Community Progress, Inc. v. White

• Decision Date: 11 May 1982
• Citation: 444 A.2d 1369,187 Conn. 128
• Court: Connecticut Supreme Court
• Parties: COMMUNITY PROGRESS, INC. v. Edward WHITE et al.

Page 1369

444 A.2d 1369

187 Conn. 128

COMMUNITY PROGRESS, INC. v. Edward WHITE et al.

Supreme Court of Connecticut.

Argued March 5, 1982.

Decided May 11, 1982.

William J. Prensky, Asst. Atty. Gen., with whom were Charles Overend, Asst. Atty. Gen., and, on the brief, Carl R. Ajello, Atty. Gen., for appellee (defendant state of Connecticut).

David A. Reif, New Haven, for appellee (plaintiff).

Alexander Winnick, New Haven, for appellants (defendants Jones et al.)

Barry K. Stevens, Asst. U. S. Atty., for appellee in the first case and appellant in the second case (defendant United States of America).

Before PETERS, PARSKEY, ARMENTANO, SHEA and BRENNAN, JJ.

PETERS, Associate Justice.

This appeal concerns the relative priority of the United States and other creditors in the judicial dissolution of a corporation pursuant to a state statute. The plaintiff, Community Progress, Inc., filed a certificate of dissolution with the Secretary of the State of Connecticut on March 1, 1977 and three days later, on March 4, filed a petition, pursuant to General Statutes § 33-491, ¹ asking for judicial determination of all outstanding claims and demands against it. After due notice and the filing of various claims, the trial court held a hearing and made a determination about the plaintiff's assets and the claimants' respective rights thereto. The claimants who have appealed are two attachment creditors and the United States.

The facts found by the trial court in its memorandum of decision are undisputed. The debtor's sole assets at the time of its dissolution consisted of funds totaling $171,144.80 on deposit in three banks, of which $50,000 in the Orange National Bank were subject to attachment. The United States filed claims totaling $3,178,045, consisting of $799,055 owed to the Community Services Administration and $2,378,990 owed to the Department of Labor. The State of Connecticut filed claims of $1,041,732.20, arising out of moneys due on various state grants-in-aid contracts. Sonford Ressler and Durrick O. K. Jones had attachment liens totaling $50,000; the Jones lien had matured into a judgment lien, but neither lien had been perfected through an execution. In addition, claims were filed by two attorneys. Attorney David A. Reif had a claim for $1874.50 for fees and expenses directly attributable to the dissolution proceedings themselves. Attorney Stephen E. Ronai was awarded $5000 on a claim of $6375 for services rendered to preserve the assets of the plaintiff in connection with the lawsuits that had resulted in the attachment claims.

The trial court, concluding that there was no evidence of the plaintiff's insolvency, relied solely upon the priority of claims established by § 33-494 ² and ordered distribution as follows: Under § 33-494(1), as a first priority, the claims of Attorney Reif and Attorney Ronai; under § 33-494(3), the claims of the United States and the State of Connecticut "upon a parity basis"; and under § 33-494(5), all other claims. The court specifically found that because of the absence of a timely execution, the attached funds on deposit with the Orange National Bank had become part of the assets available for distribution to priority creditors.

On this appeal, the United States challenges the trial court's conclusion about the applicable statutes and the creditors Jones and Ressler contest the court's conclusion about the status of their respective judgment and attachment liens. Since resolution of the claims of the United States necessarily has implications for the status of liens created under state law, we will address first the appeal of the United States.

Federal law provides for the claims of the federal government a virtually absolute priority in the assets of an insolvent debtor in cases in which an act of bankruptcy has been committed. The governing statute, variously denominated § 3466 of the Revised Statutes (1875) or 31 U.S.C. § 191, ³ has been in force since 1797 and is founded upon a policy of protecting the federal revenues. The Supreme Court of the United States has repeatedly stated that "the statute must be given a liberal construction consonant with the public policy underlying it." United States v. Key, 397 U.S. 322, 324, 90 S.Ct. 1049, 1051, 25 L.Ed.2d 340 (1970); United States v. Moore, 423 U.S. 77, 81-82, 96 S.Ct. 310, 313, 46 L.Ed.2d 219 (1975); Bramwell v. United States Fidelity & Guaranty Co., 269 U.S. 483, 487, 46 S.Ct. 176, 177, 70 L.Ed. 368 (1926). It is clear that federal rather than state law determines the proper characterization of a state or private lien that may be competitive with the claims of the United States; United States v. Security Trust & Savings Bank, 340 U.S. 47, 51, 71 S.Ct. 111, 113, 95 L.Ed. 53 (1950); Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 374-75, 67 S.Ct. 340, 347, 91 L.Ed. 348 (1946); United States v. Oklahoma, 261 U.S. 253, 260, 43 S.Ct. 295, 297, 67 L.Ed. 638 (1923); and doubtful, under federal law, whether any such competing lien is ever sufficiently perfected and choate to overcome the priority given to the United States. United States v. Vermont, 377 U.S. 351, 358 n.8, 84 S.Ct. 1267, 1271 n.8, 12 L.Ed.2d 370 (1964); United States v. Gilbert Associates, Inc., 345 U.S. 361, 365, 73 S.Ct. 701, 704, 97 L.Ed. 1071 (1953); Illinois ex rel. Gordon v. Campbell, supra, 329 U.S. 370, 67 S.Ct. 345; United States v. Texas, 314 U.S. 480, 486, 62 S.Ct. 350, 353, 86 L.Ed. 356 (1941). See generally Plumb, "The Federal Priority in Insolvency: Proposals for Reform," 70 Mich.L.Rev. 3 (1971); Kennedy, "The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien," 63 Yale L.J. 905 (1954); 2 G. Gilmore, Security Interests in Personal Property (1965) § 40.3.

