
    Buffalo Savings Bank, Appellant, v. Beverly Victory, Individually and as Administratrix of the Estate of Joseph Victory, Deceased, et al., Defendants, and United States of America, Respondent.
    Argued November 30, 1961;
    decided February 22, 1962.
    
      
      John H. Little and De Witt Clinton for appellant.
    I. The United States has consented to be bound by New York practice in this foreclosure action. II. The Neiv Britain doctrine does not apply to New York mortgage foreclosure procedure. III. The foreclosure judgment of October 20, 1960, directing the payment of real estate taxes as an expense of sale, reversed by the Appellate Division by its order of May 9, 1961, was a proper judgment because the tax lien of defendant, United States of .America, could only attach to the surplus moneys left .from the proceeds of the foreclosure sale after the payment therefrom, as an expense of the sale, of local taxes and assessments. (Emigrant Ind. Sav. Bank v. Goldman, 75 N. Y. 127; 
      Frank v. Davis, 135 N. Y. 275; Sautter v. Frick, 229 App. Div. 345, 256 N. Y. 535; Matter of Lobbett v. Galpin, 228 App. Div. 65; Ætna Cas. & Sur. Co. v. United States, 4 N Y 2d 638; Matter of City of New York [United States of America — Coblents], 11 A D 2d 240, 5 N Y 2d 300, 363 U. S. 841; United States v. Durham Lbr. Co., 363 U. S. 522; City of New York v. United States, 283 F. 2d 829; Aquilino v. United States, 10 N Y 2d 271; United States v. Wasserman, 257 F. 2d 491; Rikoon v. Two Boro Dress, 9 Misc 2d 591, 8 A D 2d 986, 9 A D 2d 783, 7 N Y 2d 711.) IV. The foreclosure judgment of June 9, 1959, directing a sale subject to real estate taxes, reversed by order of the Appellate Division, dated June 29, 1960, and the foreclosure judgment of October 20, 1960, directing the payment of taxes as an expense of sale, reversed by order of the Appellate Division, dated May 9, 1961, were both proper judgments since the method of foreclosure is governed by the law of lex rei sitae. (Bank of America v. United States, 363 U. S. 237; United States v. Brosnan, 363 U. S. 237.) V. Federal tax liens attach to the equity of the taxpayer in mortgaged property subject to the burden of local real property taxes and assessments. (United States v. Bond, 279 F. 2d 837; Borock v. City of New York, 268 F. 2d 412.)
    
      John T. Curtin, United States Attorney in and for the Western District of New York (C. Donald O’Connor of counsel), for respondent.
    I. Federal law requires that the Federal tax lien be given priority over subsequently accruing local real estate taxes. (Buffalo Sav. Bank v. Victory, 11 A D 2d 158; United States v. New Britain, 347 U. S. 81; Brown v. General Laundry Serv., 19 Conn. Supp. 335; United States v. Christensen, 269 F. 2d 624; United States v. Bond, 279 F. 2d 837, 364 U. S. 895; First Nat. Bank of Chippewa Falls v. Henneman Co., 10 Wis. 2d 260, 364 U. S. 836; United States v. Wasserman, 257 F. 2d 491; Kronenberg v. Ellenville Nurseries & Greenhouses, 22 Misc 2d 247; Rikoon v. Two Boro Dress, 9 Misc 2d 591, 9 A D 2d 783, 7 N Y 2d 711; Matter of City of New York [United States of America—Coblents], 11 A D 2d 240; Metropolitan Life Ins. Co. v. United States, 9 A D 2d 356; United States v. City of New York, 233 F. 2d 307; Stadelman v. Hornell Wordworkmg Corp., 172 F. Supp. 156; Dunkirk Trust Co. v. Dunkirk Laundry Co., 17 Misc 2d 298.) II. The doctrine of the New Britain case (347 U. S. 81) has not been modified by recent United States Supreme Court decisions. (Aquilino v. United States, 363 U. S. 509; United States v. Durham Lbr. Co., 363 U. S. 522; United States v. Brosnan, 363 U. S. 237; United States v. Chapman, 281 F. 2d 862; Matter of Gruner, 295 N. Y. 510; Michigan v. United States, 317 U. S. 338; United States v. City of Greenville, 118 F. 2d 963; Wesselman v. Engel Co., 309 N. Y. 27; United States v. John Hancock Mut. Life Ins. Go., 364 U. S. 301.) III. The judgment prescribed by the Appellate Division, Fourth Department, in this case is one authorized by New York law and is designed to equitably adjust the rights of the parties.
    
      Thomas G. Rickert for Erie County Savings Bank, amicus curiæ.
    
