417 U.S. 642 (1974), 73-5265, Kokoszka v. Belford

Docket Nº:No. 73-5265
Citation:417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374
Party Name:Kokoszka v. Belford
Case Date:June 19, 1974
Court:United States Supreme Court
 
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Page 642

417 U.S. 642 (1974)

94 S.Ct. 2431, 41 L.Ed.2d 374

Kokoszka

v.

Belford

No. 73-5265

United States Supreme Court

June 19, 1974

Argued April 22, 1974

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

1. An income tax refund is "property" that passes to the trustee under § 70a(5) of the Bankruptcy Act, being "sufficiently rooted in the bankruptcy past," and not being related conceptually to or the equivalent of future wages for the purpose of giving the bankrupt wage earner a "fresh start." Lines v. Frederick, 400 U.S. 18, distinguished. Pp. 645-648.

2. The provision in the Consumer Credit Protection Act limiting wage garnishment to no more than 25% of a person's aggregate "disposable earnings" for any pay period does not apply to a tax refund, since the statutory terms "earnings" and "disposable earnings" are confined to periodic payments of compensation and do not pertain to every asset that is traceable in some way to such compensation. Hence, the Act does not limit the bankruptcy trustee's right to treat the tax refund as property of the bankrupt's estate. Pp. 648-652.

479 F.2d 990, affirmed.

BURGER, C.J., delivered the opinion for a unanimous Court.

BURGER, J., lead opinion

MR. CHIEF JUSTICE BURGER delivered the opinion of the Court.

We granted certiorari in this case, 414 U.S. 1091 (1973), to resolve the conflict among the Courts of Appeals

Page 643

on the questions of whether an income tax refund is "property" under § 70a(5) of the Bankruptcy Act1 and whether, assuming that all or part of such tax refund is property which passes to the trustee, the Consumer Credit Protection Act's2 limitation on wage garnishment serves to exempt 75% of the refund from the jurisdiction of the trustee.3

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[94 S.Ct. 2433] The petitioner was employed for the first three months of 1971. He was then unemployed from April, 1971, until late in December of that year. He as reemployed for about the last week and a half of December, 1971. While employed, petitioner claimed two exemptions for federal income tax purposes, the maximum number of deductions to which he was entitled, and his employer withheld the appropriate portion of his wages. 26 U.S.C. § 3402. During the year 1971, petitioner had a gross income of $2,322.

On January 5, 1972, petitioner filed a voluntary petition in bankruptcy. With the exception of a 1962 Corvair automobile which the trustee abandoned as an asset upon the bankrupt's payment of $25, the sole asset claimed by the trustee in bankruptcy was an income tax refund entitlement for $250.90. On February 3, 1972, the referee in bankruptcy entered an ex parte order directing petitioner to turn the refund over to the trustee upon its receipt. The bankrupt moved to vacate that order and, after a hearing, the referee denied the motion. In mid-February, 1972, petitioner filed his income tax return for the calendar year 1971. Several weeks later, he received his refund check from the Internal Revenue Service. Upon its receipt, petitioner complied with the order of the trustee but filed a petition for review of the referee's decision in the United States District Court.4 The District Court denied relief. Petitioner was granted

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leave to appeal.5 On May 18, 1973, the United States Court of Appeals for the Second Circuit affirmed the order of the District Court, holding that the tax refund was property within the meaning of § 70a(5) of the Bankruptcy Act and that it therefore vested in the trustee. 479 F.2d 990. The court further held that the limitations on garnishment contained in the Consumer Credit Protection Act did not apply to bankruptcy situations and that, consequently, the trustee was entitled to the entire refund. Petitioner seeks review of these questions here.

(1)

We turn first to the question of whether petitioner's income tax refund was "property" within the meaning of § 70a(5) of the Bankruptcy Act. The term has never been given a precise or universal definition. On an earlier occasion, in Segal v. Rochelle, 382 U.S. 375 (1966), the Court noted that

"[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."

