United States v. City of New Britain

Background

A corporation’s real property in New Britain, Connecticut was sold after two mortgages were foreclosed, producing $28,071.24. Claims against that fund totaled about $31,000, including sale expenses, the two mortgages, a recorded judgment, city tax and water-rent liens totaling $3,587.71, and federal tax liens of $8,475.13 for unpaid withholding and unemployment contributions. The state trial court and the Connecticut Supreme Court put the city’s liens ahead of the United States, and the United States appealed to this Court.

Reasoning

The Court examined federal and state statutes and earlier decisions and concluded that federal tax liens created by §3670 do not automatically outrank or fall behind every state lien. Instead, the controlling rule is “first in time is first in right”: priority depends on when each statutory lien attached to the particular property and became choate. The opinion explained that an insolvency rule in federal law can give absolute federal priority in some cases, but insolvency was not shown here. The Court rejected the view that a federal provision about mortgages and judgments makes federal liens generally subordinate to other state interests. The Court therefore vacated the state court judgment.

Real world impact

The case was sent back to the Connecticut court to decide, by looking at the dates each lien attached, which claims get paid first from the foreclosure proceeds. That means municipalities, mortgagees, judgment creditors, and the federal government must rely on attachment dates and the courts’ factual findings to determine who is paid from a limited fund. The ruling sets a timing rule rather than automatically favoring state or federal claimants.