UNITED STATES v. EQUITABLE LIFE
Legal provision: Internal Revenue Code
Argument of Robert S. Rifkind
Chief Justice Earl Warren: Number 645, United States, Petitioner versus the Equitable Life Assurance Society of the United States.
Mr. Robert S. Rifkind: Mr. Chief Justice, may it please the Court.
This case is here on writ of certiorari to the Supreme Court of the State of New Jersey.
It brings once again to this Court an aspect of the recurring problem of the relationship of the federal tax lien to conflicting state created liens.
The question here arises from the application of a state court rule, which you may find in page 19 of our brief, which provides that in mortgage foreclosure actions, an allowance for an attorney's fee determined as a stated percentage of all sums adjudged to be paid the plaintiff, mortgagee, shall be included in the tax costs of the action and paid to the mortgagee out of the proceeds of the foreclosure sale.
The question presented is whether the court below was correct as a matter of federal law in holding that the mortgagee is entitled to recover, not only his principle in interest, but also the attorney's fee ahead of a federal tax lien which had attached after the mortgage but subsequent to the default which led to the foreclosure -- but before the default which led to the foreclosure, I'm sorry.
The facts from which the controversy arise are not complex.
In December 1960, respondent Equitable Life Assurance Society loaned one Albert Bagin and his wife $30,000 to be repaid at 6% interest over a period of 28 years.
To secure repayment, Equitable received a mortgage covering real estate owned by the Bagins.
The mortgage was properly record in the next few days.
Second and third mortgagees were subsequently conveyed to other mortgagees but are not directly involved here.
More than a year later, in March 1962, the United States filed notice of the federal tax lien against Bagin.
The lien secured a liability for $7700 in unpaid taxes.
The lien arose under provisions of the Internal Revenue Code upon the assessment of the tax liability under Section 6321, which is at page 17 of our brief.
It was a lien in favor of the United States upon all property and rights to property belonging to the taxpayer.
And under Section 6323, the lien was not valid as against any mortgagee, pledgee, purchaser or judgment creditor until notice was prompt -- properly filed.
Such notice was filed on March 21, 1962.
A year later, on March 1, 1963 the Bagins for the first time defaulted on their monthly payments to Equitable.
After that default, it continued for more than 30 days, Equitable exercised its rights under the mortgage to declare the principal sum and unpaid interest immediately due.
And on June 4, 1963 Equitable filed a complaint in the Superior Court of Bergen County seeking foreclosure of the mortgage.
The United States was named as a defendant in that action and summoned to answer the complaint.
In its answer, the United States conceded that the principle and interest on Equitable's mortgage was prior to the federal lien, but denied that the federal lien was subordinate to any claim Equitable might acquire to counsel fees.
On motion for summary judgment, the Superior Court held that the federal tax lien was junior to the claim for principal and interest under the mortgage but senior to Equitable's claim for counsel fees and that any counsel fee awarded should be allowed in a surplus money proceeding.
The court thought that this conclusion was required by this Court's decision recently in United States v.Pioneer American Insurance Company.
Equitable appealed the appellate division and while the case was pending there the appeal was certified to the New Jersey Supreme Court on that court's own motion.
The Supreme Court reversed.
It held that the Equit -- that Equitable was entitled to priority over the federal lien not only for its principal and interest and costs but also for its counsel fee under the rules of the New Jersey courts.
That fee had in the meantime been determined to be 425 odd dollars.
Because the total claims exceeded the net proceeds of the foreclosure sale, the practical immediate consequence of the decision was to reduce the Government's recovery on its $7700 tax lien from $491 to $66.
This Court has long recognized that the uniform application of the federal tax law and the protection of federal revenues requires that state determinations of the relative priority of federal tax liens must meet federal standards.
It implies no disrespect to the states to recognize as this Court has that in the absence of federal standards, the inevitable and natural tendency of the states would be to give precedence to state created liens running in favor of local real estate taxes, various municipal assessments as was the case in New Britain and Buffalo Savings Bank, or local commercial interests, all of which hit closer to home.
Accordingly to avoid the unequal application of the federal tax laws and to protect federal revenues from being whittled away, the court has evolved the general rule that whatever may be the priorities among state created liens, a recorded federal tax lien is subordinate to all previously perfected liens and superior to all subsequent and inchoate liens.
A corollary of that rule is that subsequently perfected liens do not relate back to the time of their creation to defeat federal liens perfected in the interval.
