the lien of Government.

Mr. Arthur Vann: Well, I would not agree to your conclusion in the matter.

Justice Charles E. Whittaker: (Inaudible)

Mr. Arthur Vann: Of course, we -- we argue first in -- in an answer to your question, Mr. Justice Whittaker.

I -- it is our position that the amount which is owed by the owner to the contractor, once notice is given, he --

Justice Charles E. Whittaker: (Inaudible)

Mr. Arthur Vann: That's right.

Justice Charles E. Whittaker: (Inaudible)

Mr. Arthur Vann: Well, it - it had been given within the statutory period permitted to the -- to the mechanic and material supplied which is six months.

Justice Charles E. Whittaker: (Inaudible) filing of the tax lien with (Inaudible)

Mr. Arthur Vann: As a matter of record, yes.

That's correct and I would say that there, you simply have a conflict in them and that the amount that goes to the contractor comes out.

You can't pay to the owner, the owner can't pay to the prime contractor something that he is under law bound to pay to the subcontractors in our State.

That's not the point in the case of us being up here today.

We are to say, “I -- I don't -- I'd like not to get sidetracked on the issue of priorities of lien because it is not in this -- this case does not rise or fall on that.

This case rises or falls on whether or not, the subcontractor's rights to go against the owner or extinguish by the filing of a federal tax lien.”

Justice Felix Frankfurter: Would you agree that the issue of the case is you don't like to go into priorities which is in the way was about but to be more specific, if the taxpayer had property or rights to property in existence at the time that the lien notice was given by the Government then that is valid and prevails over all other latent possessions of power under your state law, you would agree with that.

Mr. Arthur Vann: I think it's a privilege, yes, sir.

Justice Felix Frankfurter: And therefore, the real question is whether, whatever property may contain, whether the incidents created by North Carolina law both statutory in decision, whether under North Carolina law, there was any closed property and rights to property in the taxpayer contractor at the time the lien was attached, at the time the lien was given notice of.

Is that right?

Mr. Arthur Vann: In the essence, yes, sir.

Justice Felix Frankfurter: And so that's what the controversy really turns on whether that which whatever interest it maybe whether the contractor had an interest which, as a matter of federal law, is contained within the concept or the content of property or rights so far.

Mr. Arthur Vann: As decided by North Carolina and not by --

Justice Felix Frankfurter: Well, but North Carolina can say something is property which -- which is outside the scope of what the -- this Court will ultimately say is contained under the term "property" in 6321.

Mr. Arthur Vann: Well, I should hope it is.

Justice Felix Frankfurter: What property is has to be determined by federal law, otherwise every State can give its own fancy notions of what constitutes property and raise havoc with this statute.

Mr. Arthur Vann: Well, we've been doing it for 85 years.

We've maintained down there that this statute been on the books.

Justice Felix Frankfurter: That may intercede North Carolina litigants that the question of whether Uncle Sam has something to which he can hang on an assertion of a lien is here for the first time, as I understand it, isn't it?

Mr. Arthur Vann: All right.

So now what do you do, if it please the Court, with the destruction of the subcontractor's right to go against the owner?

Justice Hugo L. Black: Well, wouldn't he have that if you didn't, under any just lien statutes?

Suppose --

Mr. Arthur Vann: -- Yes.

Justice Hugo L. Black: -- there had been said that the statutory duty to pay, you would still have the lien, wouldn't it?

Mr. Arthur Vann: He would but here, it's -- it's a direct statutory created right.

Justice Hugo L. Black: Well, so it is, so all the liens.

Mr. Arthur Vann: Yes, Your Honor and --

Justice Hugo L. Black: What -- what I understood your Court to hold was is because the statute says that on account of this lien, he cannot pay contractor that -- that somehow differentiates it from the usual lien statute, is it not?

I don't quite understand that.

Mr. Arthur Vann: He cannot pay the contractor until the subcontractors have been taken care of.

Justice Hugo L. Black: Well, I think -- I think all of them provide that.

Mr. Arthur Vann: I think most of them do.

Yes, sir, your State also.

Justice Hugo L. Black: So there's nothing different, is there, to that -- for the ordinary lien up to that point?

Mr. Arthur Vann: Up to that point, no, sir.

Justice Hugo L. Black: Well, now what is it that comes after that? (Voice Overlap) --

Mr. Arthur Vann: What comes -- what comes after that has been so able pointed out in a very scholarly opinion by Judge Haynsworth in the Circuit Court of Appeals.

