Farmers & Merchants National Bank v. Schlossberg

MURPHY, Chief Judge. The issue presented in this appeal is the relative priority, in proceedings for distribution of an estate assigned by a debtor for the benefit of its creditors, of a claim of the State for unpaid sales and use taxes, and a security interest perfected before the assignment and before the State’s filing of its lien for the unpaid taxes. I. On December 28,1982, Paramount Interiors, Inc., a Maryland corporation, executed an assignment for the benefit of its creditors by which it transferred all of its assets to Roger Schlossberg as assignee. At the time of the assignment, the Farmers & Merchants National Bank of Hagerstown held a security interest in Paramount’s inventory, equipment, and accounts receivable, including after-ac ⁵¹ quired property and proceeds, securing a loan of which $240,687.09 in principal and interest remained outstanding and upon which interest continued to accrue at the rate of 12V2% per year.

The security interest had been duly perfected on July 19, 1979. Paramount was also indebted to the State of Maryland for unpaid sales and use taxes at the time of the assignment. A lien for these unpaid taxes, plus interest and penalties, in the amount of $3,331.63 was filed against Paramount on December 10,1982, by the Comptroller of the Treasury, Retail Sales Division. On April 15, 1983, the State filed a Prior Preferred Tax Claim against Paramount’s estate in which it increased its allegation of Paramount’s sales and use tax liability, including interest and penalties, to $5,816.37, and further alleged that interest would continue to accrue at the statutory rate of 0.75% per month until the taxes were paid.

Schlossberg, as assignee, filed a Petition for Assumption of Jurisdiction in the Circuit Court for Washington County on December 29, 1982, seeking that court’s assumption of jurisdiction over the distribution of Paramount’s estate; the bank subsequently filed a Consent to Assumption of Jurisdiction. The circuit court (Corderman, J.) granted Schlossberg’s petition and entered an order assuming jurisdiction over the estate. On May 31, 1983, the bank, with the consent of the assignee, petitioned the circuit court to approve a partial distribution to be made to the bank as a secured creditor. The petition recited that the inventory, fixtures, and equipment subject to the bank’s security interest had been sold by the assignee who held net proceeds of $76,630.

The bank sought payment to it of these net proceeds from its security, less $5,000 to be held as a reserve by the assignee to cover certain expenses of administration and the claim of the State of Maryland, if allowed. The circuit court so ordered. ⁵² On July 25, 1984, the bank filed a petition in the circuit court for an order directing Schlossberg to distribute the $5,000 reserve to the bank. The State filed an answer in which it asserted the priority of its claim to this reserve on the basis of Maryland Code (1957, 1980 Repl.Vol.), Article 81, §§ 202(b), 343, and 394. On December 4, 1984, the circuit court entered an order according the State’s claim priority over that of the bank.

The bank filed a timely appeal to the Court of Special Appeals, and we issued a writ of certiorari on our own motion before the intermediate appellate court’s consideration of the case.

II

The bank maintains that its perfected security interest is entitled to priority over the State’s claim for unpaid taxes by operation of §§ 9-201 and 15-102(b) of the Commercial Law Article. 1 Section 9-201 states that “[e]xcept as otherwise provided by Titles 1 through 10 of this article a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors.” Section 1-201(12) defines “creditor” broadly to include “a general creditor, a secured creditor, a lien creditor and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity and an executor or administrator of an insolvent debtor’s or assignor’s estate.” The security agreement between the bank and Paramount provides that, upon default by Paramount, the bank may exercise all of its rights and remedies under Title 9, including taking possession of the collateral and selling it in a commercially reasonable manner. An assignment for the ⁵³ benefit of creditors by Paramount is expressly stated to be an event of default. The security agreement further provides that the proceeds from the sale of the collateral must be applied to satisfy the indebtedness underlying the bank’s security interest, subject only to the prior payment of certain expenses incident to the disposition of the collateral. Nothing in Titles 1 through 10 of the Commercial Law Article provides that such a security agreement is ineffective against the State.

