Gehrig v. Shreves, 73-1352.

• Decision Date: 06 February 1974
• Docket Number: No. 73-1352.,73-1352.
• Citation: 491 F.2d 668
• Parties: In the Matter of Franklin Michael Gehrig, Bankrupt. Franklin Michael GEHRIG, Appellant, v. Kenneth E. SHREVES, Trustee, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

491 F.2d 668 (1974)

In the Matter of Franklin Michael Gehrig, Bankrupt.

Franklin Michael GEHRIG, Appellant, v. Kenneth E. SHREVES, Trustee, Appellee.

No. 73-1352.

United States Court of Appeals, Eighth Circuit.

Submitted October 19, 1973.

Decided February 6, 1974.

Robert S. Catz, Legal Aid Society of Omaha-Council Bluffs, Inc., Omaha, Neb., for appellant.

Kenneth E. Shreves, appellee, waived oral argument or filing of appellee's brief.

Before LAY, BRIGHT and WEBSTER, Circuit Judges.

BRIGHT, Circuit Judge.

This case raises important issues in the administration of the estates of bankrupt wage earners: whether postbankruptcy income tax refunds derived from prebankruptcy wages can be claimed by the bankrupt's trustee as "property" within the scope of § 70(a) (5) of the Bankruptcy Act;¹ and whether the tax refund is subject to the restrictions on wage garnishments of the Consumer Credit Protection Act of 1968.²

The district court adopted the opinion of the bankruptcy referee and held that the refund from overpayment of income tax by Franklin Michael Gehrig belonged to the trustee in bankruptcy. Bankrupt-Gehrig appeals this decision. We reverse and remand the case for further proceedings.

In passing on the issues in this appeal, we are mindful of a conflict between two other circuits.³ In the case of In re Cedor, 337 F. Supp. 1103 (N.D. Cal.1972), affirmed by the Ninth Circuit in In re James, 470 F.2d 996 (9th Cir.), cert. denied sub nom. Walsh v. Cedor, 411 U.S. 973, 93 S.Ct. 2148, 36 L.Ed.2d 697 (1973), it was held that income tax refunds generated from the minimum amounts withheld from wages as required by law does not constitute § 70(a)(5) "property" and, therefore, such refund belongs to the taxpayer-bankrupt. The Cedor court also ruled that a refund of income taxes attributable to optional withholding of amounts greater than the minimum required by law should be considered as wages which are protected by the anti-garnishment provisions of the Consumer Credit Protection Act, 15 U.S.C. §§ 1672 and 1673. The Second Circuit's opinion of In re Kokoszka, 479 F.2d 990 (2d Cir.), cert. granted sub nom. Kokoszka v. Belford, 414 U.S. 1091, 94 S.Ct. 721, 38 L.Ed.2d 548 (1973), decided that a wage earner's income tax refunds did constitute "property" passing to the trustee and that the Consumer Credit Protection Act was inapplicable.

We agree with the court in Cedor that such tax refunds do not constitute "property" under § 70(a)(5), but we are unpersuaded by its finding that the anti-garnishment provisions of the Consumer Credit Protection Act applies.

I.

TAX REFUND ATTRIBUTABLE TO MINIMUM WITHHOLDING.

Our decision turns upon an analysis of two Supreme Court decisions. In Segal v. Rochelle, 382 U.S. 375, 86 S. Ct. 511, 15 L.Ed.2d 428 (1966), the Court considered a loss-carryback tax refund claim obtained by a bankrupt partnership which related to prebankruptcy losses. The Court concluded that refund claims had passed to the trustee under § 70(a)(5) as "property `which prior to the filing of the petition ... the bankrupt could by any means have transferred.'" Id. at 381, 86 S.Ct. at 516 (footnote omitted) (brackets in original).

In Segal, the Court rejected the holdings of Fournier v. Rosenblum, 318 F.2d 525 (1st Cir.1963), and In re Sussman, 289 F.2d 76 (3d Cir.1961), that such loss-carryback refund claims for prebankruptcy business operations do not pass to the trustee. Although the tax refund claims in Segal could be made only after the close of the tax year in which the bankruptcy occurred, the Court said that potential claims for loss-carryback refunds constitute "property" within the language of § 70(a)(5) since, among other things, these refund claims are "sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts' ability to make an unencumbered fresh start * * *." Segal, supra at 380, 86 S.Ct. at 515.

The second Supreme Court decision which is apposite to this appeal is Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970) (per curiam). There the Court ruled that a wage earner's vacation pay, accrued but unpaid upon the filing of the petition in bankruptcy, did not pass to the trustee in bankruptcy as "property" under § 70(a)(5). The Court focused on the beneficent purpose of the Bankruptcy Act and said:

The wage-earning bankrupt who must take a vacation without pay or forgo a vacation altogether cannot be said to have achieved the "new opportunity in life and the brackets in original clear field for future effort, unhampered by the pressure and discouragement of preexisting debt," Local Loan Co. v. Hunt 292 U.S. 234, 54 S.Ct. 558, 78 L.Ed. 1049 which it was the purpose of the statute to provide. 400 U.S. at 20, 91 S.Ct. at 114.

