In re Columbia Tobacco Co.

Decision Date10 July 1941
Docket NumberNo. 38047.,38047.
Citation38 F. Supp. 148
PartiesIn re COLUMBIA TOBACCO CO., Inc.
CourtU.S. District Court — Eastern District of New York

William Walzer, of New York City (Raymond Gitlin, of New York City, of counsel), for trustee.

Harry Malter, of New York City, for petitioners Goldman, Malter and Goldman and pro se.

William J. McArthur, of New York City (Robert Gray, of New York City, of counsel), for United States Fidelity & Guaranty Co., claimant.

Order Affirmed July 10, 1941. See 121 F.2d 641.

BYERS, District Judge.

Petition for certificate of review of determination of referee.

The two questions presented have to do with the effect here to be given to tax payments arising under State and City statutes imposing a cigarette tax.

The bankrupt was a wholesale dealer in cigarettes, tobacco and kindred products, and failed to pay certain taxes imposed by the said legislation; that is, it obligated itself to pay for tax stamps purchased on credit—as the law permitted—and payment was made instead by the United States Fidelity and Guaranty Company, a surety for the bankrupt, as to the State taxes; and by the American Surety Company, likewise a surety for the bankrupt, as to the City taxes; concerning the latter, resort was had to the collateral deposited with the surety to secure its bond, and consequently the individuals who deposited that collateral assert their succession to the rights of the surety in this proceeding; no question is made concerning their capacity to appear and litigate this matter in place of the surety.

The questions are:

(1) Did the sureties by paying the tax become subrogated to the rights of the State and the City, respectively, so that they may now be reimbursed, as the holders of priority claims, out of the general funds in the hands of the trustee?

(2) If such right of subrogation exists, can it be enforced with reference to these particular taxing statutes?

The referee decided the first question in the negative and hence declined to pass upon the second.

At the outset it is apparent that the equities seemingly lie with the petitioners, since the payments made by them have relieved the general creditors from depletion of the bankrupt estate consequent upon the enforcement of the statutory priority of the State and City in respect of these imposts; so much is hinted at by the referee, who says: "The State could have filed a claim in this bankruptcy proceeding. But it did not. It chose to call on the claimant to pay pursuant to the three bonds referred to."

It is customary to refer to bankruptcy proceedings as being essentially equitable in nature, which suggests that those who have paid priority claims, not as volunteers but as sureties, in good conscience ought not to be relegated to the position of general creditors, to their own detriment, unless the administration of the law inexorably so requires.

The applicable provisions of the Bankruptcy Act, for ready reference, are:

§ 57 sub. i. "Whenever a creditor whose claim against a bankrupt estate is secured by the individual undertaking of any person fails to prove and file such claim, such person may do so in the creditor's name and, if he discharge such undertaking in whole or in part, he shall be subrogated to that extent to the rights of the creditor." 11 U.S.C.A. § 93, sub. i.

These petitioners seem to fall within the clear purpose of the foregoing.

The referee concedes so much when he says: "There is subrogation as to the claim but none as to the priority accorded by Section 64a(4)." 11 U.S.C.A. § 104, sub. a(4).

That section reads:

"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 * * *

"(4) Taxes legally due and owing by the bankrupt to the United States or any State or any subdivision thereof: Provided, That no order shall be made for the payment of a tax assessed against any property of the bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the court; And provided further, That, in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the court;" (Capitalization sic.)

It is difficult to follow the reasoning that the subrogation contemplated by the law constitutes a kind of legalistic molecule which must be resolved into constituent atoms, one of which is labeled "claim" and the other "priority".

That seeems to depict a statutory mirage, for nothing could be more ethereal than subrogation to an unenforceable right.

