Opinion: 363 U.S. 522 (1960)

HOLDING:  A subcontractor’s mechanics lien had priority over a government tax lien because North Carolina law provided unpaid subcontractors with a direct statutory claim against building owners.

Michael & Embree were general contractors operating a construction business in Durham, North Carolina.  They completed a construction project in July 1954 but had not been fully paid when they soon thereafter went bankrupt.  They owed money both to subcontractors for services and materials used in the construction project and to the federal government for unpaid taxes.  The subcontractors and the government asserted that they held liens on Michael & Embree’s proceeds from the construction contract.  

The bankruptcy referee found that the government’s tax lien should be paid out of these funds before any mechanic’s liens held by subcontractors, but the District Court disagreed and found that the mechanic’s lien had priority.  The Fourth Circuit affirmed, holding that under North Carolina law, the subcontractors had a direct statutory claim against the building owners, not a mechanic’s lien on the property, and that the subcontractors thus had a higher claim on the proceeds.  

The Supreme Court also affirmed.  It held that state law defines a taxpayer’s property interests for purposes of tax liens.  The North Carolina courts had “never specifically described the nature of the property rights created by the North Carolina statutes involved in this case,” so the Court deferred to the Fourth Circuit’s interpretation, since it was not clearly erroneous or unreasonable.