In re John S. Goff, Inc.

• Decision Date: 08 August 1955
• Docket Number: No. 24261.,24261.
• Parties: In the Matter of JOHN S. GOFF, Inc., Bankrupt.
• Court: U.S. District Court — District of Maine

141 F. Supp. 862

In the Matter of JOHN S. GOFF, Inc., Bankrupt.

No. 24261.

United States District Court D. Maine, S. D.

August 8, 1955.

Silas Jacobson, Portland, Me., Trusteeship, and Herbert H. Sawyer, Portland, Me., for trustee.

Peter Mills, U. S. Atty., Portland, Me., John M. Doukas, Asst. Regional Counsel, Internal Revenue Division, Boston, Mass., John T. Burke, Jr., Chief of Special Proceedings, Office of the District Director of Internal Revenue, Augusta, Me., for the Government.

CLIFFORD, District Judge.

This action comes before this Court upon a petition filed by the Trustee to review an order of the Referee in Bankruptcy, which allowed delinquent tax penalties properly assessed and included in a valid lien perfected and filed prior to bankruptcy.

The facts are undisputed. On January 12, 1954, the Director of Internal Revenue for the District of Maine, filed a proof of claim in the bankruptcy proceedings of John S. Goff, Inc., for withholding and employment taxes for the quarters ending June 30, 1953, and September 30, 1953. The total amount of the claim is $6,447.93. This amount is made up of $5,548.65 tax, $833.40 penalties and $65.88 interest. It was conceded by stipulation between the parties that a notice of tax lien was properly recorded in the appropriate registry of deeds prior to the date the bankruptcy petition was filed.

The sole question presented before this Court is whether a claim for tax penalties seasonably filed by the Director of Internal Revenue is allowable where the notice of tax lien was properly recorded prior to the filing of the bankruptcy petition.

Section 57, sub. j of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. j provides that:

"Debts owing to the United States or to any State or any subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued on the amount of such loss according to law."

The Trustee, in filing objections to so much of the claim as related to penalties, contends that section 57, sub. j applies and precludes the allowance of a claim for penalties.

The precise question, although of novel impression in this Court, was considered in In re Knox-Powell-Stockton Co., 9 Cir., 1939, 100 F.2d 979 and in Commonwealth of Kentucky ex rel. Unemployment Compensation Comm. v. Farmers Bank & Trust Co., 6 Cir., 1943, 139 F.2d 266. In both cases the court held that even though section 57, sub. j of the Bankruptcy Act precludes the allowance of a claim for penalties, adjudication in bankruptcy does not affect a valid and existing lien, consequently where a lien exists to support a penalty at the time of adjudication, section 57, sub. j does not come into operation. The holding of the Knox-Powell-Stockton case, supra, is based upon the principle that adjudication in bankruptcy does not interfere with existing valid liens and that the Trustee takes the property of the bankrupt subject to all such liens as would have been enforceable against it in the hands of the bankrupt itself. The Ninth Circuit in this instance stated that this principle was made clear by section 67, sub. d of the Bankruptcy Act of 1898, 11 U.S.C.A. § 107, sub. d.

In the case of In re Burch, D.C.Kan. 1948, 89 F.Supp. 249. The court disagreed with the holding in Knox-Powell-Stockton that section 57, sub. j of the Bankruptcy Act does not apply where a penalty is secured by a lien which arose prior to the institution of a bankruptcy proceeding and held that section 57, sub. j does apply to prevent the enforcement of a federal tax lien securing a penalty. In this decision the court states that the Knox-Powell-Stockton case was based primarily on the provisions of section 67, sub. d of the Bankruptcy Act of 1898, and points out that since section 67, sub. d was repealed by the Chandler Act, the effect of the opinion in Knox-Powell-Stockton is nullified. Another case expressly disagreeing with Knox-Powell-Stockton is In re Hankey Baking Co., D.C.Pa.1954, 125 F.Supp. 673.

This Court believes that the judicial construction placed on section 57, sub. j by the Knox-Powell-Stockton decision more closely indicates the intention of the Congress. In support of this conclusion there is noted the case of Goggin v. Division of Labor Law Enforcement, of California, 1949, 336 U.S. 118, 126, 69 S.Ct. 469, 93 L.Ed. 543, a decision rendered since the Chandler Act, wherein it was stated that liens perfected before bankruptcy are safeguarded by the Bankruptcy Act and to support this statement, the Court cites the Knox-Powell-Stockton case with evident approval.

Furthermore, it is believed that the substance of the provisions of section 67, sub. d, have been incorporated in the redrafted Sections 60, 67 and 70 of the Act. This view was recognized in the case of Oppenheimer v. Oldham...