    I. Plaintiff in this action was entitled to summary judgment. (Aquilino v. United States, 3 N Y 2d 511, 4 N Y 2d 869, 4 N Y 2d 879, 363 U. S. 509, 9 N Y 2d 901.) II. The decision in United States v. New Britain (347 U. S. 81) is necessarily involved in the disposition of this appeal. III. The County Court judgment directing the payment of the local taxes as expenses of the foreclosure sale is in accordance with the decision in the Neiv Britain case. (Brown v. General Laundry Serv., 19 Conn. Supp. 335; First Nat. Bank of Chippewa Falls v. Henneman Co., 10 Wis. 2d 260, 364 U. S. 836; City of Dallas v. Tubbs Mfg. Co., 246 F. 2d 141, 355 U. S. 868, 355 U. S. 920; Matter of Lieb Bros., 251 F. 2d 305; Wesselman v. Engel Co., 309 N. Y. 27.) IV. The decision in United States v. Brosnan (363 U. S. 237) sanctioned the payment of unpaid local taxes prior to the payment of the Federal tax lien. V. The doctrine of the New Britain case, as modified by more recent decisions, even if applicable, does not prohibit the judgment of the County Court reversed by the Appellate Division. (Aquilino v. United States, 3 N Y 2d 511; United States v. Durham Lbr.Co., 363 U. S. 522.) VI. Considerations of equity and fairness support the County Court judgment reversed by the Appellate Division.
   Burke, J.

The issue here is whether the payment of local real estate taxes and assessments as expenses of sale, rather than the application of that amount toward the payment of a Federal lien filed against the mortgagor prior to the accrual of local taxes, disregards the alleged right of the tax lien of the United States to prior payment.

We find that the Federal tax lien is not entitled to priority over subsequently accrued local tax liens—superior to the mortgage debt — since the respective liens are not comparable charges on real property and the ‘ mortgagee ’ ’ has an absolute preference over Federal liens.

Plaintiff commenced this action in October, 1958 to foreclose its real property mortgage given by Joseph B. Victory, dated and recorded April 5, 1946. At the time of verification of the complaint there was a balance due on the bond of $1,473.75, with interest at the rate of 5%' per annum from January 10, 1958. The United States was made a party because of a tax lien it filed in the Erie County Clerk’s office January 15, 1953 against the mortgagor, since deceased. Its answer stated a balance due on the lien of $689.07, plus interest. Plaintiff did not advance any sums for payment of local real property taxes and assessments, which became liens upon the land on and after July 1,1957.

The mortgagee moved for summary judgment providing that the premises be sold free of the United States tax lien, but subject to all real property taxes and assessments. This motion was granted by the Brie County Court. On appeal by the respondent, the Appellate Division reversed and remitted the case to the County Court, stating that the discretionary authority to have the property sold subject to all local real estate taxes “ may not properly be exercised in a case such as this in which there is a problem of circular priorities” (11AD 2d 160). Thereafter the County Court once more granted summary judgment in favor of the mortgagee providing that the premises be sold and directing that the Referee “ shall, as a part of the expenses of the sale, pay out of the proceeds of said sale all real estate taxes, assessments and water rates which are liens upon the property sold, and redeem the property sold from any sales for unpaid real estate taxes, assessments or water rates which have not apparently become absolute ’ ’. The judgment further foreclosed all rights, liens, and equities of redemption in the premises, except as to the one-year period of redemption granted to the United States by section 2410 of title 28 of the United States Code.

On appeal by the United States, the Appellate Division modified the judgment by providing that “ the rule of priorities laid down in United States v. New Britain (347 U. S. 81) applies ” (13 A D 2d 208), and that the local tax liens were not to be paid as expenses of the sale.

The appellant mortgagee contends that the foreclosure procedure of New York is determined by our State law and that a direction to pay local taxes and assessments as expenses of the sale was a proper direction within section 1087 of the New York Civil Practice Act. The United States contends that this court is barred from reaching a determination reversing' the Appellate Division and affirming the judgment of Erie County Court. (United States v. New Britain, 347 U. S. 81.)

Although the United States Supreme Court in recent years has passed on the question of priority of liens and the resulting effect upon mortgagees, their decisions provide no clear command governing us here.

The case of United States v. New Britain (supra) is distinguishable from the present case.

There the Supreme Court assumed, in the posture of the case as it reached that court, that the contest was between the local government and the Federal Government over their respective rights in surplus funds.