This court recognized, in Hofmann v. United Welding & Mfg. Co., 140 Conn. 597, 600, 102 A.2d 878 (1954), that " § 3466 is the supreme law of the land and the courts of this state are bound by and must apply it, whenever it is pertinent." We held (p. 604, 102 A.2d 878), furthermore, that the fact of the debtor's insolvency, which triggers the applicability of § 3466, may be adjudicated "in the very proceeding in which priority is being sought. It was the duty of the court, in passing upon the matter of priority, to determine whether facts existed which brought the claim of the United States within the section in question."

In order for its § 3466 claim to priority to be established under the circumstances of this case, the United States must demonstrate (1) the insolvency of the debtor, (2) debts due to the United States and (3) either a voluntary assignment of the debtor's property or the commission of an act of bankruptcy. The trial court found that the plaintiff-debtor had not challenged the correctness of the amounts claimed to be owed to the United States. The court concluded, however, that the statute was inapplicable because the plaintiff's insolvency had not been demonstrated. It noted that the plaintiff had neither been adjudicated a bankrupt nor alleged its insolvency in its petitions for dissolution and for winding up. ⁴ It found, furthermore, that no evidence "was ever introduced during any part of the proceedings by any party that [the plaintiff] was insolvent under the Federal Bankruptcy Act or was unable to pay its maturing debts." We disagree that the record at trial was insufficient to establish the plaintiff's insolvency.

The test of whether a person is insolvent under the Bankruptcy Act is that "the aggregate of his property ... shall not at a fair valuation be sufficient in amount to pay his debts." 11 U.S.C. § 1(19) (1940) (52 Stat. 840 [1938]). Measured by that test, the plaintiff's insolvency is apparent. Its total assets of $171,144.80 are insufficient to pay the $3,178,045 owed to the United States, and there are other outstanding creditors' claims as well. Hofmann established that insolvency may be determined without a formal adjudication of bankruptcy. The only reason why Hofmann required a remand to the trial court for a further determination of insolvency was that there the discrepancy between the debtor's assets and his debts only became apparent six years subsequent to the institution of receivership proceedings. A remand was therefore essential to determine whether, despite an initially uncontested allegation of solvency at the institution of the receivership, the debtor was already insolvent at that earlier time. In the case before us, the insufficiency of the plaintiff's assets to pay its debts incontrovertibly arose at the very time that wind-up proceedings under General Statutes § 33-494 were begun. The evidence before the trial court in the form of claims both timely filed and uncontested in amount establishes the plaintiff's insolvency.

The plaintiff's insolvency is only one element of what the United States must prove to establish its § 3466 priority. The attaching creditors in their appeal raise the question whether the claims owed to the United States are "debts" within the meaning of the federal statute. These creditors argue that the federal claims for reimbursement, based upon unauthorized expenditures which were disallowed after audit, do not sufficiently allege an obligation to repay upon the part of the plaintiff. This argument is unpersuasive.

The claim of the federal government arose out of government contracts with the plaintiff. Such contracts automatically incorporate by reference applicable federal statutes and regulations. G. L. Christian & Associates v. United States, 160 Ct.Cl. 1, 66-67, 312 F.2d 418, reh. denied, 160 Ct.Cl. 58, 320 F.2d 345, cert. denied, 375 U.S. 954, 84 S.Ct. 444, 11 L.Ed.2d 314 (1963), reh. denied, 376 U.S. 929, 84 S.Ct. 657, 11 L.Ed.2d 627, motion for leave to file second petition for rehearing denied, 377 U.S. 1010, 84 S.Ct. 1906, 12 L.Ed.2d 1059 (1964); and see Sutton v. United States, 256 U.S. 575, 41 S.Ct. 563, 65 L.Ed. 1099 (1921); The Floyd...