In re Inland Waterways, 6956.

• Decision Date: 28 February 1947
• Docket Number: No. 6956.,6956.
• Citation: 71 F. Supp. 134
• Parties: In re INLAND WATERWAYS, Inc.
• Court: U.S. District Court — District of Minnesota

71 F. Supp. 134

In re INLAND WATERWAYS, Inc.

No. 6956.

District Court, D. Minnesota, Fifth Division.

February 28, 1947.

Edward L. Fogarty, of Duluth Minn., trustee in bankruptcy of Inland Waterways, Inc.

Victor E. Anderson, U. S. Atty., and Carl R. Perkins, Sp. Atty., U. S. Treasury Department, both of St. Paul, Minn., for the United States.

Arthur M. Clure, of Duluth, Minn., for trustee in bankruptcy.

BELL, District Judge.

This is a bankruptcy proceeding. Federal tax liability of the bankrupt and the bankrupt estate is in controversy. The facts are not in dispute.

The bankrupt, a Minnesota corporation, was engaged in shipbuilding at Duluth, Minnesota, where it employed about two hundred persons. On December 19, 1942, it filed a petition under Chapter 10 of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., and a trustee was appointed. It soon was ascertained that operation of the business was not justified and the services of employees thereupon were terminated, the corporation was adjudged a bankrupt and the business liquidated. On March 13, 1943, the Court fixed the time within which claims could be filed. The Court in the hearing on claims allowed priority in the order and amounts as follows: 1. Wages due workmen and clerks not exceeding six hundred dollars each earned within three months prior to December 19, 1942, $44,168.89. 2. Taxes due and owing the United States $3,533.20. 3. Taxes due and owing to the State of Minnesota and county of St. Louis $4,557.62. There were no other debts having priority by law. Unsecured claims aggregated $168,941.62.

Where a corporate debtor is not reorganized but is ordered liquidated, Section 64 of the Bankruptcy Act, 11 U.S.C.A. § 104, specifying the classes of debts which are to have priority of payment over the general creditors of the bankrupt's estate and the order of their payment with respect to each other is applicable in determining priority of claims against the estate. In assigning the wage claims priority over taxes the Court in this case followed the plain mandate of the statute. United States v. Killoren, 8 Cir., 119 F.2d 364; In re Columbia Ribbon Company, 3 Cir., 117 F.2d 999.

The intention of Congress in giving labor claims priority over all others, save expenses of administration, is for the benefit of those who are dependent on their wages for a livelihood and who are not expected to know the credit standing of their employer but must accept employment as it comes. In re Paradise Catering Corporation, D. C., 36 F.Supp. 974; In re Lawsam Electric Company, Inc., D. C., 300 F. 736; In re Estey, D. C., 6 F.Supp. 570; Blessing v. Blanchard, 9 Cir., 223 F. 35, Ann.Cas.1916B, 341.

The bankrupt, at the time of filing the petition, was engaged in the construction of ships for the United States Navy. The vessels under construction were at various stages of completion and were finished in other Navy Yards. However, it was ascertained that a balance was due the bankrupt on the uncompleted work which was compromised and settled for $14,505.38. The Bureau of Supplies and Accounts of the Navy Department transferred to the General Accounting Office the sum of $3,533.20 in payment of the government's claim for employment and withholding taxes for 1942 and the balance $10,972.18 was paid to the Trustee in Bankruptcy. The Trustee protested the deduction for and payment of the taxes and has not received the $3,533.20 or any part thereof. By this procedure the government offset its claim for taxes against the bankrupt's claim for services.

Section 68, sub. a, of the Bankruptcy Act, 11 U.S.C.A. § 108, sub. a, provides: "In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid." The purpose of this statute was stated in Cumberland Glass Manufacturing Co. v. DeWitt, 237 U.S. 447, 35 S.Ct. 636, 639, 59 L.Ed. 1042, in which the court said: "The object of this provision is to permit, as its terms declare, the statement of the account between the bankrupt and the creditor, with a view to the application of the doctrine of set-off between mutual debts and credits. The provision is permissive rather than mandatory, and does not enlarge the doctrine of set-off, and cannot be invoked in cases where the general principles of set-off would not justify it. * * * The matter is placed...