Id. at 379, quoting Fisher v. Cushman, 103 F. 860, 864 (CA1 1900). In determining the term's scope -- and its limitations -- the purposes of the Bankruptcy Act "must ultimately govern." 382 U.S. at 379. See also Lines v. Frederick, 400 U.S. 18 (1970); Local Loan Co. v. Hunt, 292 U.S. 234 (1934).

[94 S.Ct. 2434] In applying these general considerations to the present situation, there are some guidelines. In Burlingham v. Crouse, 228 U.S. 459 (1913), for example, the Court stated:

It is the twofold purpose of the Bankruptcy Act to convert the estate of the bankrupt into cash and distribute it among creditors and then to give

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the bankrupt a fresh start with such exemptions and rights as the statute left untouched.

Id. at 473. See also Wetmore v. Markoe, 196 U.S. 68, 77 (1904); Williams v. U.S. Fidelity Co., 236 U.S. 549, 554-555 (1915); Stellwagen v. Clum, 245 U.S. 605, 617 (1918). On two rather recent occasions, the Court has applied these general principles to the precise statutory section and to the precise term at issue here. In Segal v. Rochelle, supra, the Court said:

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.

382 U.S. at 379. At the same time, the Court noted that this construction must be tempered by the intent of Congress "to leave the bankrupt free after the date of his petition to accumulate new wealth in the future," ibid., and thus "make an unencumbered fresh start," id. at 380. Several years later, in Lines v. Frederick, supra, these same considerations were repeated in almost identical language. 400 U.S. at 19. Segal and Lines, while construing § 70a(5) in almost identical language, reached contrary results. In each case, the Court found the crucial analytical key, not in an abstract articulation of the statute's purpose, but in an analysis of the nature of the asset involved in light of those principles.

In Segal, supra, this Court held that a business-generated loss carryback tax refund -- which was based on pre-bankruptcy losses but received after bankruptcy --

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should pass to the trustee as § 70a(5) property. Balancing the dual purpose of the Bankruptcy Act, see Burlingham v. Crouse, supra, the Court concluded that the refund was

sufficiently rooted in the prebankruptcy past and so little entangled with the bankrupt's ability to make an unencumbered fresh start that it should be regarded as "property" under § 70a(5),

382 U.S. at 380. The Court noted that "the very losses generating the refunds often help precipitate the bankruptcy and injury to the creditors," id. at 378, and that passing the claim to the trustee did not impede a "fresh start." On the contrary, a bankrupt "without a refund claim to preserve has more reason to earn income, rather than less." Id. at 380.

In Lines, supra, on the other hand, the Court held that vacation pay, accrued prior to the date of filing and collectible either during the plant's annual shutdown for vacation or on the final termination of employment, does not pass to the trustee as § 70a(5) property. As in Segal, supra, the Court analyzed the nature of the asset in the light of the dual purposes of the Bankruptcy Act. It concluded that such vacation pay was closely tied to the bankrupt's opportunity to have a "`clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.'" 400 U.S. at 20, quoting Local Loan Co. v. Hunt, supra, at 244.

The income tax refund at issue in the present case does not relate conceptually to future wages and it is not the equivalent of future wages for the purpose of giving the bankrupt a "fresh start." The tax payments refunded here were [94 S.Ct. 2435] income tax payments withheld from the petitioner prior to his filing for bankruptcy and are based on earnings prior to that filing. Relying on Lines, however, petitioner contends that the refund is necessary for a "fresh start" since it is solely derived from wages.

Page 648

In Lines, we described wages as "`a specialized type of property presenting distinct problems in our economic system,'"6 since they provide the basic means for the "economic survival of the debtor." 400 U.S. at 20.

Petitioner is correct in arguing that both this tax refund and the vacation pay in Lines share the common characteristic of being "wage based." It is also true, however, that only the vacation pay...

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