The priority which pertains to the sovereign is not hedged about by such divinity that it cannot accrue to those who, as sureties, place the government in funds, through the payment of taxes. Dayton v. Stanard, 241 U.S. 588, 36 S.Ct. 695, 60 L. Ed. 1190; Fidelity & Casualty Co. v. Massachusetts Mutual Life Ins. Co., 4 Cir., 74 F.2d 881; In re Baltimore Pearl Hominy Co., 4 Cir., 5 F.2d 553. See also Restatement of the Law—Restitution Sec. 162 f.

It is true that in the foregoing cases the taxes were implemented by a lien upon the property of the taxpayer, thereby rendering collection the more certain; but the creation of a lien is not essential to constituency of a tax as such; New Jersey v. Anderson, 203 U.S. 483, 27 S.Ct. 137, 51 L.Ed. 284.

The referee further observed that, under the section last quoted, it is the duty of the bankruptcy court to determine the amount or legality of any tax, and that no such determination can be had "if the taxing power is not a party to the proceeding". That was the precise circumstance in the last two of the three cases previously cited, and yet the Circuit Court of Appeals for the Fourth Circuit encountered no difficulty in deciding that the right of subrogation to the taxing power had been imparted to those who asserted it. Such right was also recognized as to the priority of a claim of the State, in American Bonding Co. of Baltimore, Md. v. Reynolds, D.C., 203 F. 356.

Further, on this subject, it is possible to consult with profit United States Fidelity & Guaranty Co. v. Carnegie Trust Co., 161 App.Div. 429, 146 N.Y.S. 804, affirmed, 213 N.Y. 629, 107 N.E. 1087. True, that case did not involve a construction of the Bankruptcy Act but, since the latter in terms creates the right of subrogation on the part of a surety who pays, this exposition of law governing a comparable situation is instructive.

A complication might seem to be suggested if the surety asserted the priority in a case in which the trustee would have been required to put the taxing authorities to the test of demonstrating "the amount or legality of any taxes". The court's duty is stated in the statute and has been judicially sanctioned: New Jersey v. Anderson, supra; Van Huffel v. Harkelrode, 284 U.S. 225, 52 S.Ct. 115, 76 L.Ed. 256, 78 A.L.R. 453; City of Springfield v. Hotel Charles Co., 1 Cir., 84 F.2d 589.

No such question is raised in this record, and it must be clear that a surety, by the mere payment of a tax-claim as presented, could not foreclose the trustee's right to raise such an issue, or the court's duty to determine it; otherwise stated, the right of subrogation is attended by appropriate burdens, which would include the presentation of convincing evidence touching both the legality and the amount of the tax, in such a case as has been suggested.

This is probably what the referee had in mind in referring to the absence of the taxing power from this proceeding.

It...

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3 cases
  • In re Co-Build Companies, Inc.
    • United States
    • U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • July 14, 1982
    ...Cir., 5 F.2d 553. The presence of a lien is unnecessary. New Jersey v. Anderson, 203 U.S. 483, 27 S.Ct. 137, 51 L.Ed. 284.12 In In re Columbia Tobacco Co., Inc.13 the United States District Court for the Eastern District of New York also held that a bankrupt's surety, who had paid state and......
  • In re Rogers
    • United States
    • U.S. District Court — Southern District of California
    • December 13, 1951
    ...Court of Appeals, In re Baltimore Pearl Hominy Co. reported in 5 F.2d 553, holding to the contrary. Judge Byers in Re Columbia Tobacco Co., D.C., 38 F.Supp. 148, 149, decided the precise point now before this court wherein he stated the question to "(1) Did the sureties by paying the tax be......
  • In re Sensor Systems, Inc.
    • United States
    • U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • November 25, 1987
    ...his own claim, and section 509(a) has no application. 7 See In re Columbia Tobacco Co., 121 F.2d 641 (2d Cir.1941), aff\'g, 38 F.Supp. 148 (E.D.N.Y.1941). See also In re Zaepfel & Russell, Inc., 49 F.Supp. 709 (W.D.Ky.1941), aff\'d sub nom. Farmer\'s State Bank v. Jones, 135 F.2d 215 (6th 8......

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