See also Williams v. U.S. Fidelity Co., 236 U.S. 549, 554-555, 35 S.Ct. 289, 59 L.Ed. 713 (1915).

Distinguishing vacation pay in Lines from the tax refund claim arising out of business operations in Segal, the Court added:

Applied to the set of facts before us here, the principles reflected in the earlier cases compel a decision for the bankrupt. In Segal, a business had ceased to operate and the task of the trustees in bankruptcy was to marshal whatever assets were left for distribution to the creditors. The tax refund claim, arising out of the operations of the business and specifically out of the losses that had precipitated its failure, was such an asset. By contrast, the respondents here are wage earners whose sole source of income, before and after bankruptcy, is their weekly earnings. The function of their accrued vacation pay is to support the basic requirements of life for them and their families during brief vacation periods or in the event of layoff. Since it is a part of their wages, the vacation pay is "a specialized type of property presenting distinct problems in our economic system." Sniadach v. Family Finance Corp., 395 U.S. 337, 340, 89 S.Ct. 1820, 23 L.Ed.2d 349 400 U.S. at 20, 91 S.Ct. at 114.

Resolution of the instant controversy rests on whether the rationale of Segal or Lines most appropriately applies to the wage earner's tax refund claim made here. The Second Circuit in Kokoszka rejected Lines as the applicable precedent, concluding that:

What we have then in Lines is a very narrow exception to the general proposition that everything of value passes to the trustee, i. e., vacation pay which will become essential for basic week to week support in the future does not pass. Because a tax refund is not the weekly or other periodic income required by a wage earner for his basic support, to deprive him of it will not hinder his ability to make a fresh start unhampered by the pressure of preexisting debt. Therefore, the tax refund is § 70(a)(5) property which passes to the trustee. 479 F.2d at 994-995.

As we have already noted, the Ninth Circuit reached a contrary conclusion in affirming Cedor. Ruling that the income tax refund is equivalent to the vacation pay present in Lines, the Cedor court stated:

There is nothing to suggest that the sums refunded were related to the circumstances which precipitated the bankruptcy. The Supreme Court considered the question in Segal to be "close", 382 U.S. 379 * * *; in light of Lines and Snaidach sic, 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349, the balance on this question tips in favor of the bankrupt. The collection by the Internal Revenue Service without the consent or control of the bankrupt, and the belated refund, render these funds quite similar in a practical sense, to the accrued but unpaid wages which constituted vacation pay. If Lines stands for anything, it is that the practical realities are controlling in this determination. While the amount of refund is not so easy to calculate as the amount of vacation pay, it may generally be said to be an amount that, by reason of past experience, is anticipated by the wage-earner as an annual event. To deprive the wage-earner of that planned-on annually recurring payment, cannot be said to be less severe than the deprivation of two weeks of paid vacation, in terms of a fresh start. 337 F.Supp. at 1105.

Although related questions have come before us, we have not heretofore passed on the precise issue presented by this appeal. However, we comment briefly on cases of this circuit which involved tangential issues.

The district court for the District of Minnesota had previously considered and denied a claim identical to that made by appellant-Gehrig. In re Jones, 337 F. Supp. 620 (D.Minn.1971).⁴ We denied the bankrupt's leave to appeal under Section 24 of the Bankruptcy Act, 11 U.S.C. § 47(a), which section permits an appeal of a judgment of less than $500 only upon allowance of the appellate court. The bankrupt applied for certiorari but the application was denied, 404 U.S. 1040, 92 S.Ct. 719, 30 L.Ed.2d 732 (1972). Our denial of leave to appeal did not constitute a decision on the merits.

We considered and rejected a bankrupt wage earner's claim to an income tax refund attributable to withholding of wages in excess of minimum amounts specified by law against the claim of a trustee in bankruptcy in In re Wetteroff, 453 F.2d 544 (8th Cir.), cert. denied, 409 U.S. 934, 93 S.Ct. 242, 34 L.Ed.2d 188 (1972). In Wetteroff, the bankrupt claimed his filing of a joint tax return with his wife who had no taxable income, created a tenancy by the entirety in a claim for an income tax refund attributable to overwithholding from his wages because of the bankrupt's deliberate failure to claim his full tax exemption entitlements. The bankrupt's claim rested on provisions of Missouri law under which persons holding as tenants by the entirety obtained no separate interest in property. The bankrupt argued, therefore, that since he and his wife held the tax refund in tenancy by the entirety, he could not acquire an individual interest in the refund claim which would pass to his trustee in bankruptcy. We rejected the contention,...