This doctrine represents an elaboration of a principle dating back to Chief Justice Marshall that first in time, is first in right.
Now the Court had occasioned to apply this general principle to facts quite similar to those presented here in the Pioneer American Insurance Company case three years ago.
Pioneer involved a mortgage that provided in terms that a reasonable attorney's fee shall be added to the principle sum and shall be secured by the instrument in the event of foreclosure.
The Court held that where federal tax liens were accorded after the mortgage, after default, after the commencement of the foreclosure proceedings but before the entry of judgment fixing the amount of the attorney's fees such tax liens were entitled to priority over the lien for counsel fees.
The Court likened the mortgagee's lien for counsel fees to a lien to secure future indebtedness, which had been held inchoate in United States v. Ball Construction Company.
The Court concluded that likewise when a mortgagee has a lien for an attorney's fee which is uncertain in amount and yet to be incurred and paid, such a lien is inchoate and is subordinate to the intervening federal tax lien filed before the mortgagee's lien for the attorney's fee matures.
Now, it is unquestionably true that there are points of difference between the present case and Pioneer.
Several of them, I think, show that this is a much stronger case.
Nevertheless as the court below stressed, the precise percentages set forth in the New Jersey rule given apparent definiteness to Equitable's claim for counsel fees which was not supplied by the relatively and definite provision for a reasonable attorney's fee --
Justice William J. Brennan: Mr. Rifkind (Voice Overlap) --
Mr. Robert S. Rifkind: -- in Pioneer's mortgage.
Justice William J. Brennan: Were there other allowances of tax costs in addition to the attorney's fee under this rule?
Mr. Robert S. Rifkind: Yes, there were some 200 odd dollars of normal tax cost, court fees and so on.
Justice William J. Brennan: And what's the Government's position as to that?
Mr. Robert S. Rifkind: The Government has never disputed that normal tax costs which are definite amount which are paid generally speaking to court officials as a toll for using the court have precedence over everything.
Justice William J. Brennan: Are these -- are all this whole 200 and 80 odd dollars, are they definite?
Mr. Robert S. Rifkind: They are certainly as definite as things can be in the -- in life.
There's a $10 fee for that and a $50 fee for that.
In addition, and I don't mean to mislead you, there are expenses of the sale.
The Sheriff who conducts the sale gets a percentage of the proceeds, but we're talking here about the net proceeds of the sale rather than the gross proceeds.
You have to hire a hall perhaps to accommodate the people who want to bid.
Justice William J. Brennan: And what is the distinction between the tax cost which the Government concedes as priority and this tax cost from the way of -- a fixed percentage for counsel fees?
Mr. Robert S. Rifkind: Well, there is -- there's first of all the historical difference that we have always recognized or generally recognized in the United States, in this Court, throughout the states that there is a difference between counsel fees as cost which may or may not be allowable, generally are not, and the fees paid into court to clerks and so on for services provided by the court.
And that distinction is not foreign to the New Jersey courts.
Only shortly before this case was decided, the Supreme Court wrote in United States-Pipe & Foundry -- the Supreme Court of New Jersey wrote in United States-Pipe & Foundry, which is cited on page 14 of our brief that cost generally comprise principally certain statutory allowances, amounts paid the clerk in fees and various other specified disbursements of counsel, including sheriff's fees, witness fees, deposition expenses and printing costs.
Counsel fees, although if allowable, are included in the tax costs are an entirely different matter.
So this isn't a noble notion to the -- even to the New Jersey courts.
Justice Hugo L. Black: Well, entirely (Voice Overlap) --
Justice Abe Fortas: Mr. Rifkind.
Justice William J. Brennan: -- matter in what way?
Mr. Robert S. Rifkind: I'm sorry?
Justice William J. Brennan: Entirely different but I know that they set an entirely --
Mr. Robert S. Rifkind: Yes.
Justice William J. Brennan: -- different matter, but in what way are they an entirely different matter?
Mr. Robert S. Rifkind: That -- they took a much more restrictive view of the circumstances under which those might possibly be allowed.
Justice William J. Brennan: As tax costs?
Mr. Robert S. Rifkind: As tax costs.
Justice William J. Brennan: As I understand it this rule specifies so that everyone knows in advance only as to those apply X percentage to some figure, doesn't he?
He knows what the counsel fee is?
Mr. Robert S. Rifkind: That's right, if you know the amount of the judgment to be allowed.