In the usual case, as here, however, the state of facts shows that the dispute is really between the mortgagee and creditors of the mortgagor. The debts of the mortgagor obviously can only be satisfied out of such equity in the real property as the mortgagor may have. When the property is sold in foreclosure, the equity of the mortgagor is extinguished except in the event the bid provides a surplus. Any interest of the mortgagor is fully protected. The mortgagor can bid at the sale, bring surplus money proceedings and resist a deficiency judgment by adducing proof that the value of the property exceeded the bids. In New York State the local government is not paid out of the surplus as the mortgage is subject to its liens, but the Federal Government as a creditor of the mortgagor can look only to the surplus for the satisfaction of its lien. The local government lien is not a levy against the mortgagor, but against the land and must be paid together with other costs from whatever funds the sale of the land produces before (if there were no creditors of the mortgagor) any claimed interest of the mortgagor could be asserted. Our State law has not characterized the nature and extent of the Federal tax lien, but has determined the nature and extent of the property interests of the taxpayer (admittedly a State function), which in the case of real property is conditioned upon the payment of annually recurring govermental land taxes, the payment of which may not be avoided by a forclosure sale. Of course, the Federal Government’s claim, which is based on the claimed interest of the mortgagor, can have no better standing, that is, the Federal lien is also to be paid when there is a surplus in which the mortgagor would have an interest. It would manifestly be unjust to require a mortgagee to pay a creditor of a mortgagor when it appears that the mortgagor had no equity in the real property.

In the New Britain suit (supra) the court, at the outset, held that the contestants were vying over rights to funds which were considered as surplus. Federal liens securing unpaid withholding and unemployment taxes and insurance contributions owed by the mortgagor attached to his interest in the property subsequent to two mortgages and a judgment hen, but prior to city liens for unpaid real estate and water taxes. Connecticut law provided that the statutory liens for real estate taxes and water rent took precedence over all other liens or incumbrances. Mr. Justice Mixtox, speaking for the court, conceding that the mortgagee had a preference, stated at pages 85-86: “It does not follow, however, that the City’s liens must receive priority as a whole. We believe that priority on these statutory liens is determined by another principle of law, namely, ‘ the first in time is the first in right. ’ * * * We think that Congress had this cardinal rule in mind when it enacted § 3670, a schedule of priority not being set forth therein. Thus, the priority of each statutory lien contested here must depend on the time it attached to the property in question and became choate.”

Although it may have been the clear intent of Congress that this Federal tax lien have a priority determined by the timeliness with which it attached to the interest of the mortgagor in the real property, New Britain does not indicate that it was the intent of Congress to upset established State procedures in foreclosure actions or curtail the absolute preference granted to mortgagees. The statement (p. 88) that “ The United States is not interested in whether the State receives its taxes and water rents prior to mortgagees and judgment creditors ” is far too removed, in the light of the real issue here, from the court’s interpretation of congressional intent to have any relation thereto.

Not to be lost sight of in its discussion of the relative priority of the liens is the court’s statement that Congress intended to assert the Federal lien ‘‘ as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors.” (United States v. New Britain, 347 U. S. 81, 88, supra; italics supplied.) The Supreme Court there recognized that the mortgagor’s interest in the proceeds of the foreclosure sale, and consequently the United States lien, reaches only surplus moneys.

But such surplus funds cannot be created by the judgment, for they are the moneys paid for the land in excess of the amount decreed in the judgment. A judgment which omits an item of sale expense in order to create a surplus fund to which subsequent liens can attach violates the statute. Rights of lienors in surplus funds are to be protected, but the law of this State cannot be subverted to create a surplus where none might otherwise exist. Our State law does not prevent such lienors from bidding at a foreclosure sale in order to protect their nens; but, inasmuch as they are not forced to bid a sum which will create a surplus, it would be inequitable to force the foreclosing mortgagee to bid an inflated price creating a surplus through the scheme of “ circular priorities ”.

In this case the respondent’s claim that its lien, founded on the interest of the defaulting mortgagor in the real property, should be granted a priority over the lien on the land, concededly superior to not only the mortgagor’s interests in the realty but the mortgagee’s interest as well, depends on the obviously fallacious contention that the lien of the municipality upon the land is akin to the lien of the Federal Government as a creditor of the mortgagor. The plain answer is that the Federal Government is only the creditor of a debtor whose interest in the land is subordinate to the local government lien, which need not be reduced to judgment nor perfected by a filing in the County Clerk’s office. As a lien for taxes for essential services supplied for the benefit of the land, it attached directly to the particular parcel of real property. The Federal lien was filed in the Clerk’s office against a presumed equity in the real property held by the mortgagor. This respondent imagines a surplus, which is as yet nonexistent, against which it would press a lien arising from a debt owed to it by the mortgagor. But in a foreclosure suit the equity of the mortgagor upon which a Federal lien depends should be established according to law, not by an ipse dixit.

