North River Coal & Wharf Co. v. McWilliams Bros.

• Decision Date: 13 June 1932
• Docket Number: No. 44.,44.
• Citation: 59 F.2d 979
• Parties: NORTH RIVER COAL & WHARF CO. v. McWILLIAMS BROS., Inc. PEOPLE OF STATE OF NEW YORK v. MACLAY et al.
• Court: U.S. Court of Appeals — Second Circuit

59 F.2d 979 (1932)

NORTH RIVER COAL & WHARF CO. v. McWILLIAMS BROS., Inc.

PEOPLE OF STATE OF NEW YORK v. MACLAY et al.

No. 44.

Circuit Court of Appeals, Second Circuit.

June 13, 1932.

John J. Bennett, Jr., Atty. Gen. (Charles A. Schneider and Robert P. Beyer, Deputy Asst. Attys. Gen., of counsel), for appellant.

George Z. Medalie, U. S. Atty., of New York City (Samuel C. Coleman and Harry G. Herman, both of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The question raised by this appeal is whether under section 3466 of the U. S. Revised Statutes (31 USCA § 191) claims of the United States for unpaid income taxes and for damages are entitled to priority over claims of the state of New York for franchise taxes and taxes for gross earnings. The United States and the state of New York each presented its claims to receivers who had been appointed upon the filing of a creditors' bill alleging that the assets of McWilliams Bros., Inc., exceeded its liabilities and praying for the appointment of a receiver, and upon an answer admitting the allegations of the bill and joining in the prayer for relief. The District Court awarded priority to the United States.

The "consent receivership" in this case was in effect a "voluntary assignment." Under the decisions, the order appointing the receivers gave the United States priority over general creditors of the insolvent estate by virtue of section 3466 of the Revised Statutes. Price v. United States, 269 U. S. 492, 46 S. Ct. 180, 70 L. Ed. 373; United States v. Butterworth-Judson Corp., 269 U. S. 504, 46 S. Ct. 179, 70 L. Ed. 380. This priority attached when the receivers were appointed. United States v. Oklahoma, 261 U. S. at page 260, 43 S. Ct. 295, 67 L. Ed. 638. The question is whether section 3466 gives priority not only over the claims of general creditors, but over the claims of the state of New York for taxes, even though the taxes were liens upon the property of the insolvent at the time when the receivers were appointed. This section is in terms very sweeping. It provides that: "Whenever any person indebted to the United States is insolvent * * * the debts due to the United States shall be first satisfied. * * *" The word "debts" has long been held to include taxes.

The state of New York relies upon the decision of the Supreme Court in Marshall v. New York, 254 U. S. 380, 41 S. Ct. 143, 65 L. Ed. 315, which gave the state, by virtue of its sovereign prerogative, a priority over the general creditors of an insolvent that had been placed in the hands of a receiver. It says that, as this prerogative right was never ceded to the federal government by the Constitution, it avails as much against the United States as against private creditors. But the right of the United States depends upon its delegated power under the Constitution (Const. art. 1, § 8, cl. 18) to pass all laws necessary for carrying into execution the express power to levy and collect taxes and duties. Price v. United States, 269 U. S. 492, 46 S. Ct. 180, 70 L. Ed. 373. It is consequently paramount whenever exercised by statute.

The question of the extent of the state's prerogative recently came before the Supreme Court in Spokane County, Wash., v. United States, 279 U. S. 80, 49 S. Ct. 321, 73 L. Ed. 621. There taxes had been assessed against the personal property of a corporation by two counties in the state of Washington and afterwards a receiver of its assets was appointed who sold the property and reduced it to cash. The Supreme Court of Washington (Exchange Nat. Bank of Spokane v. U. S., 147 Wash. 176, 265 P. 722, 62 A. L. R. 139), from which the appeal lay, had held that under the law of that state the liens of the counties for the taxes assessed before the receive was appointed had not been made specific. After the appointment of the receivers, the Commissioner of Internal Revenue assessed income taxes against the corporation for years prior to the date of the receivership. The funds in the hands of the receiver were, as in the present case, insufficient to pay in full the claims of the United States and those of the counties. The court, per Taft, C. J., held that the taxes due the United States were entitled to payment by the receiver in priority to claims for county taxes that were not supported by a specific lien acquired prior to the appointment of the receiver. But he expressly reserved the question as to whether the taxes due the United States would have had priority if liens therefor had been perfected under the laws of the state prior to the receivership, and cited the decision of the Supreme Court of Washington in Wilberg v. Yakima County, 132 Wash. 219, 231 P. 931, 933, 41 A. L. R. 184, where it was held that, if a tax is to be collected from personal property, "it does not become a lien upon such property until it has been seized and distrained by the sheriff. * * *" He emphasized the broad scope of the taxing power of the United States, referred to the decisions of the Supreme Court in United States v. Fisher, 2 Cranch, 358, 2 L. Ed. 304, Field v. United States, 9 Pet. 182, 9 L. Ed. 94, Lane County v. Oregon, 7 Wall. 71, 19 L. Ed. 101, United States v. Snyder, 149 U. S. 210, 13 S. Ct. 846, 37 L. Ed. 705, and other cases, and, after discussing the authorities, went on to say (at page 93 of 279 U. S., 49 S. Ct. 321, 324): "The foregoing citations certainly make it clear that the United States has power, in order to collect its taxes and its revenues and debts due it, to confer priority for them over those of the states."

Since the decision in Spokane County, Wash., v. United States there can be no doubt that the United States should be awarded priority here, unless the taxes due the state of New York can be regarded as supported by a sufficient lien to give them a preference over claims of the United States in spite of Rev. St. § 3466 (31 USCA § 191).

Counsel for the state of New York attempt to distinguish Spokane County, Wash., v. United States on the ground that section 197 of the New York Tax Law (Consol. Laws, c. 60) provides that a franchise or gross earnings tax "shall be a lien upon and bind all the real and personal property of the corporation * * * until the same is paid in full," whereas the statute of the state of Washington before the court in the Spokane Case was construed as imposing no effective lien prior to the taking of subsequent proceedings to enforce it. But section 197, as it read when the New York taxes in the case at bar became payable, did not specify when the tax lien would arise, and section 201 provided that, upon the issue of a warrant by the tax commission commanding the sheriff to levy and sell the real and personal...