Justice William J. Brennan: Well, you can't know that until the sales end.
Mr. Robert S. Rifkind: You can't know that until judgment.
Justice William J. Brennan: But you do know that it's going to be an X percent.
Mr. Robert S. Rifkind: That's right.
Justice William J. Brennan: Fixed percentage of that -- right.
Mr. Robert S. Rifkind: But certainly when the federal lien arose you didn't know what it was going to pay you.
There is also the fact --
Justice Byron R. White: (Inaudible) it is really is rather hard on the principle to distinguish here, this cost from attorney's fees, isn't it Mr. Rifkind?
Mr. Robert S. Rifkind: Except I think on the theory which in a way the Court adopted in Pioneer that there is a difference between something reimbursement for an amount paid into court or state court officers as a toll for judicial process, and something paid to your adversary for his lawyer who is representing him in an adverse relationship.
Justice Byron R. White: And as a matter of fact it's probably kind of harder to distinguish between this attorney's fees, isn't it, be in interest, isn't it?
Mr. Robert S. Rifkind: No, I think not.
There is no --
Justice Byron R. White: Well, how do you know how much or even the principal?
How do you know what principal is going to be ahead of your lien?
Mr. Robert S. Rifkind: You certainly don't know at any time the dollar figure, but the crucial --
Justice Byron R. White: You mean, you don't (Voice Overlap) --
Mr. Robert S. Rifkind: That is when the federal lien arises, you don't get (Voice Overlap) --
Justice Byron R. White: Do you think you know what the outside figure, is that it?
Mr. Robert S. Rifkind: No, but the point is that the counsel fee problem is contingent and inchoate in a much more fundamental sense.
You know that principal and interest are going to be returned that the principal is going to be -- is to be returned.
The liability has arisen.
With respect to counsel fees the liability which the lien is designed to secure has not occurred until default.
Justice Byron R. White: And do you take the same position on the other amounts that have -- under a mortgage that aren't either principal or interest but nevertheless is secured from the mortgage taxes, do you -- is that your position?
Mr. Robert S. Rifkind: With respect to taxes that the mortgagee might pay?
Justice Byron R. White: Yes, if the mortgagee pays.
Mr. Robert S. Rifkind: Well, we've certainly taken the position consistently and the court has supported us in that view that if the mortgagee pays taxes after a federal lien arises and those taxes themselves, state taxes, would be junior to the federal lien that the recompense for the amounts paid out are not senior to the federal lien.
Justice Byron R. White: How about insurance?
Mr. Robert S. Rifkind: Insurance presents a more difficult question.
If -- it depends upon what the insurance is to cover.
If the insurance is merely to cover --
Justice Byron R. White: (Inaudible) insurance?
Mr. Robert S. Rifkind: Yes, if it's -- but the question is how much.
If it's merely designed to secure the mortgagee's interest then it's of no value or interest to the United States to help them (Voice Overlap) --
Justice Byron R. White: And so, (Voice Overlap) -- so you say the federal lien is a -- once it's filed is prior to any subsequent insurance payment.
Mr. Robert S. Rifkind: Any subsequent advances, that's right.
I would --
Justice Byron R. White: And life insurance the same way?
Mr. Robert S. Rifkind: I'm not sure I think of how life insurance would come into play, but I -- but the general rule is that --
Justice Byron R. White: Private insurance, its (Inaudible), are you?
Mr. Robert S. Rifkind: That all advances made subsequent to the falling in the -- or of the attachment of the federal lien have to be subordinate under the general rule, first in time is first in right.
Justice Byron R. White: Well, how about the open-ended mortgage on -- for future advances with an outside limit placed on in the mortgage?
Mr. Robert S. Rifkind: The Court has taken the view in a long series of cases that a security for future advances does not give priority when those advances occur after the federal lien arises.
Justice Byron R. White: This is because it's of inchoateness?
Mr. Robert S. Rifkind: Because of inchoateness, because -- well, in a sense there's a very practical problem here.
We live in a society that the local expression is in hot.
People are borrowing credit all the time.
If you didn't in some way say these types of security arrangements we're going to recognize, but security arrangements for everything in the future we're not going to recognize, it's simply be no way for a federal lien to attach to anything in most cases.
You could suppose an assignment, indeed it's not unheard of, as -- of all future wages for all future credit to be extended that embraces everything.