Thus, § 9-201 purports to afford the bank’s antecedent perfected security interest priority over the claim of the State, as a creditor of Paramount. The bank also cites § 15—102(b) of the Commercial Law Article, which, it argues, conflicts with and supersedes the tax statutes relied upon by the State. Section 15-102(b) establishes certain priorities in the distribution of property following an assignment for the benefit of creditors: “The property of an insolvent who makes an assignment for the benefit of creditors or who has his property taken by a receiver under a decree of a court in an insolvency proceeding shall be applied to the following, in the order stated: (1) Costs and expenses of the administration of the trust or insolvency proceeding which the court approves; (2) Wages of an employee and health, welfare, and pension contributions contracted for in place of wages, earned not more than three months before the assignment or institution of the insolvency proceeding; (3) Lien claims of the State, a county, municipal corporation, or other political subdivision of the State perfected or recorded before the assignment or institution of the insolvency proceeding, and claims of persons having judicial liens on property of the insolvent recorded more than four months before the assignment or institution of the insolvency proceeding; (4) Unsecured claims of individuals, to the extent of $900 for each individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the ⁵⁴ purchase of services, for the personal, family, or household use of the individuals, that were not delivered or provided; (5) Rent for any interest in real property in the State due not more than three months before the execution of the assignment or institution of the insolvency proceeding; (6) Charges in connection with the transportation of goods advanced by one common carrier to another on behalf of a consignor or consignee not more than three months before the assignment or institution of the insolvency proceeding; (7) Taxes not included, in paragraph (3) of this subsection; and (8) Claims of unsecured creditors.” (Emphasis added.) The bank maintains that, although § 15-102(b) is silent as to the relative priority of a perfected security interest, such an interest has priority, implicitly, over all the claims listed in this section. Since paragraphs 3 and 7 of § 15-102(b) purport to provide for the priority of all state tax claims, the bank concludes that its security interest must have priority over the State’s claim in this case.

The State contends that, notwithstanding §§ 9-201 and 15-102(b) of the Commercial Law Article, its claim for unpaid taxes is entitled to priority over the bank’s perfected security interest by reason of §§ 202(b), 343, and 394 of Article 81. 2 Section 202(b) states that “[wjhenever a sale of either real or personal property of a corporation, from which State taxes, are due and payable, shall be made by any sheriff, constable, trustee, receiver or other ministerial officer, under judicial process or ⁵⁵ otherwise, all sums due and in arrears for State taxes from the corporation whose property is sold shall be first paid and satisfied, after the necessary expenses incident to the sale____” Sections 343 and 394 apply, respectively, to claims for state sales and use taxes, and contain the following identical language: “Whenever the business or property of any person subject to tax under the terms of this subtitle shall be placed in receivership, bankruptcy or assignment is made for the benefit of creditors, or if said property is seized under restraint for property taxes, all taxes, penalties and interest imposed by this subtitle for which said person is in any way liable shall be a prior and preferred claim. No sheriff, receiver, assignee or other officer shall sell the property of any person subject to tax under the terms of this subtitle under process or order of any court without first determining from the Comptroller the amount of any taxes due and payable by said person, and if there be any such taxes due, owing or unpaid it shall be the duty of such officer to first pay to the Comptroller the amount of said taxes out of the proceeds of said sale before making any payment of any moneys to any judgment creditor or other claimants of whatsoever kind or nature.” None of these three sections of Article 81 creates a lien for unpaid taxes, and each purports to afford tax claims priority whether or not the claims have been reduced to liens. See Vermont Fed. S. & L. v. Wicomico Co., 263 Md. 178, 184-85 , 283 A.2d 384 (1971); Wethered, Tr. v. Alban Tractor, 224 Md. 408, 417 , 168 A.2d 358 , cert. denied, 368 U.S. 830 , 82 S.Ct. 53 , 7 L.Ed.2d 33 (1961).

III

As the State points out, § 15-102(b) does not expressly provide for the priority of a perfected security interest in proceedings following an assignment for the benefit of creditors. If the bank’s interpretation of § 15-102(b) is incorrect, and its security interest does not have priority ⁵⁶ over the claims there enumerated, then § 15-102(b) is not implicated in this case and it would become unnecessary for us to consider any possible conflict between this statute and the tax statutes relied upon by the State. As a threshhold matter, therefore, we address the bank’s interpretation of § 15-102(b). Statutes governing creditors’ rights in insolvency proceedings are in pari materia.

