In re Cleveland

• Decision Date: 06 December 1956
• Docket Number: No. 359.,359.
• Citation: 146 F. Supp. 765
• Parties: In re Alfred Eugene CLEVELAND, Jr., t/a C. C. Tractor and Implement Company, Bankrupt.
• Court: U.S. District Court — Eastern District of North Carolina

146 F. Supp. 765

In re Alfred Eugene CLEVELAND, Jr., t/a C. C. Tractor and Implement Company, Bankrupt.

No. 359.

United States District Court E. D. North Carolina, Elizabeth City Division.

December 6, 1956.

Wilson & Wilson, Elizabeth City, N. C., for Massey-Harris-Ferguson, Inc.

GILLIAM, District Judge.

This opinion is entered upon review of three final orders from this Court's Referee in Bankruptcy, made at the final meeting of creditors of the voluntary bankrupt, Alfred Eugene Cleveland, Jr., who did business as C. C. Tractor and Implement Company. A petition for such review was duly filed by the Massey-Harris-Ferguson Company, a participating creditor.

The first order objected to is that "Claim for $12,520.16 secured by two duly recorded deeds of trust on real estate. Creditor was allowed to foreclose and paid itself therefrom the total of $8,362.93 against this claim. The balance of creditor's claim is now allowed in the sum of $4,157.23 as an unsecured claim." Massey-Harris-Ferguson (hereafter called Massey) bases its objection on the following circumstances.

Massey's claim for $12,520.16 had been allowed. The deeds of trust were held to be valid. Each deed included a provision for payment of taxes by the debtor on the property conveyed in the deed and further provided that in the event that such taxes were not paid as agreed, the creditor might pay them and the amount so paid would become due with the next interest installment. On October 7, 1955, the Referee in Bankruptcy signed an order permitting the Substitute Trustee of the two deeds to proceed with foreclosure. The order further directed that: "The proceeds derived from such sale or sales shall, if sufficient, be applied by the trustee or trustees selling under said deeds of trust to the payment, in the order of priority of liens, of taxes, premiums paid for insurance on the premises, amounts paid for the preservations thereof, cost and expenses of sale, the amounts due on the notes secured by said two deeds of trust with interest accumulations, and such other amounts as it may be necessary to pay in order to convey to the purchaser a good title free of liens."

On December 5, 1955, the Substitute Trustee sold the land under Massey's deeds of trust. Massey bought in the property at the sale and paid itself $8,362.93 after paying $948.82 to the County of Hertford and the City of Murfreesboro for delinquent taxes with interest. Massey now contends that for the $948.82 taxes and interest it paid, it should have been allowed the priority status of the taxing authorities in the distribution of the general assets, rather than being relegated to the status of an unsecured creditor for the full $4,157.23 remainder of its claim.

The first question raised by this contention is whether one, not a mere volunteer, who pays the tax liability of a bankrupt estate, can be subrogee of the taxing authority in the distribution of the estate. There is a substantial division of the authorities on this question which is amply discussed in In re Rogers, D.C.Cal.1951, 101 F.Supp. 555. Exemplary of the decisions holding that there can be no subrogation is In re Minogue, D.C.N.Y.1930, 39 F.2d 239.

A leading decision in the Fourth Circuit holds that subrogation may be properly allowed. The following language is quoted from In re Baltimore Pearl Hominy Co., 4 Cir., 1925, 5 F.2d 553 at page 556: "There is a labyrinth of decisions on the subject of subrogation. We shall not undertake to go through it. Our conclusion is that the government had a lien for the taxes, and when the banks and trust companies, unsecured creditors, paid it, they were entitled by subrogation to the same preference in the distribution of the assets of the bankrupt that the government would have had but for the payment. One who pays taxes may in a proper case be subrogated to the rights of the government in the distribution of the assets of a bankrupt estate. Dayton v. Stanard, 241 U.S. 588, 36 S.Ct. 695, 60 L.Ed. 1190."

Is this a "proper case" for subrogation? If it is, what are the rights of the county and city governments in the distribution of the assets of this bankrupt estate? First it must be noted that Massey was not an unsecured creditor that protected assets for the benefit of the general creditors. Instead it was a lien holder that realized on its security, from the sale of which no increment resulted to the general assets. Massey's payment of the property taxes improved the situation of the general creditors only in so far as it denied the taxing bodies a priority share in the general assets.