Justice Byron R. White: Oh, but take the same position in this case that the attorney's fees was in a dollar amount, $150 for each attorney's fees.
Mr. Robert S. Rifkind: Specified in the mortgage or in the lien or in the rules?
Justice Byron R. White: Or right in the mortgage, yes, $150 of attorney's fee.
Mr. Robert S. Rifkind: It still remains the fact that at the time the federal lien attached there was no reason to believe at all that foreclosure would take place, the default would take place.
Justice Byron R. White: That's (Voice Overlap) --
Mr. Robert S. Rifkind: That was a remote contingency.
Justice Byron R. White: That's the same with regard to the principal.
Mr. Robert S. Rifkind: But until default -- until the Equitable has to go into court, it doesn't incur a liability.
It has incurred the liability for the principal and it's entitled to the price of its money which is interest.
Justice William J. Brennan: Well, I would say --
Mr. Robert S. Rifkind: It's that --
Justice William J. Brennan: -- liability for cost apart from counsel fee.
Mr. Robert S. Rifkind: I'm sorry, I didn't --
Justice William J. Brennan: The liability for costs which you concede --
Mr. Robert S. Rifkind: That's right.
Justice William J. Brennan: -- are prior to the Government lien are not incurred either until Equitable went into court
Mr. Robert S. Rifkind: Perhaps --
Justice William J. Brennan: And at the time of the lien, I gather on the facts of this case, there wasn't any suggestion of a default.
That all happened later.
Mr. Robert S. Rifkind: That's certainly true, and --
Justice William J. Brennan: So, that -- is that -- that all these -- that's why I have trouble understanding what on principal how you distinguish those costs that you concede superior to the Government lien under this case.
Mr. Robert S. Rifkind: Well, perhaps there is an inconsistency.
Justice William J. Brennan: Perhaps what?
Mr. Robert S. Rifkind: Perhaps there is an inconsistency.
Justice William J. Brennan: Perhaps?
Justice Abe Fortas: Mr. Rifkind --
Mr. Robert S. Rifkind: But there has been -- there is the feeling that these are small, they're de minimis.
Justice John M. Harlan: Sort of a comity to the state.
Mr. Robert S. Rifkind: And there's an element of comity to the states.
It's going to state officers.
Justice William J. Brennan: Where do we find that in the statute?
Mr. Robert S. Rifkind: You don't.
Justice Abe Fortas: As I read your brief Mr. Rifkind, I thought the brief said that the Government acquiesced in the special treatment given to the court cost and things like that.
And I gathered from it, perhaps quite wrongly, that the Government's position is that you have a statutory and logical right to assert your priority even with respect to court costs, the cost of administration.
But that the Government has acquiesced on the principle of de minimis or state committee or whatnot.
Now from what you're saying now, and I think it perhaps I drew the wrong inference from your brief.
Mr. Robert S. Rifkind: Well, although I'm sure is that the problem hasn't arisen and therefore we've never been forced to an election or its determination that this is a matter of grace on the part of the Government --
Justice Abe Fortas: -- if --
Mr. Robert S. Rifkind: -- or rise (Inaudible).
Justice Abe Fortas: That's possible, but the other possibility it asserts, arisen right here.
Mr. Robert S. Rifkind: The counsel fee?
Justice Abe Fortas: Yes, but the question of reconciliation of the law as a general matter, and that's why I'm asking you to put it another way.
Is it your position that the Government could assert the priority of its lien as against court cost, as against cross of administration etcetera, but then it does not do so for whatever reason, comity or de minimis or whatnot?
Or is it your position that there is logical and legal distinction between attorney's fees even where they're fixed in amount in the mortgage or by statute on the one hand and the other types of costs on the other hand?
I really think, as far as I'm concerned that tentatively I think I have to know the answer to that question.
Mr. Robert S. Rifkind: Well, I think logically we -- under the decisions up to date and what little one can get out of the statute, we should be entitled to say no costs of any sort.
I think a distinction can be drawn nonetheless between the two types of costs which perhaps eases the inevitable frictions between state and federal governments and which the Treasury has been willing to draw, and which I hope they will continue to draw because it makes life much simpler.
But I think as a logical matter, we should be able to insist on cost in their entirety.
Justice Abe Fortas: Although you --
Mr. Robert S. Rifkind: I'm -- I wish should be entitled to priority to cost -- over cost in their entirety.
Justice Byron R. White: You might lose though, aren't you?
