In re Halsey Elec. Generator Co.

• Decision Date: 30 December 1909
• Citation: 175 F. 825
• Parties: In re HALSEY ELECTRIC GENERATOR CO.
• Court: U.S. District Court — District of New Jersey

175 F. 825

In re HALSEY ELECTRIC GENERATOR CO.

United States District Court, D. New Jersey.

December 30, 1909

Howard H. Williams, for the motion.

Edmund Wilson, Atty. Gen., opposed.

RELLSTAB District Judge.

This case turns upon legal propositions. There is no controversy about the facts. On October 22, 1907, a petition in involuntary bankruptcy was filed against the Halsey Electric Generator Company, a New Jersey corporation. The company was not adjudicated a bankrupt until March 8, 1909. At the time of filing the said petition, a receiver was appointed who took charge of the estate until April 7, 1909, when the trustee was appointed and qualified. On the 29th day of August, 1908, the state of New Jersey presented its claim for unpaid franchise taxes assessed against said bankrupt for the years 1904 and 1908, pursuant to the act of the Legislature entitled 'An act to provide for the imposition of state taxes upon certain corporations, and for the collection thereof,' approved April 18, 1884. Gen. St. N.J.p. 3335. The tax of 1904 amounted to $4,250, and that of 1908 to $1,000, exclusive of interest and costs.

The property of the bankrupt, consisting chiefly of a manufacturing plant, remained in the hands of the receiver for nearly 18 months pending litigation over the adjudication. The realty was subject to a mortgage which was sold under foreclosure proceedings; the estate in bankruptcy realizing nothing by such sale. The cash that came into the hands of the receiver was the sum of $1,352.62. The personal estate was sold by the trustee for $1,000. The amount that came into the hands of the receiver was less by the sum of $279.88 than the aggregate amount expended by him in preserving the estate, and that which came into the hands of the trustee was not sufficient to pay the receiver said deficit and the allowance made to him by the court for his services.

The state of New Jersey does not question the necessity of these expenditures, or the propriety of such allowance, but insists that it is entitled to the entire fund to the exclusion of such expenditures or allowances. It bases its contention on section 64 of the bankruptcy act (Act July 1, 1898, c. 541 30 Stat. 563 (U.S. comp. St. 1901, p. 3447) 1 Fed.St.Ann.p 682), and in support thereof cites New Jersey v Anderson, 203 U.S. 483, 27 Sup.Ct. 137, 51 L.Ed. 284, 17 Am.Bankr.Rep. 63; Chattanooga v. Hill, 139 F. 600, 71 C.C.A. 584, 15 Am.Bankr.Rep. 195; Waco v. Bryan, 127 F. 79, 62 C.C.A. 79, 11 Am.Bankr.Rep. 481; In re Prince & Walter (D.C.) 131 F. 546, 12 Am.Bankr.Rep. 675; and In re Weiss (D.C.) 159 F. 295, 20 Am.Bankr.Rep. 247. While the motion now before the court is limited to the moneys which came to the hands of the trustee, the decision will not be without effect on the liability of the receiver to account to the state for the moneys which came into his hands, and on the efficiency of the bankruptcy court in administering many insolvent estates; for, if the insistence of the state of New Jersey is sustained, the liability of the receiver to so account would seem to be precluded, and the court shorn of the means in many cases of preserving the estate pending litigation over the question of insolvency, and in the recovering of property fraudulently transferred or concealed.

Section 64, subs. 'a,' 'b,' Bankr. Act, the only parts pertinent to the present inquiry, reads:

'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 the 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, travelling 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.'

The franchise tax or license fee imposed by the state of New Jersey upon corporations organized under its laws is a tax within the meaning of subsection 'a.' New Jersey v. Anderson, supra. This decision is also relied upon as authority that the tax imposed for the year 1908 is entitled to the preference given by such section, notwithstanding that the petition in bankruptcy was filed in 1907, because such tax was due and owing before the adjudication. In the cited case it does not appear when the petition in bankruptcy was filed, but the adjudication, and not the filing of the petition, was taken as the time for determining whether the tax was due and owing. And it was there held that as the tax was made upon the basis of the capital stock issued and outstanding the 1st of January, presumably of the year during which the petition was filed, the tax was legally due and owing from that time, although not collectible until after the adjudication. In the case at bar the petition was filed several months before the taxing year of 1908 began. It is unnecessary, however, in this case, to determine whether the tax for that year has a preference, as the tax for 1904 is greater than the gross amount of the estate. Query, has a tax imposed, not upon tangible property, but upon the franchise of an insolvent corporation after it has been taken charge of by the bankruptcy court, a preference under section 64a of the bankruptcy act?

The claim, then, being for taxes due and owing, what preference is it entitled to? By section 6 of the New Jersey franchise tax act, it is provided that such tax 'shall be a debt due from such company to the state, for which an action at law may be maintained after the same shall have been in arrears for the period of one month; such taxes shall also be a preferred debt in case of insolvency. ' And by section 7 such company could be enjoined from using its corporate franchise if such tax remained in arrears for a period of three months after the same should have become payable.

In the New Jersey Court of Errors and Appeals, on the question of priorities in insolvency proceedings, it was held that the franchise tax, notwithstanding the preference given by the statute, is subordinate to the expenses of winding up the insolvent corporation, including allowance to the receiver, but that it had preference over all other liabilities and debts. Chesapeake & O. Ry. Co. v. A. Trans. Co., 62 N.J.Eq. 751, 48 A. 997. In United States v. Eggleston, 4 Sawy. 199, 25 Fed.Cas. 979 (No. 15,027), it was held in regard to a claim of the United States which by section 3466, Rev. St. (U.S. Comp. St. 1901, p. 2314), was given priority in payment in cases of insolvency, that:

'The priority of the United States only extends to the net proceeds of the property of the deceased, and therefore the necessary expenses of the administration are first to be paid.' These two cases, respectively, show that in construing statutes giving preference to the state for taxes and the United States for debts the priority extends only to the net proceeds.

The state contends, however, that a different rule obtains because of the positive direction of section 64 of the bankruptcy act. All corporations subject to the franchise tax imposed by the state are not amenable to the bankruptcy law. In case of insolvency of one not amenable, the proceedings to wind up being necessarily brought in the state or United States Circuit Court, the state's franchise tax by the judicial determination of its own court would be made subordinate to the cost of preserving and administering the property of such insolvent corporation; but if one of its corporations so taxed should be wound up in the bankruptcy court, it being one over which the bankruptcy court may have exclusive jurisdiction, it is contended that such franchise tax is not subordinate, but superior to even the necessary expenses incurred in securing and preserving the very property out of which alone it can secure its tax. The act should be so clear and unambiguous as to leave no reasonable doubt that it was the legislative intention to put taxes before everything before such a construction should be adopted. In re Prince & Walter and In re Weiss, supra, are cited as authority for this contention. In the former case the taxes were levied against the bankrupt's real estate. In the latter the taxes were due the United States, but for what it does not appear. In both cases it was held that taxes were...