United States v. Liverpool & London & Globe Insurance

Background

A furniture dealer in Texas suffered a fire and his insurers agreed on the loss payment. Before the insurance money was paid, a business that he owed sued and obtained a garnishment on the insurance proceeds. The Internal Revenue Service later recorded assessment lists and filed notice of tax liens for unpaid federal taxes. The insurance company paid the disputed funds into court, and the state court and a federal appeals court held the creditor’s garnishment lien was prior and allowed a $500 attorney’s fee to the insurance company.

Reasoning

The main question the Court decided was which claim comes first: the federal tax liens or the creditor’s garnishment of insurance proceeds. Relying on earlier Supreme Court authority, the Court held the United States’ tax liens are superior to the private garnishment lien. The Court also explained that the state rule allowing the garnishee’s fee to be paid out of the funds did not make that fee superior to the government’s lien. Because the federal tax lien is prior, the payment of the garnishee’s attorney fee before satisfying the tax lien was an error; the costs and fees should be charged against the defendant under the state rule.

Real world impact

The decision means federal tax claims must be paid before private creditors can take attached insurance money. Creditors who garnish insurance proceeds cannot insist that a garnishee’s attorney fee be paid out ahead of the Government’s tax lien. Insurance companies and courts must treat federal tax liens as superior when distributing such funds.