355 U.S.

587
78 S.Ct. 442
2 L.Ed.2d 510

UNITED STATES of America, Petitioner,

v.
B. F. BALL CONSTRUCTION COMPANY, Inc., and United
Pacific Insurance Company.
No. 97.
Argued Jan. 27, 1958.
Decided March 3, 1958.
Rehearing Denied April 14, 1958.

See 356 U.S. 934, 78 S.Ct. 770.

Mr. Alexander F. Prescott, Washington, D.C., for petitioner.
Mr. Josh H. Groce, San Antonio, Tex., for respondents.
PER CURIAM.

The judgment is reversed. The instrument involved being inchoate and

unperfected, the provisions of 3672(a), Revenue Act of 1939, 53 Stat. 449, as
amended, 53 Stat. 882, 56 Stat. 957, 26 U.S.C.A. 3672(a), do not apply. See
United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95
L.Ed. 53; United States v. City of New Britain, 347 U.S. 81, 8687, 74 S.Ct.
367, 370371, 98 L.Ed. 520. The claim of the interpleader for its costs is
controlled by United States v. Liverpool & London & Globe Ins. Co., 348 U.S.
215, 75 S.Ct. 247, 99 L.Ed. 268.

Mr. Justice WHITTAKER, with whom Mr. Justice DOUGLAS, Mr. Justice
BURTON and Mr. Justice HARLAN join, dissenting.

The question presented is whether an 'assignment' made by a subcontractor to

his performance-bond surety of all sums to become due for performance of the
subcontract, as security for any indebtedness or liability thereafter incurred by
the subcontractor to the surety, constituted the surety a 'mortgagee' of those

sums within the meaning of 3672(a) of the Internal Revenue Code of 1939, as
amended.
4

Ball Construction Company had contracted to construct a housing project in

San Antonio, Texas. On July 17, 1951, it entered into a subcontract with Jacobs
under which the latter agreed to do the necessary painting and decorating of the
buildings, and to furnish the labor and materials required, for a stipulated price.
The terms of the subcontract required Jacobs to furnish to Ball a corporate
surety bond, in the amount of $229,029, guaranteeing performance of the
subcontract. On July 21, 1951, Jacobs, to induce respondent, United Pacific
Insurance Company, to sign the bond as surety, assigned to the surety all sums
due or to become due under the subcontract, as collateral security to the surety
for any liability it might sustain under its bond through nonperformance of the
subcontract, and for 'the payment of any other indebtedness or liability of the
(subcontractor to the surety) whether (t)heretofore or (t)hereafter incurred,' not
exceeding the penalty of the bond. On April 30, 1953, a balance of $13,228.55
became due from Ball under the subcontract, but, because of outstanding
claims of materialmen against Jacobs, Ball did not pay the debt. In May, June,
and September, 1953, the District Director of Internal Revenue filed, in the
proper state office, federal tax liens against Jacobs, aggregating $17,010.85.
Between December 1953 and March 1954thus during the coexistent period
of the bond and the assignmentJacobs incurred indebtedness, independent of
the subcontract, to the surety in the amount of $12,971.88.

The surety, contending that its assignment of July 21, 1951, constituted it a
'mortgagee' within the meaning of 3672(a), claimed priority of right to the
$13,228.55 fund over the subsequently filed federal tax liens. The Government
disputed the claim and asserted a superior right to the fund under its tax liens.
Several creditors of Jacobs, holding unpaid claims for materials furnished for
and used in performing the subcontract, asserted priority to a portion of the fund
over the claims of both the surety and the Government. Because of these rival
claims, Ball instituted this interpleader action, under which he impleaded the
surety, the Government, and the materialmen, and paid the fund into the
registry of the court to abide the judgment. Before conclusion of the trial the
materialmen's claims were satisfied. The District Court held that, by the terms
of the 'assignment' and on its date of July 21, 1951, the surety became a
mortgagee of the fund and that its right thereto was superior, under 3672(a), to
the subsequently filed federal tax liens. R. F. Ball Const. Co. v. Jacobs, 140
F.Supp. 60. The Court of Appeals, adopting that opinion, affirmed. 239 F.2d
384.

