382 U.S. 375 (1966), 44, Segal v. Rochelle
|Docket Nº:||No. 44|
|Citation:||382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428|
|Party Name:||Segal v. Rochelle|
|Case Date:||January 18, 1966|
|Court:||United States Supreme Court|
Argued November 17, 1965
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
On September 27, 1961, the individual petitioners and their business partnership filed bankruptcy petitions. After the end of that year, loss carryback federal income tax refunds were obtained for the individual petitioners based on the firm's losses during 1961 prior to bankruptcy which were offset against income for 1959 and 1960 on which taxes had been paid. These refunds, on deposit in a special account by the bankruptcy trustee, are claimed by petitioners on the ground that bankruptcy had not passed the refund claims to the trustee. The referee ruled against petitioners, as did the District Court and the Court of Appeals, the latter holding that the loss carryback refund claims were both "property" and "transferable" at the time of the bankruptcy petition, and thus had passed to the trustee.
1. These inchoate claims for loss carryback refunds constituted "property" as that term is used in § 70a(5) of the Bankruptcy Act. Pp. 379-381.
(a) The classification as "property" is governed by the purposes of the Act. P. 379.
(b) The main thrust of § 70a(5) being to obtain for creditors everything of value possessed by the bankrupt in alienable form at the time the petition was filed, the term "property" has been generously construed, and does not exclude interests which are novel or contingent or where enjoyment must be postponed. P. 379.
(c) The term is limited by another purpose of the Act, which is to leave the bankrupt free after the date of the petition to acquire new wealth. P. 379.
(d) The loss carryback refund claim is sufficiently rooted in the pre-bankruptcy past and so little enmeshed with the bankrupt's ability to make an unencumbered new start that it should be regarded as "property" under § 70a(5). P. 380.
2. The refund claims were property which, prior to filing the petition, could have been "transferred" within the meaning of § 70a(5). Pp. 381-385.
(a) The Assignment of Claims Act, 31 U.S.C. § 203, does not always prevent giving effect, between the parties, to a noncomplying transfer, Martln v. National Surety Co., 300 U.S. 588. P. 384.
(b) In Texas, where the petitioners resided and did business, the precedents leave little doubt that an assignment of the refund claims would normally be enforced in equity between the parties. Pp. 384-385.
336 F.2d 298, affirmed.
HARLAN, J., lead opinion
MR. JUSTICE HARLAN delivered the opinion of the Court.
This case, presenting a difficult question of bankruptcy law on which the circuits have differed, arises out of the following facts. On September 27, 1961, voluntary bankruptcy petitions were filed in a federal court in Texas by Gerald Segal, Sam Segal, and their business partnership, Segal Cotton Products. A single trustee, Rochelle, was designated to serve in all three proceedings. After the close of that calendar year, loss carryback tax refunds were sought and obtained from the United States on behalf of Gerald and Sam Segal under Internal Revenue Code § 172. The losses underlying the refunds had been suffered by the partnership during 1961 prior to the filing of the bankruptcy petitions; the losses were carried back to the years 1959 and 1960 to offset net income on which the Segals had both paid taxes. By agreement, Rochelle deposited the refunds in a special account, and the Segals applied to the referee in bankruptcy to award the refunds to them on the ground that bankruptcy had not passed the refund claims to the trustee.
Concluding that the refund claims had indeed passed under § 70a(5) of the Bankruptcy Act1 as "property . . . which prior to the filing of the petition . . . [the bankrupt] could by any means have transferred," the referee denied the Segals' application. The District Court affirmed the denial, and the Segals and their partnership appealed to the Court of Appeals for the Fifth Circuit.2 That court too rejected the Segals' contention.
As the Court of Appeals here recognized, the Court of Appeals for the First Circuit, in Fournier v. Rosenblum, 318 F.2d 525, and the Court of Appeals for the Third Circuit in In re Sussman, 289 F.2d 76, have both ruled squarely that a bankrupt's loss carryback refund claims based on losses in the year of bankruptcy do not pass to the trustee, but, instead, the bankrupt is entitled to the refunds when they are ultimately paid. Concededly, under § 70a(5), the trustee must acquire the bankrupt's "property" as of the date the petition is filed, and property subsequently acquired belongs to the bankrupt. See note 1, supra; 4 Collier, Bankruptcy 70.09 (14th ed. 1962). Since the tax laws allow a loss carryback refund claim to be made only when the year
has closed, see I.R.C. §§ 172(a), (c), 6411, both the First and Third Circuits reasoned that, prior to the year's end, a loss carryback refund claim was too tenuous to be classed as "property" which would pass under § 70a(5). Alternatively, the Third Circuit stated that, because of the federal anti-assignment statute,3 inchoate refund claims were not in any event property "which prior to the filing of the petition . . . [the bankrupt] could by any means have transferred," as § 70a(5) also requires. Both circuits felt the result to be unfortunate, not least because the very losses generating the refunds often help precipitate the bankruptcy and injury to the creditors, but both believed the statutory language left no option.
After detailed discussion of the problems, the Court of Appeals in this case resolved that the loss carryback refund claims were both "property" and "transferable" at the time of the bankruptcy petition, and hence had passed to the trustee. 336 F.2d 298. We granted certiorari because of the conflict and the significance of the issue in bankruptcy administration.4 380 U.S. 931.
Conceding the question to be close, we are persuaded by the reasoning of the Fifth Circuit, and we affirm its decision.
We turn first to the question whether, on the date the bankruptcy petitions were filed, the potential claims for loss carryback refunds constituted "property" as § 70a(5) employs that term. Admittedly, in interpreting this section,
[i]t is impossible to give any categorical definition to the word "property," nor can we attach to it in certain relations the limitations which would be attached to it in others.
Fisher v. Cushman, 103 F. 860, 864, 51 L.R.A. 292. Whether an item is classed as "property" by the Fifth Amendment's Just Compensation Clause or for purposes of a state taxing statute cannot decide hard cases under the Bankruptcy Act, whose own purposes must ultimately govern.
The main thrust of § 70a(5) is to secure for creditors everything of value the bankrupt may possess in alienable or leviable form when he files his petition. To this end, the term "property" has been construed most generously, and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed. E.g., Horton v. Moore, 110 F.2d 189 (contingent, postponed interest in a trust); Kleinschmidt v. Schroeter, 94 F.2d 707 (limited interest in future profits of a joint venture); see 3 Remington, Bankruptcy §§ 1177-1269 (Henderson ed. 1957). However, limitations on the term do grow out of other purposes of the Act; one purpose which is highly prominent and is relevant in this case is to leave the bankrupt free after the date of his petition to accumulate new wealth in the future. Accordingly, future wages of the bankrupt do not constitute "property" at the time of bankruptcy nor, analogously, does an intended bequest to him or a promised gift -- even though state law might permit all of these
to be alienated in advance. E.g., In re Coleman, 87 F.2d 753; see 4 Collier, Bankruptcy 70.09, 70.27 (14th ed. 1962). Turning to the loss carryback refund claim in this case, we believe it is sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts' ability to make an unencumbered fresh start, that it should be regarded as "property" under § 70a(5).
Temporally, two key elements pointing toward realization of a refund existed at the time these bankruptcy petitions were filed: taxes had been paid on net...
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