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In re Bowen. United States

decided: October 16, 1945.


Author: Goodrich


GOODRICH, Circuit Judge.

The present litigation contains the second and, we trust, the concluding chapter of the story begun in our decision In re Bowen, 3 Cir., 1943, 138 F.2d 22, certiorari denied Baker v. United States, 1944, 320 U. S. 799, 64 S. Ct. 430. Nominally a proceeding in bankruptcy, the controversy involves only a dispute between the United States and a judgment creditor of the bankrupt, named Henry Baker. In the former litigation we held two things. The first was that in spite of the wording of the statute (26 U.S.C.A. Int. Rev. Code, § 3675) the discharge of the Government's tax lien could be attacked if fraudulently obtained. The second thing decided was that the relief sought could be accorded by a court of bankruptcy. Following that decision the case went back to the referee. His orders struck off and vacated the discharge of the federal tax liens from the real estate of the bankrupt, reinstated the liens and instructed that the liens be satisfied and the federal taxes paid out of the funds in the trustee's hands. The District Court reversed, 1944, 58 F. Supp. 286, and the Government appeals.

When we said that a certificate discharging the Government's tax lien could be discharged for fraud we used no decorative or qualifying adjectives in describing the word. But the Government does not now claim that Baker, in making the application under § 3674(b) of the Internal Revenue Code, 53 Stat. 449, 26 U.S.C.A. Int. Rev. Code, § 3674(b), made misstatements of fact which he knew to be untrue. Instead, the argument is that the facts show that Baker was guilty of "constructive" fraud and the discharge of the lien is vulnerable on that basis.

One is conscious at once that this takes one skating on pretty thin ice. The language of the statute says that the "certificate of release * * * shall be held conclusive that the lien * * * is extinguished." Nevertheless, we said that fraud might be shown to void the release, going on what seemed to us then, and still does, the almost universal analogy as to the effect of fraud in transactions generally.

Proof having failed to show actual fraud, in which conclusion we are wholly in accord with the District Court, we are now asked to say that something else will do. That something selse is made to sound like fraud by putting the word "constructive" in front of it. No better illustration could be found of the dangers involved in the slippery use of language. Constructive fraud, of course, is not fraud at all as both lawyers and laymen know and understand the term, but conduct which the courts regard as liability creating and which, therefore, has some of the consequences which actual fraud has. One may say at the outset that this is not the kind of thing being talked about in the former opinion and certainly takes one a long way from any proposition there before the Court in dealing with the effect of peremptory and sweeping statutory language.

As we understand the Government's argument, the constructive fraud comes here because, it says, one who applies to have a tax lien cancelled enters into a relationship with the Government's taxing authorities which is fiduciary in its nature. The relationship is not precisely that of cestui que trust, and trustee, guardian and ward, or principal and agent, but it does involve fiduciary obligations. One of those obligations is to make full disclosure of what the applicant knows or what he could reasonably find out about the subject-matter of the application which he is making. The basis of the existence of this fiduciary obligation is that the Government has not appropriated money to investigate these claims, to hire expert appraisers and otherwise inform itself of the facts on which the discharge is sought. Therefore, it is argued, the duty devolves upon the lien holder.

Every lawyer is familiar with situations where the relationship of the parties is such that affirmative duties from one to the other are owed. If those duties are not performed a claim for damages arises.All this is well known and it is not made any clearer by calling failure to perform the duty constructive fraud when it has nothing to do with fraud at all.

Does an applicant for the removal of a tax lien assume such affirmative obligation? In answering the question it is relevant to look at the language in the Regulation governing the discharge of property from federal tax liens promulgated by the Treasury Department. See T.D. 4446, XIII - 2 Cum. Bull. 578 (1934). Two paragraphs give directions respectively to the applicant and the Collector. As to the applicant the language is:

"Any person desiring that a certificate discharging property from a Federal tax lien be issued under the provisions of section 3186(c)4, should present to the collector of internal revenue charged with the assessment in respect of the tax, a written application requesting that the certificate be issued.Such application should give the reasons for the request, and should clearly describe the property with respect to which the discharge is desired. In support of the request, the applicant must furnish the collector with proof sufficient to establish satisfactorily the fair market value of the property, the amounts, character, and dates (both of execution and of record) of all encumbrances of record prior to the Federal lien, as well as the amount and character of any unrecorded encumbrances believed to be prior to the Federal lien (including information as to how and when all such encumbrances arose). Appropriate references must be made to the pages and volumes of the recording books in which any such encumbrances have been recorded."

As to the Collector it is said:

"The collector should review the proof, check the accuracy of all material statements made, and forward to the Commissioner a report of the case together with his recommendation. The collector's report should include a statement of the expenses of his office incident to the placing and discharging of the lien as well as his conclusions with respect to the fair market value of the property involved and the value of the Government's interest therein, viewed in the light of such fair market value and the amount of liens and encumbrances on the property believed to have priority over the lien of the United States. Information as to the nature and amount of such encumbrances sufficient to enable a determination to be made whether, as a matter of law, they actually have priority over the Government's lien, should be included in the report."

This language does not appear to us to create a situation where all the burden is on the applicant, and in which the Collector is to receive what the applicant gives him and rely on it for whatever action he takes. We think it undoubtedly puts a duty on the Collector for ascertainment of facts and the use of his own judgment in making his decision. We do not find here the sort of situation where, by reason of circumstances, one party is entitled to have from the other the performance of an affirmative obligation to acquire all available information and put it at the disposal of the other.

In the second place, if we should assume, for the purpose of discussion, that the situation between applicant and Collector is one imposing a fiduciary obligation on the applicant, we do ...

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