Mr. Robert S. Rifkind: That's possible.
Returning briefly to the supposed precision of the percentages supplied by the court rules, I just want to emphasize that there are many circumstances in which the sums adjudged to be paid can be varied by factors other than the accrue interest and principal, which therefore would affect the sums adjudged to be paid and therefore protect --
Justice William J. Brennan: I've forgotten this rule Mr. Rifkind.
Is this a -- is it graduated?
Mr. Robert S. Rifkind: Yes it is.
Justice William J. Brennan: Yes.
Mr. Robert S. Rifkind: -- 1%, 1.5%, 3% over some amount, but there are -- they are taxes, there is insurance, there're all sorts of things which might or might not have priority over the federal claim which nevertheless expand or contract the attorney's fees.
And I think the allu -- the impression of precision is really a little illusory.
Justice John M. Harlan: What did you say in answer to Justice White's question, (Inaudible) no attorney's fees, fixed amount that the Government (Inaudible) the Government's position?
Mr. Robert S. Rifkind: The Government's position would still be that at the time the federal lien attached, the --
Justice John M. Harlan: (Inaudible)
Mr. Robert S. Rifkind: The fee was contingent.
Justice Hugo L. Black: But no more contingent than the cost?
Mr. Robert S. Rifkind: Than the costs, the court costs, that's true.
Now there is an important distinction which -- between Pioneer and this case which I think also is worthy of some note and it bears on this problem of contingency, because after all in Pioneer by the time the federal lien was reported defaults had occurred, the mortgagee had elected to declare the note due and payable, an attorney had been engaged and a suit to foreclose the mortgage had been filed.
There was no doubt in Pioneer that the attorney's fee was to be incurred.
The -- some uncertainty as to the amount, it hadn't actually been incurred but there was really no contingency that it would be con -- incurred.
In the present case, all of those events were in the unforeseeable, unpredictable future.
A year was to go by after the federal lien was recorded before the default occurred which precipitated the foreclosure which led ultimately to the allowance of an attorney's fee.
If Pioneer's lien was like a lien to secure future indebtedness even though the lawyer whose fee was involved was already hard at work, here, the degree of futurity, the element of contingency is much more marked.
The fact is that Equitable's lien, if there was a lien at all, was entirely contingent because the events which would lead to the liability which the lien would secure had not occurred and might never have occurred.
Chief Justice Earl Warren: Mr. Hoak.
Argument of Frank W. Hoak
Mr. Frank W. Hoak: Your Honors.
I would like to address first to the statements which Mr. Rifkind made concerning the ability of the Government to say that we should not be entitled to any cost.
To his statement in answer to Chief -- Justice White's question about the $150 counsel fee and his statement that if there was a lien at all.
These answers, I believe that he has presented, indicate a misconception of the -- what a mortgagee's lien is.
It is a different lien from the lien of the Government at the time that the Government's tax lien arises, there has been a demand for payment of taxes and a refusal of payment then the assessment is made, the Government's tax lien arises.
The taxpayer has default.
He's in default at the time the lien arises.
A mortgagee's lien arises at the time that the mortgagor and the mortgagee enter into a contractual relationship whereby the mortgagor agrees to repay alone.
We don't know at any time when or if the mortgagor will default.
If he defaults, our courts or our legislatures or both, have said that the only recourse we have to realize anything out of our mortgage lien is to foreclose the mortgage in a judicial proceeding.
The only way we get anything, principal, interest, costs, advancement, anything we want, the only way we get it is to commence the foreclosure action after default.
Carry that foreclosure action through to a share of sale and have the actual purchase price paid to the sheriff, our lien is then extinguished.
That's when we get paid.
That's when our lien becomes meaningful.
If our lien is taken away from us prior to that time we have known.
I believe that the real question in this case concerns the 1913 Act of Congress which stated that a federal tax lien shall not be valid as to any mortgagee until notice is filed.
In the light of the Pioneer case, I believe that that statute should now be read that a federal tax lien shall not be valid as to all choate rights of mortgagees until notice is filed.
And the question that is presented to us today is how we are to determine the choate rights of a mortgagee.
Commencing in 1950, this Court has decided almost a dozen cases involving competition or the choateness of state created liens on real property of taxpayers who are not insolvent.
In all of these cases except Pioneer, the liens were for municipal taxes, attachment liens or mechanics liens.