The real estate tax and water-rent liens are not liens which attach to the property merely because of an unconnected indebtedness of the owner of the land, as are Federal tax liens, The property itself, in its very nature as land, incurs the indebtedness. It matters not who owns the land for, even if the United States in foreclosing its lien had a Receiver appointed to sell the land, the property could not have been transferred free and clear of the local tax liens attaching while the United States was in possession (see Borock v. City of New York, 268 F. 2d 412).

Thus, the circumstances in the present case are quite different from those assumed in United States v. New Britain (supra). The question is not ‘ ‘ the relative priority of statutory federal and municipal liens to the proceeds of a mortgage foreclosure sale of the property to which the liens attached ” (United States v. New Britain, supra, p. 82), but whether the payment of the Federal lien filed against the mortgagor should be mandated where there is no evidence that the mortgagor has a financial interest at the time of foreclosure. Here we are faced with the true parties in interest—the mortgagee and the Federal Grovernment. Under New York law no funds are deemed surplus until the expenses of the sale, the costs of the action and the amount of the foreclosed mortgage debt plus interest have been fully paid. (Civ. Prac. Act, § 1082). The procedure in this State requires the officer conducting the foreclosure sale to pay out of the proceeds all taxes, assessments and water rates which are liens on the property, unless the judgment directs otherwise. These payments are expenses of the sale by statute. Therefore, the question of what, if any, financial interest the mortgagor-taxpayer had on which the Federal Government had a lien can only be determined under the State law after the foreclosure sale.

The procedure adopted by the Appellate Division does not follow New York State procedure. Up to the present time the expenses of sale have always been determined by State, rather than Federal, law, and even the judgment in New Britain (Brown v. General Laundry Serv., 19 Conn. Supp. 335) recognized that the expenses of sale have priority over any other claim to the moneys realized on the sale. Certainly precedent demands that we should reaffirm the principle that State procedures govern.

Moreover, the Supreme Court in a recent decision has allowed State law to control the procedure of foreclosure and payment of liens. In United States v. Brosnan (264 F. 2d 762, affd. 363 U. S. 237) Federal tax liens attached to property subject to a purchase-money mortgage, but prior to local tax liens. Upon default in payment of the mortgage, the mortgagee caused a confession of judgment to be entered on the bond. A writ of fieri facias for the sale of the property issued to the Sheriff. The United States was not a party to this action. ‘ The sheriff held the sale of the property on January 3, 1956; it was bid in by Brosnan and Jacob [assignees of the mortgagee] for $6,203 and, it is presumed, the discharge of the mortgage indebtedness. The amount of the hid went to satisfy costs of the sale, and for various outstanding local taxes.” (264 F. 2d, p. 764; emphasis supplied.)

More than a year later the United States brought an action to enforce its lien, but the District Court (164 F. Supp. 357) and the Court of Appeals for the 3d Circuit (264 F. 2d 762, supra) held that the junior lien of the Government was extinguished even though the United States had not been joined as a party. The Supreme Court affirmed the determinations below (363 U. S. 237). The opinion was replete with references to State law and procedure — something not found in New Britain.

The Supreme Court’s attention was drawn to the fact that Pennsylvania gave its own tax liens more favorable treatment than it rendered the Federal liens at pages 25 to 27 of the United States’ brief: Indeed, Pennsylvania law itself treats state tax liens more favorably than federal tax liens. A Pennsylvania statute provides that ‘ The lien of all taxes * * * against any real estate within this Commonwealth shall be divested by any judicial sale of such land: Provided, The amount of the purchase money shall equal the amount of the said taxes ’ (Purdon’s Penna Statutes Annotated, Title 53, Section 7104, Appendix, infra, p. 36). While Pennsylvania law permits discharge of a junior lien on realty through foreclosure of a prior mortgage at a sheriff’s sale, the Commonwealth’s liens may be divested only to the extent permitted by statute [eases cited]. Thus, under Pennsylvania law the state’s tax lien will be discharged through foreclosure only if the state’s tax claim is paid in full out of the proceedings. The decision below holds, however, that the same foreclosure proceeding wipes out the federal lien even though the United States receives not a single penny toward payment of its claim. ’ ’

The dissent makes it clear that the objection to Pennsylvania procedure in extinguishing the lien of the Federal Government was not that it was done according to State procedure, but that Pennsylvania procedure did not provide for notice to junior lienors (363 U. S. 261).

Although the main facet of the Brosnan case was a sanction of Pennsylvania’s procedure, whereby the United States was not required to be a party to the action in order to extinguish its lien, the affirmance also necessarily sanctioned that State’s procedure of paying local taxes out of the proceeds of the sale without the necessity of creating a surplus with which to pay liens prior to the local tax liens. (Purdon’s Pennsylvania Statutes Ann., tit. 53, §§ 7103-7105.) This is a departure from the holding in the New Britain case, as that case is construed by the respondents. The Supreme Court in Brosnan also gave effect to the preference accorded to mortgagees by State and Federal law, and the decision tends toward the principle stated in the dissenting opinion of Haynswoeth, J., in United States v. Bond (279 F. 2d 837, 848, cert. den. 364 U. S. 895).

