Chandler v. Nathans

• Decision Date: 06 July 1925
• Docket Number: No. 3323.,3323.
• Parties: CHANDLER v. NATHANS.
• Court: U.S. Court of Appeals — Third Circuit

6 F.2d 725 (1925)

CHANDLER v. NATHANS.

No. 3323.

Circuit Court of Appeals, Third Circuit.

July 6, 1925.

John C. Gilpin and Graham & Gilfillan, all of Philadelphia, Pa., for appellant.

J. Howard Reber, F. B. Bracken, Percival H. Granger, and Reber, Granger & Montgomery, all of Philadelphia, Pa., for appellee.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

Frederick T. Chandler, Jr., a member of the stock brokerage firm of Chandler Bros. & Co., filed an income tax return for the year 1919, in which he showed income substantially larger than that which he had actually received. Whether he did this with the purpose of concealing his failing circumstances or the failing circumstances of the firm is not a matter of present concern. Of the taxes assessed on this peculiar return he made three of the four payments — March, June, and September — all larger than they should have been. When the December payment came due he did not have the money with which to meet it. Thereupon he looked about for a way out. He found it by filing a claim for refund of the excess taxes previously paid and unlawfully collected. While his claim was pending, Chandler and the firm went into bankruptcy, and thereafter, on prosecution by his trustee, his application for refund was allowed, and $44,549.60 paid by the government. Chandler then filed a petition with the referee in bankruptcy praying that the trustee be directed to surrender this sum to him. The referee entered an order denying the prayer of the petition. On review, the District Court approved the referee's order. The case is here on appeal, and on petition to review and revise in matter of law. The money paid by the government has been placed on special deposit to await payment to Chandler or to his trustee in bankruptcy according as this court shall decide.

There are two issues involved: First, whether the bankrupt's unliquidated claim for refund was property, or a property right, which vested in his trustee in bankruptcy by operation of the bankruptcy law; and, second, whether the money refunded on the claim in 1923 was paid under the Revenue Act of 1921 (42 Stat. 227), which repealed the Revenue Act of 1918 (40 Stat. 1057), under which the tax was paid and claim for refund made, and whether accordingly the money so paid was after-acquired property of the bankrupt, passing directly to him.

The answer to the first question depends on the interpretation of those provisions of the Bankruptcy Act (Comp. St. §§ 9585-9656) which declare what property of the bankrupt vests in the trustee on adjudication. The main, if not the controlling, provision of the act in this respect is section 70 (Comp. St. § 9654), which provides that: "The trustee of the estate of a bankrupt, * * * shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt * * * to all * * * (3) powers which he might have exercised for his own benefit; * * * (4) property transferred by him in fraud of his creditors; (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him; * * * and (6) rights of action arising upon contracts or from the unlawful taking or detention of, or injury to, his property."

If section 70 includes every kind of property which by force of the statute passes from the bankrupt to his trustee, and excludes property of every other kind, there is a debatable question whether the right which the Revenue Act of 1918 gave a taxpayer to apply for and obtain a refund of taxes unlawfully paid and collected comes within the provision. If the section is not strictly inclusive of all property of the bankrupt which on adjudication vests in his trustee, the question is less difficult.

On this question the learned trial court followed the law of English v. Richardson, 80 N. H. 364, 117 A. 287, 22 A. L. R. 1302, 48 Am. Bankr. R. 582, declared by the Supreme Court of New Hampshire in 1922, where, in turn, that court followed In re Baudouine, decided by Judge Brown in the District Court of the United States for the Southern District of New York in 1899 (96 F. 536), approved as to the law by Judge Lacombe in a concurring opinion when on appeal to the Circuit Court of Appeals for the Second Circuit (101 F. 574, 41 C. C. A. 318). In the English Case the Supreme Court of New Hampshire said: "The defendant contends that the trustee must look to the Bankruptcy Act for his title, and that the terms of section 70a of that act, specifying estate of the debtor which vests in the trustee, are not broad enough to include the deposit the right there in issue. The properties enumerated in this section include those we have just quoted as 4, 5, and 6. It is not perceived why the debtors in the instant case could not, any time before bankruptcy, have transferred whatever equity they had in the deposit over and above the obligation secured by it. But if there were any doubt upon this question, it is sufficient to say that the enumeration of property in section 70a is not exclusive of other assets of the debtors not therein specifically defined."

Quoting Judge Brown in Re Baudouine, the court continued: "This and other provisions of the act show that the act was designed to cover all assets and estate of a bankrupt that can in any manner be made legally available for the payment of his debts. * * * In specifying the properties of debtors which vest in the trustee, the Bankruptcy Act of 1898 deals in particulars, where in the Act of 1867 general words were used. It is not thought, however, that they differ in meaning. Collier, Bankruptcy (10th Ed.) 994. The statute is broad enough to include the right to redeem the property of a debtor hypothecated to secure future rentals."

This is the substance of the statement more elaborately made in Re Baudouine. In that case Judge Brown did not think that section 70 of the Bankruptcy Act, in classifying the properties of a bankrupt which by operation of law vest in his trustee, made those properties exclusive of other assets of the bankrupt not therein specifically named. Inquiring what properties vest, he went to other provisions of the Bankruptcy Act and construed the act rather than section 70, saying: "The Bankruptcy Act, however, cannot be construed so narrowly as to exclude any vested interest constituting an asset available to creditors, merely on the ground that this asset is not expressly enumerated in section 70. Other provisions of the Bankrupt Act show that the act is designed to cover all the property and estate of the bankrupt and all assets that can in any manner be legally made available for the payment of his debts, and to distribute all these assets equally among his creditors. * * * It is manifest, therefore, that the Bankrupt Act cannot be justly administered, nor the rights of creditors be secured against certain loss, unless this important asset is reduced to the possession and administration of the bankruptcy court. Section 70 in no way prohibits this. Its provisions are not exclusive of other assets not therein described; and it should not be made exclusive by unnecessary construction, when that construction would evidently thwart the purpose of the act, and work a manifest wrong to creditors and an advantage to the debtor to which he is not entitled. By section 2, the court of bankruptcy is authorized (7) to cause the estates of bankrupts to be collected, reduced to money and distributed. By section 47, trustees are required (2) to collect and reduce to money the property of the estates for which they are trustees. There can be no doubt that the terms `property' and `estates of bankrupts' are here used in the broadest sense, and intended to include every species of...