Incidentally, the Second Circuit in the Fidelity and Deposit matter which the Government passed over very likely the other day in arguing this matter, held that the balance due the owner by the -- owner to the contractor was not a property right under the New York law to which the federal tax lien could apply.

Second Circuit has already held that.

Justice Hugo L. Black: But is there anything in your law that in your judgment says this state law, in this State there shall never be a debt owing by an owner to -- to someone else until the subcontractors are paid?

Is that the way you construe your law, that there's no debt owing never has been, never will be under any circumstance?

Mr. Arthur Vann: No, sir, there would have to be a debt that the debt is --

Justice Hugo L. Black: Debt to whom?

Mr. Arthur Vann: It would be a debt to the -- to the contractor.

Justice Hugo L. Black: To the contractor.

Mr. Arthur Vann: Whoever was architect whoever was responsible up until the time the notice was given.

Justice Hugo L. Black: Yes.

Mr. Arthur Vann: But after that, then he has -- then the debt is transferred in the -- and the responsibility is transferred to the material suppliers, laborers, and mechanics as the case maybe.

Justice Hugo L. Black: Provided some -- something hasn't intervened in the meantime to make the debts give someone else a lien on that day.

Mr. Arthur Vann: Well, as I say, I thought it was one of the premises upon which I came into this Court that the right of the property would have been determined by the States how they are to be taxed to be determined by this Court under the federal jurisdiction.

I mean, I thought that was a premise on which my case was based.

Now, if this Court is going to presume, they're going to the 48 States and rewrite the statutes, and say, "Now, this isn't the law, you don't mean that at all.

Here's what you mean."

Well, then -- that's a different thing.

Justice Hugo L. Black: -- what does have to rewrite the statute after all if the statute is -- North Carolina provided that there should be a lien under these circumstances.

It says besides the idea but the federal law has already stepped in and said there's another law which so far as applying to the Federal Government, you can't do why is that rewriting a statute?

Mr. Arthur Vann: Well, because, if the best, if it please the Court, writes that our people have under the law to come along now and -- and say that they do not have those rights because of a prior -- because of a federal statute is in effect rewriting [Laughs] our statutes.

Justice Hugo L. Black: Well, it's -- it's holding if it's held that the federal statute is the supreme law of the land and the lien has validly vested there, valid -- validly created which the State has to record.

Mr. Arthur Vann: That's it.

We reach a hopeless impasse.

I -- I don't know the answer except to say that we -- we maintain that the rights of the States to decide whose property it is and what the rights and interests there are arising under the statute, how they're taxed, classification of tax, in those powers, once those rights have arisen there is a federal question.

There's no question about that either.

Justice Felix Frankfurter: Mr. Vann, may I pursue the questions of Justice Black put.

When the owner and the contractor made a contract, there was an undertaking by the owner and that (Inaudible) shows-in-action, didn't it, under that contract?

Mr. Arthur Vann: It did.

Justice Felix Frankfurter: At that moment, a right went from the owner to the contractor and the subcontractor wasn't in existence.

Mr. Arthur Vann: Correct.

Justice Felix Frankfurter: The purposes of the transaction.

Mr. Arthur Vann: Correct.

Justice Felix Frankfurter: Are you saying that that shows-in-action under that contract, namely, the avails of the work to be done by the contractor in money payment by the owner shifted that shows-in-action, shifted to the subcontractor as soon as the contractor made an arrangement with the subcontractor.

Thereafter, under your statute, the duty of the owner shifted from an obligation to pay what he owed under the contract to the contractor that shifted over to the subcontractor, is that what you're saying?

Mr. Arthur Vann: That's exactly what I'm saying.

Justice Felix Frankfurter: That in a way, there's a kind of ovation there.

Mr. Arthur Vann: It may well be.

Chief Justice Earl Warren: Well, does the statute either say that or have -- have any of your cases -- state cases specifically held that?

Mr. Arthur Vann: Our -- our decisions have held that, that it's a -- primary direct obligation to pay from the owner to the subcontractor.

Justice Felix Frankfurter: Would you mind giving us -- the Chief Justice have asked you that too, would you mind giving us a specific North Carolina decision that you want us to look at out of which there arises legal situation such as I, in a blundering way, tried to sketch.

Mr. Arthur Vann: Yes, sir, there are cited in the first part of --

Justice Felix Frankfurter: Now, could you turn?

Mr. Arthur Vann: Yes, sir.