According to respondent’s reasoning, the mortgagee, concededly not under any obligation to pay the Federal lien on the interest of the mortgagor at the time the lien was filed, becomes obligated when it bids in at the foreclosure sale simply because the mortgagee as bidder under State law must bear the cost of unpaid local taxes on the land falling due subsequent to the filing of the Federal lien. This imposition of liability is justified on the assumption that at the time of foreclosure the undetermined financial interest of the mortgagor has a value at least equal to the amount of the unpaid taxes which fell due subsequent to the filing of the Federal lien.

The circumstances present in the case of the foreclosure of a real estate tax lien by a municipality illustrate best the paradoxical result of the application of the rule respondent asserts. Under that rule the municipality which is foreclosing the tax lien for local taxes, which accrued subsequent to the filing of a tax lien filed against the equity of the property owner, shall be obligated to discharge the Federal tax lien in order to secure a clear title. But the interest of such a property owner obviously is worthless, since neither the property owner nor the public would bid on the tax lien which the municipality ultimately had to foreclose. In spite of this evidence of lack of value, the respondent would contend that the Federal lien has a priority because the nonexistent financial interest of the property owner cannot be diminished by giving priority to local taxes accrued subsequent to the filing of the Federal lien, and that, therefore, the municipality must satisfy the Federal lien. In other words, the financial interest of the property owner which was nil develops value through the default of the property owner on local taxes. This nonsequitur had to be resorted to because respondent realizes its lien is not a lien on the land, but is only a lien on the equity of the owner. Therefore, it had to invent an equity which the owner could be said to possess at the time of the foreclosure in order to avoid the controlling State law which provides that the nature and extent of the property interests of a defaulting mortgagor can only be determined after a foreclosure sale conducted according to the State laws. The patent infirmity of this contrivance explains why the respondent has improperly invoked a canon, in a matter involving disparate liens, which is relevant only to the relationships of kindred liens, i.e., “ the first in time is the first in right

Such a rule, if accepted now, would adversely affect the credit rating of all municipal bonds which are marketed on the assumption that local taxes are a first lien on the land within the municipality. It would also impair the borrowing power of municipalities because it makes the municipality liable for the personal debts a tax delinquent property owner owes to the Federal Government. Finally, it would cloud the title of properties which the municipalities have resold after acquisition through tax lien foreclosures.

The logic of the respondent appears to be as circular as the type of priority that it would have this court stamp with approval. The procedure that it proposes is novel to this State. Were local taxes not owing upon the land, the United States could not, through its own admissions, compel the creation of a surplus in which its lien would share with the judgment creditors. Is it logical that the Federal Government should be entitled to compel the mortgagee to treat the amount of real estate taxes subsequently accruing as a surplus to be applied toward payment of the Federal lien?

To accede to this attempt to foist the personal debts of the mortgagor owing to the United States on the mortgagee is to agree to the imposition of an indirect tax on savings banks who have invested billions of dollars in mortgages and on the savings of our citizens invested in mortgages which have been accorded a preference even under Federal law (U. S. Code, tit. 26, § 6323, subd. [a]). If the preference is to be whittled down, it should be done explicitly by a statute enacted by the representatives of the States in the national Congress and not by the courts.

The direction in the resettled judgment of foreclosure that the Referee should pay the real estate taxes, assessments and water rates out of the proceeds of the sale as expenses of the sale is not only in conformity with State law (Civ. Prac. Act, § 1087), but is also in keeping with the preference conferred on the mortgagee by State and Federal law protecting ‘ ‘ all those rights which the Congress must have known the mortgagee commonly and usually possesses ” (United States v. Bond, 279 F. 2d 837, 851, supra). Being the proper procedure of this State, the resettled judgment of foreclosure of October 20, 1960 should be affirmed.

The judgment of the Appellate Division, entered June 13, 1961, should be reversed, and the judgment of the County Court, Erie County, entered October 20,1960, reinstated, without costs.

Fuld, J. (dissenting).