Section 57, sub. n of the Chandler Act, Title 11 U.S.C.A. § 93, sub. n states the following rule. "Except as otherwise provided in this title, all claims provable under this title, including all claims of the United States and of any State or subdivision thereof, shall be proved and filed in the manner provided in this section. Claims which are not filed within six months after the first date set for the first meeting of creditors shall not be allowed: * * *."

Section 64 of the Chandler Act, Title 11 U.S.C.A. § 104, sub. a, provides: "The Court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, State, county, district, or municipality, in the order of priority as set forth in paragraph (b) hereof: * * * (b) The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and the order of payment shall be * * * (6) taxes payable under paragraph (a) hereof * * *."

The case of De Laney v. City and County of Denver, 10 Cir., 1950, 185 F.2d 246, 249, sets out the relationship of these two sections of the Chandler Act.

"Prior to the enactment of § 57, sub. n of the Chandler Act, claims for taxes did not need to be proved and filed, but were governed by § 64, sub. a, 11 U.S.C.A. § 104, sub. a, which required the trustee to pay all taxes legally due and owing without distinction between the state and federal government. However, the bankruptcy court could issue a bar order requiring a state or the United States to file its tax claims within a certain period or be barred from participating in the estate. By § 57, sub. n of the Chandler Act, tax claims were removed from their former favored position and tax claims, as distinguished from tax liens, must now be proved and filed in the manner provided in § 57 of the Chandler Act."

Then after setting out Sec. 64 which is quoted above, the Court continued:

"But, priority under that section Sec. 64 does not refer to liens existing on the bankrupt's property, nor to the order of payment of such liens, but to the order of payment of debts out of the general assets of the estate after the satisfaction of valid liens. Claims for taxes secured by valid liens, like other valid liens, must be satisfied out of bankrupt's estate before any distribution begins under § 64, supra, subject however to the provisions of § 67, sub. c of the Chandler Act, which provides for postponement in payment of certain tax liens to the debts specified in clauses (1) and (2) of subdivision a of § 64, supra. * *

"A lien claimant may pursue one of three courses: (1) he may prove his claim as an unsecured claim and surrender his security; (2) he may prove his claim as a secured claim, give credit thereon for the value of the security, and share in the general assets as to the unsecured balance; or, (3) he may not file a claim at all and rely solely upon his lien.

"The proof in bankruptcy of a claim as secured implies that the creditor desires primarily to avail himself of his security and to share in the general assets on the basis of the unsecured balance. Only on account of and with respect to his share in the general assets as to the unsecured balance, is it necessary to file a proof of claim.

"If the lien claimant elects either optional course (1) or (2), he must file and prove his claim in accordance with the provisions of § 57 of the Chandler Act. If he elects optional course (3), he need not file a formal claim. The filing of a formal claim in bankruptcy is not essential to the preservation of a lien."

The county and city had an iron-clad lien on the realty for which taxes were overdue, North Carolina General Statutes 105-340 and 376. It could have been enforced against the property in the hands of Massey, the purchaser, at the foreclosure sale. However, only a part of the tax liability discharged by Massey was collectable from the general assets of the bankrupt's estate. This part was $294.81 plus interest, representing city taxes for 1954. A claim for that amount had been made by the city. No claims were made for the other taxes that Massey paid.

In the light of the foregoing, it is readily seen that, except for the $294.81 plus interest that the City of Murfreesboro made a claim for, the county and city chose to rely solely on their statutory liens. Massey or the Substitute Trustee of the deeds removed the liens by paying the delinquent taxes. However, except for the $294.81 with interest, there is no priority claim against the general assets to which Massey can be a subrogee. The Referee erred by not allowing Massey a priority payment of this amount that the taxing authority had claimed.

Massey's two remaining objections relate to the Referee's refusal to recognize two of its claims as secured. The first, a claim for $8,467.97, was purportedly secured by a "Sales and Service Agreement", unregistered before bankruptcy. The relevant provisions of that agreement are as follows.

"The title for all goods shipped under this agreement is to remain in the Company (Massey-Harris-Ferguson) and all goods will be held by the Dealer (the bankrupt), at all times, subject to the Company's order until the purchase price is fully paid in United States money. If any goods are disposed of through retail sales, the proceeds of such Inventory changes, whether cash, book...