Hildebrand versus --

Justice Felix Frankfurter: Wait a minute, just one second, in your brief?

Mr. Arthur Vann: Yes, sir.

You want the name of this citation?

Justice Felix Frankfurter: Yes -- I just wanted the page of your brief, where they are.

Mr. Arthur Vann: Well, it's in the index.

Justice Felix Frankfurter: All right, would you just give me the names, would you?

Mr. Arthur Vann: All right, so Hildebrand versus Vanderbilt, 147 N.C. 639, Charlotte Pipe & Foundry versus Southern Aluminum, 172 North Carolina 704, Campbell versus Hall, 180 --

Sir.

Justice Felix Frankfurter: I didn't get that.

Mr. Arthur Vann: Campbell versus Hall.

Justice Felix Frankfurter: Yes, I see it.

Mr. Arthur Vann: 187 North Carolina at 464.

Unknown Speaker: (Inaudible)

Mr. Arthur Vann: Yes, sir.

Schnepp versus Richardson, 222 North Carolina at 228, one not cited in the brief but holds this point, King versus Elliott, 197 North Carolina at 93.

Justice William J. Brennan: What was the name of that?

Mr. Arthur Vann: King versus Elliott, yes, sir.

Justice William J. Brennan: Elliott.

Mr. Arthur Vann: Yes, sir.

Justice William J. Brennan: What page?

Mr. Arthur Vann: 197 at 93.

I know this Court doesn't take much -- protects the right then view of the relation back doctrine but the King versus Elliott hold as one of its points said when the notice is filed, it relates back to the point when the work originally began on the contract which of course goes as a matter of necessity in this -- in this.

If it please, the Court, there's one thing further.

I -- I just probably have done a very bad job of trying to impress on the Court the fact that in this instance, it is our position that the subcontractor rights to go against the owner should not be extinguished by the filing of a federal tax lien and that we, in essence, are not fall -- and do not fall under same classification as do these other cases where you have priorities involved, but ours is right against the owner and that's what Justice Haynsworth decided the matter on when it came before the Fourth Circuit.

The Second Circuit has held almost exactly the same thing.

You have two other circuits who are --

Justice John M. Harlan: (Inaudible)

Chief Justice Earl Warren: Well, I thought --

Mr. Arthur Vann: The Second Circuit did.

Chief Justice Earl Warren: Yes.

Mr. Arthur Vann: Well, they -- they've decided --

Justice John M. Harlan: (Inaudible)

Mr. Arthur Vann: Contract law.

I've understand both.

I think the biggest reason the Government interfere after is about $46,000 involved in -- in the Fidelity case and -- and is exhausted patience, you know, you go to the District Court and Circuit Court, (Inaudible) I don't know they brought a real big case up here on these things.

Most of them are minor matters which is they didn't get a principle established and where the litigant who doesn't have enough money involved to make it worthwhile.

There are two things involved here.

I represent the man with this $3000, it's a substantial amount of money and we're talking about simple justice and equity way as equity in this case.

Are you not using money which belongs to a subcontractor to pay the debt of a man who's been dishonest and defaulted in following the laws not only of his own State but of the Federal Government?

Justice John M. Harlan: (Inaudible)

Mr. Arthur Vann: Provided the Government has claimed to it.

Justice John M. Harlan: (Inaudible)

Mr. Arthur Vann: Well --

Chief Justice Earl Warren: Mr. Vann, suppose the tax lien had been filed by the Government before this contract was entered into by the subcontractor, what would the situation be then?

Mr. Arthur Vann: Well, if the federal lien had -- had been filed against the contractor prior to the --

Chief Justice Earl Warren: Yes.

Mr. Arthur Vann: -- contract --

Chief Justice Earl Warren: (Inaudible)

Mr. Arthur Vann: I don't know, Your Honor.

I honestly don't because the --

Chief Justice Earl Warren: Well, I just wonder if it would lead you to the same conclusion because you -- you (Voice Overlap) --

Mr. Arthur Vann: Being consistent I have to reach to the same conclusion probably.

Chief Justice Earl Warren: Yes.

Mr. Arthur Vann: That the state law would give them that right under the statute to do it and I just don't think it's extinguished by the filing of a -- of a federal tax lien which simply says that they have the rights, claim of lien on a property right to follow.

We say that they had not had this right to the property based on a North Carolina statutory law and its decisions and that's been sustained by the Circuit -- by the District Court and the Circuit Court.