By its present decision, the court Is holding that a Federal tax lien filed against a mortgagor prior to the accrual of local real estate taxes and assessments—which are superior to the mortgage debt — is not entitled to priority over those subsequently accrued local liens. I cannot agree. In my view, the conclusion reached by the majority stands opposed to controlling authority. (See United States v. New Britain, 347 U. S. 81; see, also, United States v. Bond, 279 F. 2d 837 [4th Cir.]; United States v. Christensen, 269 F. 2d 624 [9th Cir.]; Stadelman v. Hornell Woodworking Corp., 172 F. Supp. 156 [U. S. Dist. Ct., W. D. N. Y.]; United States v. Lord, 155 F. Supp. 105 [U. S. Dist. Ct., N. H.]; Union Central Life Ins. Co. v. Peters, 361 Mich. 283.) Nor may the impact of such authority be avoided by having the State, through legislative enactment or court decision, label local taxes and assessments “expenses of the sale”, that is, of the mortgage foreclosure sale following the action brought by the mortgagee (Civ. Prac. Act, § 1087).

Once it has been determined, under State law, that the taxpayer has property or rights to property, “ state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States.” (United States v. Bess, 357 U. S. 51, 57.) Moreover, when a Federal tax lien has attached to property o'f the taxpayer, as undoubtedly it had here, State law may not destroy it. (See Commissioner v. Stern, 357 U. S. 39.) As already indicated, calling the local taxes “ expenses of the sale ” does not help the local taxing authority, for it is to substance, not form, that the courts look. Local taxes do not result from the mortgage foreclosure sale; on the contrary, they pre-exist the sale. Accordingly, the State’s characterization of them as ‘ ‘ expenses of the sale ’ ’ — appropriate though it may be for the State’s own purposes — is thoroughly unreal in our present context and completely ineffectual to affect the priority of the Federal lien. (Cf. United States v. Gilbert Associates, 345 U. S. 361.)

In deciding questions concerning the relevant priorities of a Federal tax lien and other liens, it is perfectly clear that State law determines the nature and extent of the property interests of the taxpayer and that Federal law determines the priority of the competing claims themselves. (See, e.g., Aquilino v. United States, 363 U. S. 509, 515-516; United States v. Brosnan, 363 U. S. 237, 240; United States v. Bess, 357 U. S. 51, 55, supra; United States v. Acri, 348 U. S. 211, 213.) Although the court’s opinion herein does not expressly reject this proposition — as to the proper role of State and Federal law in this area-—-its decision stands squarely opposed to it. What the court has done, under State law, is to characterize the nature and extent of the Federal lien and determine its priority in competition with local liens — a function exclusively reserved to the Federal law. (See Aquilino v. United States, 363 U. S. 509, supra.) Thus, the majority describes the Government’s status in the present action as that merely of a creditor of the mortgagor ” and concludes that, since the Government’s position is based on the claimed interest of the mortgagor, [it] can have no better standing [than the mortgagor], that is, the Federal lien is also to be paid when there is a surplus [over mortgage debt plus local taxes] in which the mortgagor would have an interest” (opinion, p. 37). To employ the language of the opinion in the Brosnan case, this is not an authorized State determination of the ‘ ‘ property and rights to property ’ * * * to which a government tax lien attaches,” but rather an unauthorized State determination of ‘' matters directly affecting the nature or operation of [federal tax] liens ” (363 U. S. 237, 240).

Furthermore, giving priority to the after-accrued local taxes, as the majority is here doing, is directly contrary to the Supreme Court’s decision in United States v. New Britain (347 U. S. 81, supra). In that case, in addition to prior mortgages and a prior judgment lien, the taxpayer’s property was incumbered by a Federal tax lien and, subsequent in time to such lien, by a municipal tax lien. The Connecticut Supreme Court reasoned, as the majority does here, that, since Federal law subordinated the Federal tax lien to mortgage and judgment liens and since, under State law, these mortgage liens were subordinated to real property tax liens, the Federal tax lien had to be subordinated to the local real property tax lien. (See Brown v. General Laundry Serv., 139 Conn. 363, 373.) In answer to this argument, the Supreme Court of the United States declared (347 U. S., at p. 88):

“ We do not agree. The United States is not interested in whether the State receives its taxes and water rents prior to mortgagees and judgment creditors. That is a matter of state law. But as to any funds in excess of the amount necessary to pay the mortgage and judgment creditors, Congress intended to assert the federal lien.”

Even more recently, in United States v. Brosnan (363 U. S. 237, supra), the Supreme Court, citing numerous decisions, “ rejected ” the very position taken by the majority in this case (363 U. S., at p. 241):

“ This Court has repeatedly rejected the contention that because a fee owned by a taxpayer was already encumbered by a lien which enjoyed seniority under state law, the Government’s lien necessarily attached subject to that lien.”

