UNITED STATES V. KEY
| Decision Date | 30 March 1970 |
| Court | U.S. Supreme Court |
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
The United States challenges, as violative of § 3466 of the Revised Statutes, a reorganization plan under Chapter X of the Bankruptcy Act under which claims of junior creditors were to be partially or fully paid before full payment was made of the Government's tax claims. Section 3466 provides that, "[w]henever any person indebted to the United States is insolvent . . . , the debts due to the United States shall be first satisfied." The District Court approved the plan. The Court of Appeals affirmed on the ground that § 3466 was impliedly inapplicable by virtue of the statutory plan of Chapter X proceedings, § 199 of the Act providing that the United States shall have "payment," of its tax claims in such proceedings unless the Secretary of the Treasury accepts "a lesser amount," and §§ 216 and 221 establishing an equitable standard to govern the method of payment.
Held: The United States is entitled to absolute priority of payment under § 3466 of the Revised Statutes over the other claimants in the reorganization here involved, there being no inconsistency between the terms of that section and the provisions of Chapter X. P P. 324-333.
407 F.2d 635, reversed and remanded.
In this case, the United States challenges the treatment given to its claim for unpaid taxes against an insolvent
corporation in reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C. §§ 501-676. Under the reorganization plan approved by the District Court, the debtor, Hancock Trucking, Inc., will sell its chief asset, its Interstate Commerce Commission operating rights, to Hennis Freight Lines, Inc., for 5,000. The sale contract provides for a 0,000 downpayment, with the balance to be paid in 78 monthly installments. Under the reorganization plan, the downpayment will be used to satisfy certain wage and state and local tax claims in full, to satisfy 20% of the claims of the unsecured creditors, and to satisfy about 10% of the United States' tax claim of 5,386.55. The remainder of the United States' claim will he paid out of the monthly installments. The plan, an atypical one for a corporate reorganization, does not contemplate the continued existence of the debtor as a going concern, but amounts in substance to a liquidation.
The United States objects to that aspect of the plan that provides for partial or complete payment of the claims of unsecured creditors and state and local government units before full payment of the federal tax claims. This, the Government urges, violates the command of § 3-166 of the Revised Statutes, 31 U.S.C. § 191, that "[w]henever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied." Respondent urges that § 3466 does not apply to Chapter X proceedings, but that the United States is entitled only to "payment" of its tax claim, as provided by § 199 of the Bankruptcy Act, 11 U.S.C. § 599.
The Court of Appeals accepted respondent's theory, and affirmed the order of the District Court approving the plan. 407 F.2d 635 (C.A. 7th Cir.1969). We granted certiorari, 396 U.S. 874 (1969), and we reverse.
Since the earliest days of the Republic, § 3466 and its predecessors have given the Government priority over all other claimants in collecting debts due it from insolvent debtors. [Footnote 1] The present statute has existed almost unchanged since 1797, [Footnote 2] and its historical roots reach back to the similar priority of the Crown in England, an aspect of the royal prerogative, founded upon a policy of protecting the public revenues. [Footnote 3] The same policy underlies the federal statute, United States v. State Bank of North Carolina, 6 Pet. 29, 31 U. S. 35 (1832), and it is established that the terms of § 3466 are to be liberally construed to achieve this broad purpose. Beaston v. Farmers' Bank, 12 Pet. 102, 37 U. S. 134 (1838); Bramwell v. United States Fidelity Co., 269 U. S. 483, 487 (1926).
Section 3466 applies literally to the situation here. The debtor is concededly insolvent, and it is established that a tax debt is a "debt due to the United States" within the meaning of the statute. Price v. United States, 269 U. S. 492, 499 (1926). No provision of Chapter X explicitly excepts corporate debtors in reorganization from the application of § 3466, and so the only remaining question is whether the legislative scheme established in Chapter X, either by logical inconsistency or other manifestation of congressional intent, implies such an exception.
United States v. Emory, 314 U. S. 423, 433 (1941).
Section 221 merely sums up the applicable tests for a valid reorganization plan by providing that "[t]he judge shall confirm a plan if satisfied that" § 199 has been complied with, and that "the plan is fair and equitable, and feasible."
The Court of Appeals reasoned from these provisions to the implied exclusion of the operation of § 3466 as follows:
In our view, these provisions are not logically inconsistent with the terms of § 3466, nor would they be rendered redundant if the older statute applied, nor does their language or legislative history reveal a purpose incongruous with its application.
In the first place, § 216(7) has nothing to do with the priorities of different classes of claimants under Chapter X. That section merely provides that, where an affected class of creditors (and here the United States itself constitutes the whole of such a class) dissents from a plan, their claims are to be dealt with in one of the four ways specified, one of which is that those claims must be disposed of "equitably and fairly."
This Court has long held that these words, along with the words "fair and equitable" in § 221, in no way authorize a District Court to ignore or erode priorities otherwise granted by law, and it follows that this language cannot be taken to exclude by implication an explicit statutory priority, such as that granted the United States by § 3466. In short, the words "fair and equitable" in Chapter X are terms of art, and no plan can be "fair and equitable" which compromises the rights of senior creditors in order to protect junior creditors. Case v. Los Angeles Lumber Co., 308 U. S. 106, 115-116 (1939); Consolidated Rock Co. v. Du Bois, 312 U. S. 510, 527-529 (1941).
We turn then to the argument upon which respondent chiefly relies for his claim that § 3466 does not reach to Chapter X proceedings -- the alleged inconsistency between application of the "first satisfied" requirement and the terms and purposes of § 199. As already noted, § 199 provides that the United States shall have "payment" of its tax claims in Chapter X proceedings unless the Secretary of the Treasury accepts "a lesser amount." respondent argues and the Court of Appeals held that this establishes by negative implication that Congress did not mean the United States to be able to insist upon the more onerous remedy of payment first in time. [Footnote 5]
As a matter of logic, we see no inconsistency between a requirement of payment and a requirement of first satisfaction. Congress surely could have provided that the United States receive payment out of a limited fund at the expense of other claimants, and quite consistently provided that, when the wherewithal to make such payment became available in installments over time, the United States should also have the right to claim the first of those installments and each succeeding one until its debt was satisfied. [Footnote 6] Separate provisions to this effect in the same statute could certainly be read in harmony with each other, and there is no reason why § 3466 should not be read to supplement the requirement of payment contained in § 199...
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