In re Johnson Electrical Corporation

• Decision Date: 04 May 1971
• Docket Number: Docket 35029.,No. 683,683
• Parties: In the Matter of JOHNSON ELECTRICAL CORPORATION, Debtor. UNITED STATES of America, Appellant, v. JOHNSON ELECTRICAL CORPORATION, Debtor-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

442 F.2d 281 (1971)

In the Matter of JOHNSON ELECTRICAL CORPORATION, Debtor.

UNITED STATES of America, Appellant, v. JOHNSON ELECTRICAL CORPORATION, Debtor-Appellee.

No. 683, Docket 35029.

United States Court of Appeals, Second Circuit.

Argued March 30, 1971.

Decided May 4, 1971.

Susan Freiman, Asst. U. S. Atty. (Whitney North Seymour, Jr., U. S. Atty. for the Southern District of New York, and Alan B. Morrison, Asst. U. S. Atty., of counsel), for appellant.

Elias Mann (Levin & Weintraub, New York City, of counsel), for debtor-appellee.

Before LUMBARD, Chief Judge, FRIENDLY and KAUFMAN, Circuit Judges.

FRIENDLY, Circuit Judge:

The United States filed a tax claim of $17,048.82 in the proceeding of Johnson Electrical Corporation in the District Court for the Southern District of New York, begun on March 17, 1967, for an arrangement under Chapter XI of the Bankruptcy Act. Under § 17 of the Act such a claim is not dischargeable. It was paid in full, without post-petition interest, on December 24, 1968, about a month after confirmation of the arrangement. In April 1969, when the Internal Revenue Service took preliminary steps looking toward collection of the interest, $1,512.59, that had accrued after the filing of the Chapter XI petition, Johnson caused the proceeding to be reopened and sought and obtained an order from the referee, later confirmed by the district court, 312 F.Supp. 840, enjoining the United States from taking any action to assess and collect such interest.

The Government appeals, both on "jurisdictional" grounds and on the merits. Although the Government took "no position" below with respect to the first issue, suggesting only that the court "may be without jurisdiction to restrain the United States from collecting interest," it now vigorously presses the point. In addition to reliance on the familiar anti-injunction provision of the Internal Revenue Code, 26 U.S.C. § 7421, it asserts correctly enough, that the order does not concern any assets still under administration and argues that, in contrast to a case such as Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (bankruptcy court may enjoin state court suit against discharged bankrupt despite statute, then § 265 of the Judicial Code, prohibiting stays of state court proceedings "except in cases where such injunction may be authorized by any law relating to proceedings in bankruptcy"), the bankruptcy court had not — indeed could not have — issued an order of discharge with respect to the tax claim, which the injunction was needed to protect. With respect to the merits, while conceding that this court's opinion in National Foundry Co. of New York, Inc. v. Director of Internal Revenue, 229 F.2d 149 (2 Cir. 1956), is directly against it, the Government contends that National Foundry has been destroyed by Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964). Although our impression concerning the Government's argument on the first issue is negative since the bankruptcy court was presented with an application colorably within its powers, we find it unnecessary to rule on this since we agree with the Government on the merits.¹

The Supreme Court granted certiorari in Bruning to resolve a conflict between the Ninth Circuit's decision, 317 F.2d 229 (1963), sustaining the collection of post-petition interest from a discharged bankrupt, and the contrary view of the Tenth Circuit in United States v. Mighell, 273 F.2d 682 (1959). The Tenth Circuit had relied in part on our decision in National Foundry, supra.² The Ninth Circuit had said:

Some of the cases denying relief for the extra interest out of the estate do speak of compassion for the debtor or of what will restore the debtor\'s economic health. For example, see National Foundry Company of New York v. Director of Internal Revenue, 2 Cir., 229 F.2d 149. But if paying interest on one\'s taxes after discharge is inimical to an ex-bankrupt\'s health, so is the payment of any balance of principal.

Section 17, sub. a is not a compassionate section for debtors. Congress, speaking for society, has decided that the problems of others: the government, the abandoned-dependent wife, the defrauded widow, override the value of giving the debtor a wholly new start in life.

After quoting 26 U.S.C. § 6873(a),³ the Supreme Court sustained the reasoning of the Ninth Circuit, stating, 376 U.S. at 361, 84 S.Ct. at 908:

We find no indication in the wording or history of § 6873(a) that the section was meant to limit the Government\'s right to continuing interest on an undischarged and unpaid tax liability. Nor is petitioner aided by the now-familiar principle that one main purpose of the Bankruptcy Act is to let the honest debtor begin his financial life anew. As the Court of Appeals noted, § 17 is not a compassionate section for debtors. Rather, it demonstrates congressional judgment that certain problems — e. g., those of financing government — override the value of giving the debtor a wholly fresh start. Congress clearly intended that personal liability for unpaid tax debts survive bankruptcy. The general humanitarian purpose of the Bankruptcy Act provides no reason to believe that Congress had a different intention with regard to personal liability for the interest on such debts. (Footnote omitted.)

The only basis suggested for disregarding Bruning is that here the entire tax, apparently including pre-petition interest, was paid as a result of the Chapter XI proceeding, whereas in Bruning only a partial payment had been made. In re Vaughan, 292 F.Supp. 731 (E.D. Ky.1968), also sought to diminish the effect of Bruning in this manner pointing out that scrutiny of the record in that case revealed...