The rule adopted in the New Britain case as the Federal rule for resolving conflicts between a Federal tax lien and local real property tax liens is the olden one that ‘ ‘ ‘ the first in time is the first in right’” (347 U. S., at p. 85). As there pointed out, “When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing the United States, whether secured by liens or otherwise, by § 3466 of the Revised Statutes, 31 U. S. C. (1946 ed.) § 191. In that circumstance, where all the property of the debtor is involved, Congress has protected the federal revenues by imposing an absolute priority ’ ’. Where, however, the court continued (p. 85), “the debtor is not insolvent, Congress has failed to expressly provide for federal priority, with certain exceptions not relevant here ”. (And see Internal Revenue Code of 1939, U. S. Code, tit. 26, § 3672; Internal Revenue Code of 1954, U. S. Code, tit. 26, § 6323). And, added the court, “ There is nothing in the language of § 3672 to show that Congress intended antecedent federal tax liens to rank behind any but the specific categories of interests set out therein ” (p. 88), that is, mortgagees, judgment creditors, pledgees and purchasers. Accordingly, the relative priority of each lien here involved must depend upon the time [each of them] attached to the property in question and became choate ” (p. 86. See, also, United States v. Bond, 279 F. 2d 837, supra; United States v. Christensen, 269 F. 2d 624, supra).

The court seeks to distinguish New Britain from the present case on the ground that the contest there was between the local government and the Federal government over their respective rights in surplus funds ”, whereas here the “ facts [show] that the dispute is really between the mortgagee and creditors of the mortgagor ” (opinion, p. 36). Starting from this premise, the majority urges that, if the contest were between the Federal Government and the local taxing authorities, New Britain would control and the Government would prevail. But, since the dispute here is between the United States, as a creditor of the mortgagor, and the mortgagee, the latter must prevail, because (the argument proceeds) the Government can have no better standing than the mortgagor himself. And the court seeks to bolster this conclusion by claiming that the respective liens [in this case] are not comparable charges on real property ” (p. 35). In my judgment, the proffered ground for distinction is not tenable.

It is true that in New Britain the contest was between the city and the Federal Government but, as the facts disclosed and later developments made clear (see Brown v. General Laundry Serv., 19 Conn. Supp. 335), the real parties in interest were the Federal Government and private lienors of the debtor’s real estate who were entitled to priority over the Federal lien by the express terms of the Federal lien statutes. The State of Connecticut received its taxes in full at the expense of lienors whose liens were prior to those of the Federal Government. The fact that the contest in New Britain was between the city and the Federal Government and in this case between the mortgagee and the Government neither compels nor justifies a difference in result.

As I have already noted, it is the majority’s assertion that the lien for local taxes must take precedence over the Government’s lien because the respective liens are not comparable charges on real property. This is its position (pp. 36-38): On the one hand, “ The local government lien is not a levy against the mortgagor, but against the land”. On the other hand, the Federal Government’s status is only that of a creditor of the mortgagor ’ ’, its claim merely one ‘1 based on the claimed interest of the mortgagor ”. And its lien, rather than being a lien which “ attach [es] directly to the particular parcel of real property ”, as does that of the local government, attach [es] to the property merely because of an unconnected indebtedness of the owner of the land ’ ’. In other words, the Federal lien is not against the land, but against a presumed equity in the real property held by the mortgagor.”

Having made these distinctions, the court goes on to suggest that the difference in the way these liens arise assures priority to the liens of the local taxing authorities over the lien of the Federal Government. From this and the status ascribed to the Federal lien, it is the court’s conclusion that “ the Federal Government’s claim, which is based on the claimed interest of the mortgagor, can have no better standing [than the mortgagor’s claim], that is, the Federal lien is also to be paid when there is a surplus [above the mortgage debt and expenses of sale, including local taxes] in which the mortgagor would have an interest ” (opinion, p. 37).

The fallacy of this argument, I venture, is that it mistakes the Federal law with respect to the status and incidence of the Federal interest. The Federal Government is no mere unsecured creditor of a delinquent taxpayer. It is, rather, the holder of “ a lien * * * upon all property or rights to property, whether real or personal, belonging to such person ” (Internal Revenue Code of 1954, TJ. S. Code, tit. 26, § 6321). Such a lien attaches to the real property owned by the taxpayer at the time the “ [tax] assessment is made ” (U. S. Code, tit. 26, § 6322), not to whatever equity he may have in it after a subsequent mortgage sale. In short, the Federal lien is not, as the majority insists, against a presumed equity in the real property held by the mortgagor ”, but against the land itself. The rights of the Federal Government to the proceeds of the mortgage sale are not, therefore, limited to those of the mortgagor.

Let me state the matter somewhat differently. The lien of the United States arose when the assessments were made, and it attached to the mortgaged property at that time. Consequently, if the sale of the property had then been held, that lien could have been satisfied out of the proceeds of such sale after payment of proper expenses and of the amount then due on the mortgage plus interest to the date of payment. The local taxes here involved had not yet come into being and might never have become liens against the property. They might have been paid by the mortgagor or the property might have been foreclosed before they became due. Since, therefore, the liens of the local authorities had at best only a potential existence, we do not reach the question whether those liens were choate when the Federal liens attached. It comports neither with reality nor with law to give such “potential liens ” priority over the pre-existing matured Federal lien by labeling them “ expenses of the sale ” in foreclosure proceedings.