In all of these cases -- although some of these cases other than Pioneer started these mortgage foreclosure actions, the liens which this Court considered were not held by the foreclosing mortgagee, and that each of these cases other than Pioneer, the United States disputed the entire lien with the competing lien holders.
In Pioneer however, and in this case, the competing lien was and is held by the foreclosing mortgagee and his mortgage had been recorded long prior to the Government's federal tax lien.
In either of these cases however, has the Government chosen to dispute our entire lien, is probably because if it had chosen to do so it would have had to justify its position in the light of this 1913 Act of Congress.
And that Act did not apply to these other cases in which the United States had disputed the entire lien.
In order to avoid this position, this unfavorable position, we believe that the Government made the lists of all rights of mortgagees.
And some of Your Honors have discussed some of these items.
I would like to mention a few of them very briefly.
Although the Government concedes that principal is choate, it is not difficult to describe a mortgage in which the principal would not be choate.
There would be no objective standard by which to measure the amount it would be due to the mortgagee that the mortgagor should default.
In such a case, the principal of the mortgage would be every bit as inchoate until judgment is entered as the counsel fee is in -- was in Pioneer.
The interest is even more inchoate.
Interest and counsel fee in New Jersey are computed in exactly the same manner.
For that matter, the sheriff's commissions are also computed in the same manner.
But the am -- the actual dollar amount of our counsel fee is fixed at the time the judgment is entered in the foreclosure action.
The actual dollar amount of both the interest and the sheriff's commissions are only determined at the end of the foreclosure proceeding, after judgment, execution and levy, after sheriff's sale and payment of the purchase price to the sheriff.
Regarding to the item of cost, the Government has not chosen to dispute sheriff's cost, sheriff's commission and tax costs other than counsel fees on the grounds that these items are usually de minimis, fixed in amount and constitute reimbursement for some state over to state officials.
However, we have reviewed a number of our foreclosure actions in which the principal balances exceeded $10,000.
We have found that the overall cost of foreclosure ranged from 5% to 9%.
The counsel fees which they have chosen to dispute have accounted for only 1 1/2 to 2 1/4%, and they have ranged in amount from $250 to $550.
The other costs exclusive of counsel fees have ranged from $750 to (Inaudible) -- $1800.
Justice Abe Fortas: Well, those counsel fees are less than the statute provides, isn't that right?
You say there had been a study that you made, counsel fees were less than 1%.
Mr. Frank W. Hoak: They were --
Justice Abe Fortas: In your state (Voice Overlap) --
Mr. Frank W. Hoak: -- 1 1/2 to 2 1/4% of the principal balance.
The percentages 3%, 1 1/2%, 1% are applied to the amount that is adjudged to be due the plaintiff.
That would also include an amount of principal that was due up to the time we field her affidavit of the amount due on the defaulted loan.
Justice Abe Fortas: I'm sorry, just to clear this up for me, you are saying that your study did not disclose its fee, counsel less than the statutory --
Mr. Frank W. Hoak: No sir.
They were the exact amounts computed by the standing (Inaudible).
Chief Justice Earl Warren: Mr. Hoak, does your case depend on the distinction that we might make between statutes that provide reasonable attorney's fees on the one hand and a statute on the other hand that provides for a percentage of the amount due?
Mr. Frank W. Hoak: Yes sir, I think that the --
Chief Justice Earl Warren: That you'll -- it depends upon that issue that (Voice Overlap) --
Mr. Frank W. Hoak: Yes sir.
Chief Justice Earl Warren: Yes.
Mr. Frank W. Hoak: There must be a -- an objective standard by which to measure a competing lien.
If there is an objective standard by which it can be measured at the time that the notice of the federal tax lien arises, then the lien is choate.
If at least -- if we are a lien holder who is protected by the 1913 Congressional Act, in order to give any meaning to this Act, we must look at the lien that we are dealing with.
And as I've stated, a mortgagee's lien, default is insignificant.
We never know when that will happen.
So that if we -- if at the time the Government files its notice we can take any of our rights and just assume a date to which the interest will be computed and determine what the facts might -- the relevant facts might be.
But make only that one assumption.
If we can compute a fictitious but definite sum then I would say that that item is choate.
That we can do with the New Jersey counsel fee.
That we can not do with the Arkansas' counsel fee in Pioneer.
Pioneer was correctly held to be inchoate.
I think New Jersey's counsel fee should definitely be held to be choate otherwise we can not give substantial meaning to this 1913 Congressional Act.