See Allegaert v. Chemical Bank, 657 F.2d 495, 502 (2d Cir.1980); In re Schlageter, 319 F.2d 821, 822 (3d Cir.1963); Quinn v. Voorhees, 194 Kan. 574 , 400 P.2d 986, 991 (1965); Seaboard Finance Company v. Barnes, 378 Mich. 627 , 148 N.W.2d 756, 759 (1967). As such, they must be interpreted with reference to one another and harmonized to the extent reasonably possible. See Bridges v. Nicely, 304 Md. 1, 10 , 497 A.2d 142 (1985); Willis v. State, 302 Md. 363, 375 , 488 A.2d 171 (1985); Unnamed Physician v. Comm’n, 285 Md. 1, 10 , 400 A.2d 396 (1979); 2A N. Singer, Sutherland on Statutes and Statutory Construction § 51.02, .03 (rev. 4th ed.1984). This principle applies regardless of whether the statutes were enacted at different times and without reference to one another.

See Management Personnel Serv. v. Sandefur, 300 Md. 332, 341 , 478 A.2d 310 (1984); Hope v. Baltimore County, 288 Md. 656, 666 , 421 A.2d 576 (1980); Dep’t of Nat. Resources v. France, 277 Md. 432, 461 , 357 A.2d 78 (1976). As already discussed, § 9-201 makes a valid security agreement “effective according to its terms” against all creditors unless another provision in Titles 1 through 10 of the Commercial Law Article provides to the contrary. See Guy Martin Buick, Inc. v. Colorado Springs Nat.

Bank, 32 Colo.App. 235 , 511 P.2d 912, 914 (1973), aff'd, 184 Colo. 166 , 519 P.2d 354 (1974); Walter E. Heller & Company, Inc. v. Salerno, 168 Conn. 152 , 362 A.2d 904 passim (1975); Citizens Nat. Bank, etc. v. Mid-States Dev. Co., 177 Ind. App. 548 , 380 N.E.2d 1243, 1248 (1978); Salzer v. Victor Lynn Corporation, 114 N.H. 29 , 315 A.2d 185, 186 (1974); ⁵⁷ 8 R. Anderson, Uniform Commercial Code § 9-201:5 (1985); J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code § 25-2 (2d ed.1980).

We think the definition of “creditor” in § 1-201(12), quoted earlier, is broad enough to encompass the State’s relationship to Paramount arising from Paramount’s state tax liability. Although we are aware of no cases in which the applicability of this definitional provision to governmental entities has been considered, other courts have uniformly held federal, state, and local governments to which taxes or other obligations were owed to be “creditors” in the context of other commercial law statutes. See, e.g., United States v. Fernon, 640 F.2d 609, 613 (5th Cir.1981) (federal government’s claim for tax deficiencies made it a “creditor” for purposes of Florida’s fraudulent conveyances statute); In re Columbia Tobacco Co., 121 F.2d 641, 643 (2d Cir.1941) (tax claims of state and city made them “creditors” for purposes of federal bankruptcy statute); Edmundson v. Scofield, 92 F. Supp. 91, 95 (S.D.Tex.1950) (federal government’s lien for unpaid taxes made it a “creditor” for purposes of Texas’ lien recordation statute); Crabb v. Estate of Mager, 66 A.D.2d 20 , 412 N.Y.S.2d 508, 510 (N.Y.App.Div. 1979) (where county department of social services had claim against decedent’s estate for medical assistance benefits, county commissioner was a “creditor” for purposes of New York’s fraudulent conveyances statute); Lindstrom v. Spicher, 53 N.D. 195 , 205 N.W. 231, 233 (1925) (county’s claim for unpaid taxes made it a “creditor” for purposes of North Dakota’s bulk sales statute); State v. Bean, 218 Or. 506 , 346 P.2d 652, 655 (1959) (where state department of labor had been assigned claim for unpaid wages, state commissioner was a “creditor” for purposes of federal bankruptcy statute). Cf.

Rockower Bros. v. Comptroller, 240 Md. 379, 392 , 214 A.2d 581 (1965) (holding that a vendor stands in the relationship of debtor to the State with respect to sales tax liability). The security agreement between the bank and Paramount purports to grant the bank’s perfected security interest ⁵⁸ priority over all creditors, after payment of the costs incident to the disposition of the collateral, and nothing in Titles 1 through 10 vitiates this grant of absolute priority. Thus, § 9-201, read literally, would provide the bank’s perfected security interest with priority over all the claimants listed in § 15-102(b). Nothing in § 15-102(b) addresses the priority of the claims there enumerated in relation to an antecedent perfected security interest.