Indeed, an argument very similar to that made by the court here, namely, that the respective charges of the Federal Government and the local taxing authorities are ‘ ‘ not comparable charges on real property ”, was expressly made and rejected in the New Britain case (347 U. S. 81, supra). It had evidently been argued that the local tax liens should take precedence over the Federal tax lien because they were “specific” while the Federal lien was “ general ”. With respect to this contention, the Supreme Court declared (p. 84):

“ [T]he fact that one group of liens [the local] is specific and the other [the federal] general in and of itself is of no significance in these cases * * *. Thus, the general statutory liens of the United States are as binding as the specific statutory liens of the City. The City gains no priority by the fact that its liens are specific while the United States’ liens are general. ’ ’

Finally, a word must be said about the majority’s characterization of the decision in United States v. Brosnan (363 U. S. 237, supra) as “ a departure ” from the holding in the New Britain case. In the first place, Brosnan was concerned with a question whether a Federal tax lien could be extinguished under a State procedure for foreclosure in which the Federal Government, a junior lienor, was not, and need not have been, a party; what was involved, therefore, was not the problem of priority at issue here. In the second place, although local taxes had been paid out of the proceeds of the mortgage sale and thus had, in effect, achieved priority, that issue was never raised on appeal, the sole issue being—to cull from the court’s opinion—“whether the federal lien was effectively extinguished by state proceedings to which the United States was not, nor was required under state law to be, a party ” (363 U. S., at pp. 238-239). The third' and (to me) conclusive reason why Brosnan may not be taken to be a departure from the New Britain holding is that in Brosnan the Supreme Court actually cited New Britain with approval (363 U. S., at p. 241, n. 4) and restated one of the principles which it had announced; thus, it wrote in Brosnan (p. 241): “ This Court has repeatedly rejected the contention that because a fee owned by a taxpayer was already encumbered by a lien which enjoys seniority under state law, the Government’s lien necessarily attached subject to that lien”. As is evident, far from supporting the majority view in the present case, the opinion in Brosnan stands -with. New Britain to refute it.

In sum, then, in situations of this kind, the lien of the Federal Government must be recognized as prior in right to that of the local taxing authorities. This follows from the fact that it is prior in time. But this does not mean that those local taxing authorities will not collect their taxes. The majority opinion has placed the contest in its proper setting. The dispute is between the mortgagee and the Federal Government as a creditor of the mortgagor. The local taxing authorities will be paid at the expense of the mortgagee so there will be no adverse economic impact upon the taxing authorities. The mortgagee’s interest in the proceeds of the mortgage sale may, perhaps, be diminished. But the mortgagee is not left without recourse where the mortgagor is liable for payment of the debt secured by the mortgage and he is not insolvent. In such a case, the mortgagee may collect the “ residue ” or balance due from the mortgagor by way of a deficiency judgment (Civ. Prac. Act, §§ 1082,1083).

I would affirm the judgment of the Appellate Division.

Chief Judge Desmond and Judges Dye, Froessel and Van Voorhis concur with Judge Burke; Judge Fuld dissents in an opinion in which Judge Foster concurs.

Judgment of Appellate Division, entered June 13, 1961, reversed and judgment of the County Court, Erie County, entered October 20, 1960, reinstated, without costs. 
      
      . (Civ. Prae. Act, § 1087)—“ Where a judgment rendered in an action to foreclose a mortgage upon real property directs a sale of the real property, the officer making the sale must pay out of the proceeds, unless the judgment otherwise directs, all taxes, assessments and water rates which are liens upon the property sold and redeem the property sold from any sales for unpaid taxes, assessments or water rates, which have not apparently become absolute. The sums necessary to make those payments and redemptions are deemed expenses of the sale within the meaning of that expression as used in any provision of this article. The provisions of this section shall not apply to any judgment in an action wherein any municipal corporation of this state is the plaintiff and the purchaser at the foreclosure sale thereunder.”
     
      
      . The Federal liens, amounting to $40,403.34 attached to the property between April 11,1949 and November 28,1951 (Exhibit B to complaint of United States). The local taxes paid out of the proceeds of the sale were county, township and school taxes for the period 1952-1955 in the amount of $5,756.90 (Transcript of Record, p. 22).
     
      
      . It is appropriate to note at this point that the record before us, like the record in New Britain (347 U. S., at p. 85), does not indicate that the mortgagor-taxpayer was insolvent.
     