This Court now reverses summarily, citing United States v. City of New

Britain, 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520, and United States v. Security
Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53. We believe
those cases are not in point nor in any way controlling. Neither of them even
involve either the question here presented or the statute here conceded by the
parties to be controlling. Rather, they involved entirely different facts,
presented very different questions, and were controlled by and decided upon
other statutes. They were controlled by and decided upon 3670 and 3671 of
the Internal Revenue Code of 1939,1 which, in pertinent part, provided: 'If any
person liable to pay any tax neglects or refuses to pay the same after demand,
the amount * * * shall be a lien in favor of the United States upon all property
and rights to property * * * belonging to such person' ( 3670) from the time '*
* * the assessment list was received by the collector * * *.' ( 3671.) Whereas
the statute governing this case, as the parties concede, is 3672(a) of the
Internal Revenue Code of 1939, as amended,2 which, in pertinent part,
provided: 'Such lien shall not be valid as against any mortgagee, pledgee,
purchaser, or judgment creditor until notice thereof has been filed by the
collector(1) * * * in the office in which the filing of such notice is authorized
by the law of the State * * * in which the property subject to the lien is situated
* * *.'

The controversy in New Britain was over that portion of the proceeds of a real
estate mortgage foreclosure sale which exceeded the amount of the mortgage.
The City of New Britain, in virtue of its unpaid annual ad valorem tax liens
which attached to the real estate on October 1 in each of the years 1947 through
1951, and its water-rent liens which had accrued from December 1, 1947, to
June 1, 1951, claimed priority of right to the fund over general federal tax liens
against the mortgagor which had been effected under 3670 and 3671 by
deposit of assessment lists in the Collector's office on various dates between
April 26, 1948, and September 21, 1950. Thus, some of the City's liens had
attached to the real estate prior to receipt by the Collector of the assessment
lists and some had not.

This Court was not there dealing with any mortgage, pledge or other contractual
lien, but was only dealing, as it said, with 'statutory liens' (id., 347 U.S. 84, 74
S.Ct. 369); and in deciding the issue of their priority it observed that, although
3670 and 3671 created a lien in favor of the United States upon all property
of the taxpayer as of the time the assessment list was received by the Collector,
'Congress (had) failed to expressly provide for federal priority * * *' (id., 347
U.S. 85, 74 S.Ct. 370) under those sections, and the Court held '* * * that
priority of these statutory liens is (to be) determined by (the) principle of law
(that) 'the first in time is the first in right." Ibid. The Court then vacated the
judgment of the state court and remanded the case for determination of the

order of priority of the various liens asserted, in accordance with the opinion.
9

We think it is not only apparent that 3672(a) had no application to that case
but also that the Court expressly so declared. It noted that the City of New
Britain contended that, because applicable state statutes provided that real
estate tax and water-rent liens should take precedence over all other liens and
encumbrances and 3672(a) subordinated federal tax liens to antecedent
mortgages, the Court should hold that the City's tax and water-rent liens
having priority over mortgageswere prior in rank to the federal tax liens; but
the Court disagreed, saying: 'There is nothing in the language of 3672((a)) to
show that Congress intended antecedent federal tax liens to rank behind any but
the specific categories of interests set out therein * * *.' Id., 347 U.S. at page
88, 74 S.Ct. at page 372. (Emphasis supplied.) As we have observed, supra, 'the
specific categories of interests set out' in 3672(a) were and are those of 'any
mortgagee, pledgee, purchaser, or judgment creditor.'

10

In the Security Trust case a creditor instituted a suit in California against one
Styliano on a note and, on October 17, 1946, pursuant to provisions of the
California Code of Civil Procedure, procured an attachment of a parcel of real
estate owned by Styliano. While the attachment suit was pending the
Government, on December 3, 5 and 10, 1946, filed notices of federal tax liens
against Styliano in the proper state office. Thereafter, on April 24, 1947,
judgment was rendered against Styliano in the attachment suit, thus perfecting
the attachment lien on the real estate. Subsequently Styliano sold the real estate,
subject to these liens, and the purchaser filed a suit to quiet his title, impleaded
the attachment lienor and the Government, and paid the purchase price into the
registry of the court to abide the judgment. The California trial court ordered
the fund to be applied, first, in payment of the attachment lien, and, second, in
payment of the federal tax liens. The California District Court of Appeal
affirmed. Winther v. Morrison, 93 Cal.App.2d 608, 209 P.2d 657. On certiorari
this Court reversed, pointing out that, under the law of California as declared in
Puissegur v. Yarbrough, 29 Cal.2d 409, 412, 175 P.2d 830, 831832, an
attaching creditor obtains 'only a potential right or a contingent lien' until a
judgment perfecting the lien is rendered, and that meanwhile the lien 'is
contingent or inchoatemerely a lis pendens notice that a right to perfect a lien
exists.' United States v. Security Trust & Savings Bank, 340 U.S. at page 50, 71
S.Ct. at page 113. Naturally in those circumstances, the tax liens which became
perfected in December 1946 were superior to the attachment lien which did not
become perfected until May 1947. There, as in New Britain, this Court was not
dealing with any mortgage, pledge or other contractual lien, or with any
question of priority of an antecedent mortgage over subsequently filed tax liens.

