CALIFORNIA STATE DEPT. OF EMPLOY. v. United States, 13663.

• Decision Date: 25 January 1954
• Docket Number: No. 13663.,13663.
• Citation: 210 F.2d 242
• Parties: CALIFORNIA STATE DEPARTMENT OF EMPLOYMENT v. UNITED STATES et al.
• Court: U.S. Court of Appeals — Ninth Circuit

210 F.2d 242 (1954)

CALIFORNIA STATE DEPARTMENT OF EMPLOYMENT v. UNITED STATES et al.

No. 13663.

United States Court of Appeals Ninth Circuit.

January 25, 1954.

Edmund G. Brown, Atty. Gen., State of Cal., James E. Sabine, Asst. Atty. Gen., Edward Sumner, Deputy Atty. Gen., for appellant.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Asst. Atty. Gen., Chief, Appellate Section, Carlton Fox, Fred Youngman, Sp. Assts. to Atty. Gen., Laughlin E. Waters, U. S. Atty., E. H. Mitchell, Edward R. McHale, Craig, Weller & Laugharn, Los Angeles, Cal., for appellees.

Before HEALY, BONE and ORR, Circuit Judges.

ORR, Circuit Judge.

This appeal presents for determination the rather novel issue as to whether tax liens of the United States, hereafter the Government, perfected prior to and superior to state tax liens are subordinated by § 67, sub. c of the Bankruptcy Act to the state tax liens because the state acquired possession of the bankrupt's personal property prior to bankruptcy. The specific question posed is, does § 67, sub. c of the Bankruptcy Act alter the priorities of statutory liens recognized by § 67, sub. b of said Act.

The facts are not disputed. Prior to June 12, 1950, the Commissioner of Internal Revenue perfected statutory liens upon the real and personal property of Claude E. Gee for the nonpayment of federal insurance contributions and withholding taxes. The California Department of Employment, hereafter the State, pursuant to the California Unemployment Insurance Act filed tax liens upon Gee's property, and on June 12, 1950, took actual possession of Gee's personal property. On July 19, 1950, Gee filed a voluntary petition in bankruptcy and was adjudicated a bankrupt. The receiver in bankruptcy entered into a stipulation with the State whereby the assets in the State's possession were turned over to the receiver subject to whatever rights the State might have in the property by virtue of its possession. The bankrupt's estate, on liquidation, amounted to $2,100.00, which sum was insufficient to pay the state and federal tax claims and expenses of administration.¹

On February 27, 1951, an order to show cause was issued to the State and the Government to appear before the referee for determination of their respective rights in the proceeds of the bankrupt's estate. The referee found that the Government tax liens were entitled to priority of payment over the State tax liens. The District Court affirmed the order of the referee.

Section 67, sub. b of the Bankruptcy Act expressly provides that liens for taxes owed to the United States or any state are valid against the trustee. 11 U.S.C.A. § 107, sub. b. Section 67, sub. b places federal and state liens in the same category. The rank and position of such liens is determined by applicable lien law. In re Pennsylvania Central Brewing Co., 3 Cir., 1940, 114 F.2d 1010, certiorari denied 312 U.S. 685, 61 S.Ct. 612, 85 L.Ed. 1123; In re Mt. Jessup Coal Co., D.C.Pa.1934, 7 F.Supp. 603; Collier on Bankruptcy, 14th Ed. Vol. 4, Par. 67.24. It is clear that the Government tax liens, having been perfected first, take precedence over the state tax liens. 26 U.S.C.A. §§ 3670, 3671, 3672; Michigan v. United States, 1943, 317 U.S. 338, 339, 63 S.Ct. 302, 87 L.Ed. 312.

The State, while conceding that prior to bankruptcy its tax liens were subordinate to the government liens, argues that after bankruptcy its liens became superior to the Government liens by virtue of its possession of the bankrupt's personal property. The State's argument is that § 67, sub. c gives its liens which are accompanied by possession priority over administrative expenses, and since by § 67, sub. c the Government liens, unaccompanied by possession, are subordinate to administrative expenses, they are therefore subordinate to the state liens.

The Government acknowledges that its lien position is subordinate to expenses of administration by reason of § 67, sub. c, but contends that the priority of its tax liens as against the state liens is unaffected by § 67, sub. c. This contention is bottomed on the theory that § 67, sub. c merely postpones payment of statutory liens to the payment of the debts specified in clauses (1) and (2) of § 64, sub. a but does not alter the order of priority as between lienholders placed in the same category by § 67, sub. b.²

From a consideration of both the language used in the Act and the legislative history we are persuaded that § 67, sub. c does not affect or impair the priorities of liens recognized by § 67, sub. b. The relevant part of § 67, sub. c provides that "* * * statutory liens, including liens for taxes or debts owing to the United States or to any State * * * on personal property not accompanied by possession of such property * * * shall be postponed in payment to the debts specified in clauses (1) and (2) of subdivision a of section 64 of this title * * *." 11 U.S.C.A. § 107, sub. c. The section deals only with the relationship of the lienholder without possession to unsecured creditors having priorities under § 64, sub. a. It does not attempt to deal with priorities as between secured...