In re Blackwood
| Decision Date | 28 March 1957 |
| Docket Number | No. 42807.,42807. |
| Citation | 147 F. Supp. 93 |
| Parties | In the Matter of Roy R. BLACKWOOD, Bankrupt. |
| Court | U.S. District Court — Northern District of California |
Karl V. Bledsoe, Palo Alto, Cal., for Bankrupt.
Max H. Margolis, San Francisco, Cal., for Trustee.
Edmund G. Brown, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Eugene B. Jacobs, Dep. Atty. Gen., San Francisco, Cal., for State of California through its Department of Employment.
Judgment Affirmed March 28, 1957. See 242 F.2d 201.
Blackwood filed a petition in bankruptcy on April 2, 1954, and was adjudged a bankrupt the same day. He was then indebted to nine employees for wages which had been earned within the three month period preceding the filing of the petition, and a claim for these wages was filed by the Labor Commissioner. Eleven months later a hearing was held and the Referee entered his order settling and allowing the Trustee's First and Final Report. The estate was only large enough to pay the expenses of administration, and a 52% dividend toward the wage claims filed. These the trustee paid, after first deducting from the wage dividend state and federal taxes of the employees.
The State of California, acting through the Department of Employment, then demanded of the trustee that he pay the tax imposed upon employers by the California Unemployment Insurance Code. This tax is based upon wages paid to employees, and becomes payable when the wages have been actually paid.
Under § 64, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a, the order of priority for payment of debts is (1) expenses of administration, (2) wages, (3) certain costs incurred by creditors, and (4) taxes. The estate is insufficient to pay any 4th priority tax claims, but it is the contention of the State that their claim should be classified and paid as a 1st priority expense of administration. The Trustee petitioned the Referee for instructions and was ordered not to comply with the demands of the State and the case comes here on a Petition for Review of the Referee's Order.
There is no dispute as to the basic facts, although petitioner challenges some of the facts found by the Referee. The Court has reviewed the findings of fact made by the Referee and finds that they are supported by the record. The remaining questions are questions of law arising out of interpretations of the Bankruptcy Act and the California Unemployment Insurance Code.
The Referee held that the Trustee, in paying the dividend toward the wage claims which had been filed against the estate, incurred no liability for taxes under the California statute. Section 976 of the California Unemployment Insurance Code declares that "Employer contributions to the Unemployment Fund shall accrue and become payable by every employer for each calendar year with respect to wages paid for employment." An employer is defined in § 675 as being "any employing unit, which for some portion of a day, has within the current calendar year or had within the preceding calendar year in employment one or more individuals and pays wages for employment in excess of one hundred dollars ($100) during any calendar quarter". An employing unit under § 135 is "any individual * * * corporation * * * and the receiver, trustee in bankruptcy, trustee or successor thereof, * * * which has, or subsequent to January 1, 1936, had, in its employ one or more individuals performing services for it within this State". Since the Trustee had not employed the persons to whom the wage dividend was paid, the Referee concluded that the employer's contribution did not become payable.
A similar problem was before the Court of Appeals for the Eighth Circuit in United States v. Fogarty, 8 Cir., 164 F.2d 26, 174 A.L.R. 1284, where the Trustee's liability for unemployment taxes under the Federal Social Security Act, 26 U.S.C.A. § 1400 et seq. was examined. As in this case, the Trustee paid a wage dividend toward wages which had been earned before bankruptcy and filed as a claim against the estate. The District Court, In re Inland Waterways, Inc., D.C.Minn., 71 F.Supp. 134, 136, held the tax claim invalid because "the Trustee was not the `employer' of these laborers as defined in Section 1621(d) of the Internal Revenue Code 26 U.S.C.A. § 1621(d) nor did the Trustee pay these men `wages' as defined in Section 1621(a) * * * as the laborers never rendered services to the Trustee". But the Circuit Court reversed the holding, and held that for purposes of the unemployment tax, the Trustee stood in the shoes of the employer-bankrupt, and the reasoning of the Court in sustaining his liability is applicable here. The Court in the Fogarty case was faced with the same obstacle that presents itself here, viz., the wording of the Social Security Act contemplated an employment relationship between the person who paid the wages and the recipient thereof. But the Court did not make its decision turn upon whether the Trustee, in paying the pre-bankruptcy wage claims, could be brought within the exact wording of the statute so far as it defined "employer" and "wages". The holding was made in view of the legislative purpose underlying the Social Security Act to mitigate the hardships caused by unemployment; insofar as the benefits under the Act depended both upon the amount of wages received and the time in which they were received, holding that the payments were not wages, and that the trustee was not an employer would cause an unjustified deprivation of benefits. "But if the trustee may not be held liable for the taxes here in question, it would seem that the broad purposes of the legislation would not be accomplished in the instances where the employer goes into bankruptcy and the wages due from him earned within ninety days of his bankruptcy are paid in whole or in part out of his assets through the bankruptcy proceedings." United States v. Fogarty, supra 164 F.2d 29. These same considerations are applicable to the California Unemployment Insurance Code. The state legislation is designed to accomplish the same purpose sought by the federal Act, so far as it seeks to give relief to the unemployed. In Gillum v. Johnson, 7 Cal.2d 744, 62 P.2d 1037, 1041, 63 P.2d 810, 108 A.L.R. 595, the Court said:
Section 101 of the California statute states: "This part is a part of a national plan of unemployment reserves and social security, and is enacted for the purpose of assisting in the stabilization of employment conditions * * *." Because the state and federal legislation are so closely allied in purpose and provision, well-reasoned construction regarding the scope of the federal statute should not be readily disregarded in construing the scope of the state act. The courts of California are in accord, Union Oil Associates v. Johnson, 2 Cal.2d 727, 43 P.2d 291, 98 A.L.R. 499, and have looked closely to federal decisions in settling problems under...
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Lines v. STATE OF CALIFORNIA, DEPT. OF EMPLOYMENT, 15484.
...2, Remington on Bankruptcy, § 797, and Vol. 6, Remington on Bankruptcy, § 2818. 3 On this point the District Court in the instant case (147 F.Supp. 93, 96) cited In re Berkshire Hardware Co., D.C., 39 F.Supp. 663, as standing for the proposition that where the tax liability has not yet accr......
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Lines v. STATE OF CALIFORNIA, DEPARTMENT OF EMPLOY.
...Judges. STEPHENS, Circuit Judge. This is an appeal from a decision of the District Court in bankruptcy proceedings entitled Matter of Blackwood, 147 F.Supp. 93. Appellant is the trustee in We are here asked to determine whether a trustee in bankruptcy is required to pay to the State of Cali......