11

12

It thus seems quite clear to us that the New Britain and Security Trust cases did
not involve the question here presented nor deal with the statute here conceded
to be controlling and, therefore, they do not in any way support the Court's
decision here.
We also think that, under the law and the facts in this record, the 'assignment'
was in legal effect a 'mortgage,' and inasmuch as it antedated the filing of the
federal tax liens it was superior to them under the expressed terms of 3672(a).
That section does not define the term 'mortgagee' and, hence, we must assume
that it was there used in its ordinary and common-law sense. United States v.
Gilbert Associates, Inc., 345 U.S. 361, 364, 73 S.Ct. 701, 703, 97 L.Ed. 1071;
United States v. Security Trust & Savings Bank, supra, 340 U.S. at page 52, 71
S.Ct. at page 114 (concurring opinion). Substance, not form or labels, controls
the nature and effect of legal instruments. 'State law creates legal interests and
rights.' Morgan v. Commissioner, 309 U.S. 78, 80, 626, 60 S.Ct. 424, 425, 426,
84 L.Ed. 585, 1035. The law of Texas, where the questioned assignment was
made and was to be performed, makes such an 'assignment' a valid mortgage.
Southern Surety Co. v. Bering Mfg. Co., Tex.Civ.App., 295 S.W. 337, 341;
Williams v. Silliman, 74 Tex. 626, 12 S.W. 534. Although the relation of a
state-created right to federal laws for the collection of federal credits is a federal
question, the State's classification of state-created rights must be given weight.
United States v. Security Trust & Savings Bank, supra, 340 U.S. at pages 49
50, 71 S.Ct. at pages 112113. Here, the State's determination that such
assignments are mortgages in legal effect, and its classification of them
accordingly, is not met by anything of countervailing weight. The period of the
assignment was coextensive with the bond. The bond remained effective
throughout the period here involved and, hence, so did the assignment. The fact
that the assignment was of property to be afterwards acquired did not affect its
validity as a 'mortgage,' Conard v. Atlantic Ins. Co., 1 Pet. 386, 448, 26 U.S.
386, 448, 7 L.Ed. 189, nor did uncertainty in the amount (not exceeding the
fixed maximum) of the generally identified obligation, so secured, do so. Ibid.
Neither does the fact that the instrument was not recorded under the State's
fraudulent conveyance statutesthus to impart constructive notice to
subsequent purchasers, mortgagees and the likemake any difference here, for
the instrument was valid between the parties to it, and Congress, by 3672(a),
expressly subordinated federal tax liens to antecedent mortgages. The
questioned assignment conveyed to the surety all sums then due and thereafter
to become due under, and for performance of, the then existing subcontract
performance of which was guaranteed by the surety's bondas security for the
payment of sufficiently identified but contingent and unliquidated obligations
which the subcontractor might incur to the surety during the coextensive period
of the bond and the assignment. In these circumstances, I think it is clear that

the assignment was in legal effect a mortgage, completely perfected on its date,
in all respects choate, and valid between the parties; and inasmuch as it
antedated the filing of the federal tax liens it was expressly made superior to
those liens by the terms of 3672(a).
13

For these reasons, I dissent and would affirm the decision and judgment of the
Court of Appeals.

53 Stat. 448 and 449, 26 U.S.C. (1952 ed.) 3670 and 3671, 26 U.S.C.A.
3670, 3671.

53 Stat. 449, as amended by 401 of the Revenue Act of 1939, c. 247, 53 S.Ct.
882, and 505 of the Revenue Act of 1942, c. 619, 56 Stat. 957, 26 U.S.C.
3672(a), 26 U.S.C.A. 3672(a).