In re Prince & Walter

• Decision Date: 28 July 1904
• Docket Number: 43.
• Citation: 131 F. 546
• Parties: In re PRINCE & WALTER.
• Court: U.S. District Court — Middle District of Pennsylvania

131 F. 546

In re PRINCE & WALTER.

No. 43.

United States District Court, M.D. Pennsylvania.

July 28, 1904

[Copyrighted Material Omitted]

James S. Biery and J. C. Loose, for exceptions.

W. G Freyman and E. O. Nothstein, opposed.

ARCHBALD District Judge.

The trustee realized $1,150 from the sale of the bankrupts' personal property, and $1,450 from the real estate, and the question is how the money should be distributed. The principal controversy arises over the taxes. At the time the proceedings in bankruptcy were instituted, in August, 1901 the bankrupts were owing county, school, poor, and borough taxes to the extent of $478.50, which, with penalties for nonpayment subsequently accruing, ran the amount up to $502.43. While the estate was in the hands of the trustee, it was further assessed the same amount for like taxes for the year 1902, and claim is now made for both years. It is clear that, so far as the real estate fund is concerned, these taxes are not entitled to payment. The sale of the real estate was made subject to a first mortgage of $18,000, and the amount obtained, $1,450, is claimed by Mr. Nothstein, who holds a second mortgage of $12,500. It is expressly provided by section 67d of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 564 (U.S. Comp. St. 1901, p. 3451) that:

'Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act.'

This requires that the money realized from the sale of property on which there are existing liens shall go to satisfy them according to their priority. There can be no question that the Nothstein mortgage was divested by the sale, and thereby remitted to the fund for payment. Not only is this implied by the order of the court, by which the sale was directed to be made subject to the first mortgage, but it was expressly provided in the original order of the referee, of which the subsequent order of court was a mere continuance, that this should be the case; and, in view of this, Mr. Nothstein, being the trustee, obtained special leave to bid as a lien creditor. The return of sale, also, is in line with this. It would not only fly in the face of the record, therefore, but would be contrary to what was the confessed understanding of all parties, to hold that the lien of this mortgage still remains.

But payment of the taxes out of the proceeds of the sale is sought to be maintained by virtue of the Pennsylvania act of Assembly of June 4, 1901 (P.L. 364), by section 2 of which it is provided that all taxes which may thereafter be lawfully imposed or assessed on any property shall be a first lien thereon, together with all charges, expenses, and fees for failure to pay promptly, and that 'such lien shall have priority to, and be fully paid and satisfied out of the proceeds of, any judicial sale of said property, before any other obligation, judgment, claim, lien, or estate with which the said property may become charged or for which it may become liable, save and except only the costs of the sale and of the writ upon which it is made.'

It is to be noted that, if this act covers the taxes of 1901, it does those of 1902 also-- assuming that the property is liable for the latter in the hands of the trustee-- since both were assessed before the sale. But the truth is that it applied to neither. The act, by its terms, is prospective, and not retroactive; priority being given to taxes only as against any obligation, judgment lien, etc., with which the property 'may become charged, or for which it may become liable. ' This plainly refers to the future. Lukens v. Katz, 12 Pa.Dist.R. 604. And the Nothstein mortgage, having been executed and recorded in December, 1900, six months before the act was passed, is not, therefore, affected by it. Whether it would be competent for the Legislature to postpone in favor of taxes a lien already duly acquired, it is not necessary to decide, for they have not undertaken to do so; nor, if the construction of the act was doubtful, would this be presumed.

But it is urged that by the thirty-second section (page 375) of the act the taxes are made a continuing lien on the property, notwithstanding a sale, unless the proceeds are sufficient to pay them, and that they should not fare any differently or better in the bankruptcy court than they would elsewhere, and should therefore be left to be worked out against the property in the hands of the purchaser; the municipalities to which they are due being abundantly secured thereby. In re Veitch, 4 Am.Bankr.Rep. 112, 101 F. 251. In re Brinker (D.C.) 128 F. 634; City of Waco v. Bryan (C.C.A.) 127 F. 79 (dissenting opinion of Shelby, J.). But it is not correct to assume that the lien of the taxes continues notwithstanding the sale which has been made. No doubt they would if the matter was regulated purely by the state law. But notwithstanding what has been said above liens being unaffected by bankruptcy proceedings, it is in the power of the court to order a sale free and clear of them, regardless of how they would ordinarily stand. In re Keet, 11 Am.Bankr.Rep. 117, 128 F. 651. And the court having undertaken to administer upon the real estate in the present instance, and directed a sale subject to the lien of the first mortgage, all others were thereby divested; and any one who purchased upon the faith of this, as disclosed by the record, took a clear title, on which nothing further can be imposed.

But if nothing can be made for the taxes in question out of the real estate, it is clear that, so far as the personal fund is concerned, the taxes of 1901, at least, are entitled to be paid. The order of priority in which debts or charges against the estate of a bankrupt are to be met is established by section 64 of the bankruptcy act (Act. July 1, 1898, c. 541, 30 Stat. 563 (U.S. Comp. St. 1901, p. 3448)), by subsection 'a' of which it is provided that '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 by subsection 'b' that the order of payment, except as so provided, shall be (1) the actual and necessary cost of preserving the estate subsequent to filing the petition; (2) the filing fees paid in involuntary cases, and the reasonable expenses of creditors in recovering property transferred or concealed by the bankrupt; (3) the costs of administration; (4) wages due to workmen, clerks, or servants, earned within three months; and (5) debts owing to any person entitled by the laws of the states or the United States to priority. Taxes, as a class, are thus put at the head of everything-- even above the expense of preserving the estate, or the cost of administering it. Brandenburg, Sec. 1008; Collier (4th Ed.) 459. This is explicit and decisive, and, as the taxes of 1901 are unquestionably within the provisions of the act, they must be paid.

The taxes for 1902 stand somewhat differently. They were not due and owing by the bankrupts at the time of their bankruptcy but have accrued since the proceedings were instituted, and do not, therefore, fall within the strict letter of the law. But the bankruptcy act does not withdraw the estates of bankrupts from the reach of the taxing powers, and they are subject, in consequence, to the payment of taxes imposed while...