In re California Pea Products

• Decision Date: 19 February 1941
• Docket Number: No. 32615-C.,32615-C.
• Citation: 37 F. Supp. 658
• Parties: In re CALIFORNIA PEA PRODUCTS, Inc.
• Court: U.S. District Court — Southern District of California

37 F. Supp. 658

In re CALIFORNIA PEA PRODUCTS, Inc.

No. 32615-C.

District Court, S. D. California, Central Division.

February 19, 1941.

Leslie S. Bowden and James E. Bednar, both of Los Angeles, Cal., for L. Boteler, trustee.

Earl Warren, Atty. Gen., and Albert R. Belford, Deputy Atty. Gen., for the State Board of Equalization of California.

McCORMICK, District Judge.

On November 28, 1938, after unsuccessful proceedings for corporate reorganization under former Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, California Pea Products, Inc., was adjudged bankrupt, and administration under the ordinary processes in bankruptcy have been conducted by and before Referee Ben E. Tarver.

Upon petition of the trustee in bankruptcy, an order was issued and directed by the referee to the State Board of Equalization of California, requiring the Board and its members to appear and show cause before the referee why an order should not be made restraining the members of such State Board, its agents, etc., from in any manner enforcing the provisions of Act 8493 of the General Laws of the State of California 1937 against the trustee of the bankrupt estate.

Appearances were made and hearing was had before the referee, and on March 22, 1940, the referee issued an order of "permanent injunction" restraining the State Board of Equalization "from in any manner enforcing or attempting to enforce any of the provisions of Act 8493 of the General Laws of the State of California, against the trustee herein, L. Boteler, Esquire, his agents, servants or employees, or from in any manner interfering with the administration of this estate."

The State Board of Equalization has petitioned for review of such order.

Act 8493 is also titled "Retail Sales Tax Act of 1933" of the State of California. Briefly stated, it is a comprehensive legislative scheme of the State, imposing and collecting a tax of 3% upon the gross receipts of retailer for the privilege of selling tangible personal property at retail, and providing for permits to retailers to engage in the business of selling such property, and prescribing penalties for violation of its provisions. The Act describes the entities which are subject to its provisions, but it does not specify a trustee in bankruptcy as one in such classification, and taxation by implication is not favored. Reinecke v. Gardner, 277 U.S. 239, 48 S. Ct. 472, 72 L.Ed. 866; In re Messenger's Merchants Lunch Rooms, 7 Cir., 85 F.2d 1002.

The referee from the evidence at the hearing before him held that the trustee in bankruptcy is not one of the persons mentioned in the Act as being engaged in the business of selling tangible personal property and therefore is not required to secure a permit to sell in liquidation activities any property of the bankrupt estate, or required to collect any sales tax on any property sold by him as trustee in liquidation of this bankrupt estate; that such trustee is under the record not subject to the control or jurisdiction of the California State Board of Equalization; that such Board is threatening to enforce the provisions of Act 8493 against such trustee and to require him to obtain a license and otherwise comply with the provisions of such State act.

The referee's order and injunction are attacked solely upon two grounds: (1) That said trustee in bankruptcy, L. Boteler, was selling on behalf of the bankrupt California Pea Products, Inc., machinery and equipment at retail within the contemplation of the California Retail Sales Tax Act, and (2) that an injunction against the State Board of Equalization will not lie for the reason that the said trustee in bankruptcy has under the California Retail Sales Tax Act an adequate remedy at law by paying the tax and suing to recover.

Preliminarily, it is pertinent to observe that the petition for review originally contained a statement that the State Board of Equalization had filed in this bankruptcy matter its claim for sales tax due the State of California, and a part of the prayer of the petitioner on review was that this court on the review overrule any objections to said claim of the State Board of Equalization and allow said claim in full. By interlineations appearing upon the original petition for review, the aforesaid matters are stricken and are therefore not now a part of this review. It thus does not appear that the State Board of Equalization has filed any claim for retail sales tax or in fact for any other tax in this bankruptcy proceeding, or that any extension has been granted for the filing of any such tax claims.

In view of such situation, it is unnecessary on this review to go farther than to determine the validity and proper scope of the injunctive order issued by the referee. And until a claim for taxes is filed in this bankruptcy proceeding by the State authorities, or until a "bar order" is operative upon the State agency, the question as to whether the trustee in bankruptcy in selling tangible personal property in liquidation of the bankrupt estate is a retailer and a person obligated to comply with the provisions of Act 8493 of the General Laws of the State of California, is not properly before us. See New York v. Irving Trust Co., 288 U.S. 329, 53 S.Ct. 389, 77 L.Ed. 815; 6 Remington on Bankruptcy, 4th Ed., Section 2844.50.

It is, however, clear from the documentary evidence sent up with the referee's certificate that the State Board of Equalization had determined that the trustee was "engaged in the business of selling tangible personal property, the receipts from the retail sale of which are subject to the sales tax," and that such trustee was "required by the California Retail Sales Tax Act" to secure a permit under the Act. Accordingly, demand was made by the State Board for the permit fee provided in the Act, and also that the trustee file quarterly returns in accordance with the Act under a likelihood or implied threat of being penalized for non-compliance with the demands of the State Board, and possibly of being sued in the state court for non-payment of taxes, or at least of encountering some interference by the State Board in the administration of this bankrupt estate. The probability of such an eventuality justified the referee in making an appropriate stay order. Section 2, sub. a (15), Chandler Act, 11 U.S.C.A. § 11, sub. a (15). The possession of the property by the trustee is the court's possession, and any act interfering with the court's power of control and disposal and done without the court's sanction is void. Dayton v. Stanard, 241 U.S. 588, 36 S.Ct. 695, 60 L.Ed. 1190.

The record shows that the trustee was not authorized by the bankruptcy court to conduct business under the permissive provisions of the bankruptcy act. Section 2, sub. a (5), 11 U.S.C.A. § 11, sub. a (5). In fact, no application of any kind was made to carry on or to conduct business. On the contrary, all of the selling activities of the trustee in bankruptcy were purely liquidating functions and in no proper sense should be considered in any other category. This factual difference distinguishes such cases as City of Springfield v. Hotel Charles, 1 Cir., 84 F.2d 589, and In re Chas. Nelson Co., D.C., 27 F.Supp. 673. It also illustrates the inapplicability of Section 124a of Title 28, U.S.C.A. to the transactions of the trustee in...