Several statutory provisions, however, clearly mandate that the claim of an assignee for the benefit of creditors is subordinate to an antecedent perfected security interest. As indicated earlier, §§ 9-201 and 1-201(12) make a security agreement providing absolute priority to an antecedent perfected security interest effective against an assignee for the benefit of creditors. Similarly, § 9-302(l)(g) provides that an assignee’s claim is perfected as of the date of the assignment, and § 9-312(5)(a) states that conflicting security interests rank according to priority in time of perfection. Finally, § 15-101(d) specifies that the assignee’s rights in the assigned assets, as of the date of the assignment, are limited to those of a judgment creditor, a creditor with an unsatisfied execution, and a lien creditor. 3 The claims of such creditors are made subordinate to an antecedent perfected security interest by operation of § 9-201. 4 ⁵⁹ In light of these statutory provisions, it is patent that the rights of a secured party with an antecedent perfected security interest are never conveyed to the assignee, and that only the equity of the debtor in the collateral, if any, is part of the fiduciary estate available for distribution.

Cf. Citizens Nat. Bank, etc. v. Mid-States Dev. Co., supra, 380 N.E.2d at 1246 (1978) (collateral in which secured party had antecedent perfected security interest held not to be part of debtor’s estate in bankruptcy).

Section 15-102(b) applies by its terms only after the assignment has been made, and it is therefore manifest that the claims there enumerated are to be satisfied, from the fiduciary estate. We conclude that § 15-102(b) and § 9-201 are readily harmonized, and that the claims afforded priority by § 15-102(b) are subordinate to an antecedent perfected security interest. An examination of the law governing assignments for the benefit of creditors, as it existed when what is now § 15-102(b) was enacted and subsequently amended, leads us to the same conclusion. It has long been the law in Maryland that an assignee for the benefit of creditors takes the assigned assets subject to all the equities against the assignor.

See, e.g., Plitt v. Stevan, 223 Md. 178, 183 , 162 A.2d 762 (1960); Kellas & Co. v. Slack & Slack Co., 129 Md. 535, 540 , 99 A. 677 (1916); Tyler v. Abergh, 65 Md. 18, 20 , 3 A. 904 (1886). In other words, the assignee obtains the assignor’s property subject to existing liens and encumbrances. See Richardson v. Anderson, 109 Md. 641, 645-46 , 72 A. 485 (1909); G. Ober & Sons Co. v. Keating, 77 Md. 100, 102 , 26 A. 501 (1893). Thus, in Plitt, supra, this Court stated that, when a valid, duly recorded chattel ⁶⁰ mortgage exists on an asset assigned for the benefit of creditors, the assignee takes the asset subject to the chattel mortgage.

A corollary of the principle stated above is that the assignee succeeds only to the rights of the assignor. See Kellas & Co., supra, 129 Md. at 540 , 99 A. 677 ; Tyler, supra, 65 Md. at 20 , 3 A. 904 . Since the assignee, therefore, never obtains the property rights validly transferred by the assignor to third parties prior to the assignment, such property rights do not become part of the fiduciary estate. Applying this principle in Nat.

Surety Co. v. State, 152 Md. 71 , 136 A. 274 (1927), the Court explained that the assignee, who had sold assigned property upon which an antecedent mortgage existed, was required to satisfy the outstanding mortgage before accepting the purchase price as part of the fiduciary estate. 152 Md. at 78-79 , 136 A. 274 . Similarly, in Union Bank v. Mechanics’ Bank, 80 Md. 371 , 30 A. 913 (1895), the Court observed that “[t]he creditor who holds collateral securities for his claim, has the advantage over other creditors to the extent of their value, or what he may realize upon them,” and, furthermore, that the creditor could participate with the other creditors in the pro rata distribution of the estate to the extent of any deficiency. 80 Md. at 382-83 , 30 A. 913 . See also 6 Am.Jur.2d Assignments for the Benefit of Creditors § 18 (1963) (debtor may not assign greater interest in property than that he possesses). We presume that the legislature was aware of this body of case law when it enacted and subsequently amended what is now § 15-102(b).

See City of Baltimore v. Hackley, 300 Md. 277, 283 , 477 A.2d 1174 (1984); Board of Educ., Garrett Co. v. Lendo, 295 Md. 55, 63 , 453 A.2d 1185 (1982); Williams v. State, 292 Md. 201,