In re A.E. Fountain, Inc.

• Decision Date: 20 February 1924
• Citation: 295 F. 873
• Parties: In re A. E. FOUNTAIN, Inc.
• Court: U.S. District Court — Southern District of New York

295 F. 873

In re A. E. FOUNTAIN, Inc.

United States District Court, S.D. New York.

February 20, 1924

William Hayward, U.S. Atty., of New York City (William M. A O'Neill, Asst. U.S. Atty., of New York City, of counsel) for the United States.

Carl Sherman, Atty. Gen. (Thomas J. Cuff, Deputy Atty. Gen., of counsel), for the State of New York.

Rosenberg & Ball, of New York City (Wilbur L. Ball and George G. Ernst both of New York City, of counsel), for trustee.

AUGUSTUS N. HAND, District Judge.

Three questions are raised: (1) The order of priority of payment as between federal and state taxes; (2) the priority as between taxes and the actual necessary cost of preserving the estate and the cost of administration; (3) the priority of wage claims over tax claims.

The referee held that the taxes of the United States and the state of New York should be prorated and paid pari passu, and that neither were entitled to priority as against wage claims. He also held that the cost of preserving the estate and of administration was entitled to priority over taxes. Section 64 of the Bankruptcy Act of 1898 (Comp. St. Sec 9648) reads as follows:

'Sec. 64. Debts Which Have Priority.-- a. 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 advance of the payment of dividends to creditors, and upon filing the receipts of the proper public officers for such payment he shall be credited with the amount thereof, and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court.

'b. The debts to have priority, except as herein provided, and to be paid in full out of bankrupt estates, and the order of payment shall be (1) the actual and necessary cost of preserving the estate subsequent to filing the petition; (2) the filing fees paid by creditors in involuntary cases, and, where property of the bankrupt, transferred or concealed by him either before or after the filing of the petition, shall have been recovered for the benefit of the estate of the bankrupt by the efforts and at the expense of one or more creditors, the reasonable expenses of such recovery; (3) the cost of administration, including the fees and mileage payable to witnesses as now or hereafter provided by the laws of the United States, and one reasonable attorney's fee, for the professional services actually rendered, irrespective of the number of attorneys employed, to the petitioning creditors in involuntary cases, to the bankrupt in involuntary cases while performing the duties herein prescribed, and to the bankrupt in voluntary cases, as the court may allow; (4) wages due to workmen, clerks, traveling or city salesmen, or servants which have been earned within three months before the date of the commencement of proceedings, not to exceed three hundred dollars to each claimant; and (5) debts owing to any person who by the laws of the states or the United States is entitled to priority.

'c. In the event of the confirmation of a composition being set aside, or a discharge revoked, the property acquired by the bankrupt in addition to his estate at the time the composition was confirmed or the adjudication was made shall be applied to the payment in full of the claims of creditors for property sold to him on credit, in good faith, while such composition or discharge was in force, and the residue if any, shall be applied to the payment of the debts which were owing at the time of the adjudication.'

It is to be noticed that taxes under the foregoing provisions of the Bankruptcy Act are not directed to be paid in any precise order, though the United States is mentioned first. As the act carefully provides in subdivision 'b' the order of payment of various items by placing them under separate numerals, it seems reasonable to contend that it would have done this in respect to taxes if Congress had intended any discrimination in priority between taxes due the United States and taxes due the states and political subdivisions thereof. Of course, any tax which is a lien would necessarily precede any other claim whether by virtue of the taxing power or otherwise which was not a prior lien.

Judge Neterer, in the case of United States v. San Juan County (D.C.) 280 F. 120, decided that taxes due the United States have priority over state taxes. In this I cannot agree with him. He referred to section 3186, Rev. Stat. U.S. (Comp. St. Sec. 5908). This section, as amended by Act of March 4, 1913, reads as follows:

'If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the United States from the time when the assessment list was received by the collector, except when otherwise provided, until paid, with the interest, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to such person. * * *'

Judge Neterer also cited section 3466 of the Revised Statutes (Comp. St. Sec. 6372), which makes the following provision:

'Whenever any person indebted to the United States is insolvent or whenever the estate of any deceased debtor, in the hands of executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority hereby established shall extend * * * to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.'

The taxes due the United States were not demanded prior to the filing of the petition in bankruptcy, so that no lien has ever arisen by virtue of section 3186, supra, against the fund in court. Nor does section 3466 in my opinion apply. That very section was invoked in the case of Guarantee Co. v. Title Guaranty Co., 224 U.S. 152, 32 Sup.Ct. 457, 56 L.Ed. 706, and the Supreme Court held that it was superseded by the later Bankruptcy Act. The opinion said (224 U.S.at page 160, 32 Sup.Ct. 460):

'The act takes into consideration, we think, the whole range of indebtedness of the bankrupt, national, state and individual, and assigns the order of payment.'

It is contended by the state of New...