Justice Byron R. White: I take it you are somewhat dissatisfied with the whole choateness concept however as applied to mortgages.
Mr. Frank W. Hoak: As applied to mortgages, yes sir Your Honor.
I do believe that choateness if it is defined is a very helpful tool.
I think in New Britain, you defined it in the general sense that under the property, that under the lien or -- and fixed in amount.
But this item of fixed in amount has not been defined certainly as to a mortgagee.
If we had a definition of this choateness in relation to a mortgagee, the general definition that could be applied to each right as it arises then I think we could avoid a lot of our problems with the United States Government.
Justice Byron R. White: What do you do in New Jersey with regard to a second mortgagee?
There are some states, I know from experience, in which the first mortgagee may not collect attorney's fees as against the second mortgagee from foreclosure when there is a -- not enough to pay both liens.
And the question is how much the second mortgagee gets?
The first mortgagee may not have out of the property as attorney's fee, even though it's reserved in the mortgage even in a specific amount.
Mr. Frank W. Hoak: That is not the rule in New Jersey.
In fact in this case, we had a priority adjustment fund equal to the amounts exclusive of counsel fees due to the first and second mortgagees.
The first mortgagee obtained the amount of the counsel fee at the expense of the second mortgagee.
So that the second mortgagee is actually the person who is out $425 (Voice Overlap) --
Justice Byron R. White: The rule is otherwise some other places, you know (Inaudible) -- but how about the -- how about future advances as against the second mortgagee?
Mr. Frank W. Hoak: We are entitled to -- well, when we get into the question of future advances that --
Justice Byron R. White: I don't want to take all your time on it.
Mr. Frank W. Hoak: There is a distinction I think sometimes made between whether there's a legal liability to make the advance or not.
We can get them under certain circumstances and others we could not.
The only other thing that I think I would like to say Your Honor, is this, that I do believe that we can get a much more satisfactory relationship in this field and settle a lot of the questions before coming up to this Court if we have a general definition to be applied.
Chief Justice Earl Warren: Mr. Rifkind.
Rebuttal of Robert S. Rifkind
Mr. Robert S. Rifkind: Mr. Chief Justice, I just like to make one or two very short points.
As counsel for Equitable pointed out, the question of fixed in amount as spelled out in New Britain has not been spelled out in great detail.
But one thing ought to be very clear, if you can't tell whether the amount is something or another, as was the case here, it certainly not fixed in amount.
In this case, we're not talking about whether it was $10 or $12 or $100.
At the time the federal lien attached we didn't know where there was any dollars and in fact it might well and in the normal course of things would've been nothing.
The respondent also faces great reliance on the 1912 or 1913 Act of Congress, which it says Cong -- in which it says Congress impended to protect a wide variety of interests pertaining to the mortgagee.
Now the 1912 Act, which is now Section 6323, simply provides that until recorded the federal tax lien should be invalid as against mortgagees as well as against a variety of other people.
And it seems quite clear that it was designed simply to protect against the secret lien.
And as a matter of fact, the committee reports deal largely with the problem of the purchaser who doesn't know that a lien is attached to his property.
But there is reason to suppose that it intended to protect every device for augmenting a mortgagee's security against prospective risks whenever they might ripen into liabilities that mortgagee's lawyers could device.
Indeed as this Court pointed out in Pioneer, Congress did not intend to purport or did not purport to affect the time at which local liens were deemed to arise or to become choate or to subordinate the tax lien to tentative, conditional or imperfect state liens.
Clearly when the federal lien arose here, Equitable's lien if there was one at that point was at best tentative conditional and imperfect.
Finally, I'd like to point out one other attribute of the New Jersey rule and of similar rules in a few other states that provide court counsel fees.
It seems to me, although I have not investigated the legislative history of many of these rules, that they were designed principally not to augment the mortgagee's reach, but rather to restrict it.
They were designed to prevent overbearing.
They were designed to prevent overreaching and they did it by saying, as New Jersey says, no counsel fee shall be allowed no matter what the mortgage says except as provided.
And that's -- the theme runs through the several states that have such arrangements.
They were not designed to make integral to the mortgages property right as the Equitable would suggest.
Some new claim but were designed to restrict overreaching on the part of creditors.
I don't think that gives a right that the Congress intended to protect at least until the time the liability arises.
Chief Justice Earl Warren: Very well.