United States v. Randall

• Decision Date: 24 March 1971
• Docket Number: No. 125,125
• Citation: 401 U.S. 513,91 S.Ct. 991,28 L.Ed.2d 273
• Parties: UNITED STATES v. William L. RANDALL, Trustee in Bankruptcy
• Court: U.S. Supreme Court

28 L.Ed.2d 273

91 S.Ct. 991

401 U.S. 513

UNITED STATES

v William L. RANDALL, Trustee in Bankruptcy.

No. 125.

Argued Feb. 22, 1971.

Decided March 24, 1971.

Syllabus

The debtor corporation, kept in possession of its business by court order under Chapter XI of the Bankruptcy Act, did not comply with requirements that it deposit withheld taxes in a special tax account. It was later adjudicated a bankrupt, and the United States asked the bankruptcy court to pay the amount of withheld taxes prior to payment of costs and expenses of the bankruptcy proceedings, pursuant to 26 U.S.C. § 7501(a), which provides that the amount of withheld taxes 'shall be held to be a special fund in trust for the United States.' The referee denied the request, and the District Court and the Court of Appeals agreed. Held: Section 64(a)(1) of the Bankruptcy Act, which is an overriding statement of federal policy on the question of priorities, clearly provides that the first priority in payments from bankrupt estates belongs to the costs and expenses of administration incurred in the bankruptcy proceedings. Pp. 515—517.

419 F.2d 1068, affirmed.

Richard B. Stone, Washington, D.C., for petitioner.

Kevin J. Gillogly, Chicago, Ill., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Halo Metal Products, Inc. (the debtor) was kept in possession of its business by court order under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. The order required it to open three separate bank accounts for its general, payroll, and tax indebtedness and to make appropriate disbursements from those accounts. Salaries and wages paid were to be credited against the payroll account and checks for wages and for withheld income and social security taxes were to be paid after approval by the referee. Checks for the withheld taxes were to be paid into the tax account. Withdrawals from this account were to be allowed only for payment of withheld taxes and welfare obligations.

The debtor did not comply with those requirements. Although it withheld income and social security taxes from the wages of its employees, it did not deposit them in the special tax account and did not pay them, as required, to the United States.

Later the debtor was adjudicated a bankrupt. The United States, which had previously filed a proof of claim in the Chapter XI proceedings for payment of the taxes, now asked the bankruptcy court to pay the amount of withheld taxes prior to the payment of the costs and expenses of administration of the bankruptcy proceedings. The referee denied the request. The District Court agreed with the referee. The Court of Appeals affirmed the order denying payment, 419 F.2d 1068. The case is here on petition for a writ of certiorari which we granted (400 U.S. 817, 91 S.Ct. 34, 27 L.Ed.2d 44) because of a conflict among the circuits, cf. City of New York v. Rassner, 2 Cir., 127 F.2d 703; United States v. Sampsell, 9 Cir., 193 F.2d 154; Hercules Service Parts Corp. v. United States, 6 Cir., 202 F.2d 938.

The United States relies for its priority on 26 U.S.C. § 7501(a) which provides:

'Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.'

The argument is that withheld taxes are a trust in favor of the United States. It is answered that the debtor-in-possession failed to segregate the taxes so withheld; hence there was no trust. To that the United States replies that since the debtor-in-possession was a court-appointed officer, the misconduct of the officer should not defeat the trust.¹ And, the argument continues, creditors are not unfairly harmed since the trust funds were never an asset of the estate.

We deal, however, with a Bankruptcy Act which we conclude is an overriding statement of federal policy on this question of priorities. Section 64(a)(1) of the Act, 11 U.S.C. § 104(a)(1) (1964 ed., Supp. V), provides:

'The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment, shall be (1) the costs and expenses of administration * * *. Where an order is entered in a pro- ceeding under any chapter of this title directing that bankruptcy be proceeded with, the costs and expenses of administration incurred in the ensuing bankruptcy proceeding * * * shall have priority in advance of payment of the unpaid costs and expenses of administration * * * incurred in the superseded proceeding * * *.'

Until 1926 claims for administrative expenses were subordinate to tax claims. ² In that year they were placed ahead of taxes.³ The costs and administrative expenses of a trustee were, however, still subordinate to claims of the referee or creditors for preserving or recovering assets.⁴ In 1952 the Act was amended to give priority to administrative expenses of an ensuing bankruptcy proceeding over unpaid administrative expenses of a superseded proceeding.⁵

We have then a progressive legislative development that (1) marks a decline in the grant of a tax preference to the United States and (2) marks an ascending priority for costs and expenses of administration.

We think the statutory policy of subordinating taxes to costs and expenses of administration would not be served by creating or enforcing trusts which eat up an estate, leaving little or nothing for creditors and court officers whose goods and services created the assets. In Nicholas v. United States, 384 U.S. 678, 690—692, 86 S.Ct. 1674, 1683—1684, 16 L.Ed.2d 853, we rejected the claim of the United States that under § 7501(a) of the Internal Revenue Code it was entitled to interest accruing after the arrangement under Chapter XI and during the bankruptcy. We so held because to allow interest would run counter to the 'strong policy of § 64(a)(1) of the Bankruptcy Act.' Id., at 691, 86 S.Ct. 1683. To allow the present claimed priority for the principal would by the same token run counter to the grain of the Bankruptcy Act.

This construction conforms with a literal reading of the second sentence of § 7501(a) which makes the amount of such fund payable 'in the same manner and subject to the same provisions and limitations * * * as are applicable with respect to the taxes from which such fund arose.' In conformity with Nicholas we read those words against the history of the Bankruptcy Act. So read, the fund is as subordinate as the taxes. See In re Green, D.C., 264 F.Supp. 849, 851.

What we decide today is also in accord with those decisions which hold that the specific priorities granted by Congress in the Bankruptcy Act govern generalized statutes giving the United States priority in a wide range of situations.⁶ Guarantee Title & Trust Co. v. Title Guaranty & Surety Co., 224 U.S. 152, 32 S.Ct. 457, 56 L.Ed. 706; Davis v. Pringle, 268 U.S. 315, 45 S.Ct. 549, 69 L.Ed. 974.

Affirmed.

Mr. Justice BLACK dissents.

Mr. Justice BLACKMUN, whom THE CHIEF JUSTICE, Mr. Justice BLACK, and Mr. Justice STEWART join, dissenting.

I cannot escape the conviction that the Court's ruling on this very narrow issue dishonors property...