421 U.S. 330 (1975), 74-121, Phelps v. United States

Docket Nº:No. 74-121
Citation:421 U.S. 330, 95 S.Ct. 1728, 44 L.Ed.2d 201
Party Name:Phelps v. United States
Case Date:May 19, 1975
Court:United States Supreme Court
 
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Page 330

421 U.S. 330 (1975)

95 S.Ct. 1728, 44 L.Ed.2d 201

Phelps

v.

United States

No. 74-121

United States Supreme Court

May 19, 1975

Argued April 16, 1975

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

After the Internal Revenue Service (IRS) had made federal tax assessments against a company and the company failed to pay the taxes after formal demand, the company transferred its assets to an assignee for the benefit of creditors, who converted the assets into cash. The IRS then filed a notice of tax lien respecting the assessments and served a levy notice on the assignee, who did not, however, comply with the IRS's payment demand. The company was thereafter adjudicated bankrupt, and petitioner receiver in bankruptcy made application to the bankruptcy Referee for an order requiring the assignee to turn over the cash proceeds. The IRS opposed the application on the ground that the bankruptcy court lacked jurisdiction over the subject matter of the application because the United States was entitled to possession of the cash proceeds held by the bankrupt's assignee. The Referee rejected the IRS's contention, holding that the assignment passed inalienable title to the assets of the company to the assignee, and the District Court upheld the Referee. The Court of Appeals reversed.

Held: The United States, by serving the bankrupt taxpayer's assignee with a valid notice of levy, took constructive custody of the cash proceeds in the assignee's possession, and neither the bankrupt nor petitioner as receiver could assert a claim to those proceeds. The receiver's recourse is limited to a plenary suit under § 23 of the Bankruptcy Act. Pp. 333-337.

495 F.2d 1283, affirmed.

BRENNAN, J., delivered the opinion for a unanimous Court.

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BRENNAN, J., lead opinion

MR. JUSTICE BRENNAN delivered the opinion of the Court.

Between March and June, 1971 the Internal Revenue Service (IRS) made assessments of federal taxes in the amount [95 S.Ct. 1730] of $140,831.59 against Chicagoland Ideel Cleaners, Inc. Chicagoland failed to pay the taxes after formal demand. Instead, on June 28, 1971, Chicagoland transferred its assets to an assignee for the benefit of creditors. The assignee promptly converted the assets into cash of approximately $38,000. On August 25, 1971, the IRS filed a notice of tax lien respecting the March-June assessments in the office of the Recorder of Deeds of Cook County, Ill., and, on the same day, served a notice of levy on the assignee. The notice of levy stated that the proceeds in the assignee's hands "are hereby levied upon and seized for satisfaction" of the taxes, "and demand is hereby made upon you for the [proceeds]." On September 14, 1971, an involuntary petition in bankruptcy was filed against Chicagoland. Chicagoland was adjudicated bankrupt, and petitioner Phelps was appointed receiver in bankruptcy.

Petitioner receiver, on October 19, 1971, filed an application with the Referee in Bankruptcy for an order requiring the assignee, who had not complied with the IRS demand for payment, to turn over to petitioner the $38,000 proceeds from the sale of Chicagoland's assets. The IRS opposed the application on the ground that

[t]his court of bankruptcy lacks jurisdiction over the subject matter of the application because the United States is entitled to the possession of the moneys now held by [the] assignee of the bankrupt. . . .

The Referee in Bankruptcy rejected the contention, holding that "the

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assignment . . . passed inalienable title to the assets of Chicagoland . . . to the assignee," and therefore "the notice of levy of the Internal Revenue Service is a nullity. . . ." The Referee accordingly entered an order directing the assignee to "surrender and turn over to" petitioner "all sums in his possession. . . ." The District Court for the Northern District of Illinois, on petition for review on behalf of the IRS, approved the Referee's turnover order. The Court of Appeals for the Seventh Circuit reversed. 495 F.2d 1283 (1974). The Court of Appeals held:

Since possession of the property resided in the United States as against the [petitioner] receiver, the bankruptcy court lacked jurisdiction summarily to adjudicate the controversy without the Government's consent. . . . The United States is now entitled to have its claim adjudicated in a plenary suit. We respectfully decline...

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