In re Raflowitz, 19893.

• Decision Date: 21 February 1941
• Docket Number: No. 19893.,19893.
• Citation: 37 F. Supp. 202
• Parties: In re RAFLOWITZ et al.
• Court: U.S. District Court — District of Connecticut

37 F. Supp. 202

In re RAFLOWITZ et al.

No. 19893.

District Court, D. Connecticut.

February 21, 1941.

Stoddard, Persky & Eagan, by Donald E. Cobey, all of New Haven, Conn., for Trustee.

David S. Rivkin, of New Haven, Conn., for City of New Haven.

HINCKS, District Judge.

In this matter the City of New Haven duly filed a claim for "Business Assessment" tax for five years preceding bankruptcy, showing the tax for each such year with the interest separately computed thereon, all in the aggregate amount of $224.78. These taxes had been duly assessed under Section 1152 of the Gen. Stats.Conn. The assessments here involved had all been made by the Board of Assessors as provided in Gen.Stat. § 1126 and Section 250 of the Charter of the City of New Haven, and no appeals from said assessments had ever been taken by the bankrupts.

The Referee, acting under Section 64, sub. a (4), of the Bankr.Act, 11 U.S.C.A. § 104, sub. a (4), after taking evidence, found the assessment of $1,500 for each year had been excessive to the extent of $530. He accorded priority only to the 1939 tax and to one-fourth of the 1938 tax (his reason for so dealing with the 1938 tax is not plain to me), but fixed the amount thus found entitled to priority by revising downward the assessed valuation in accordance with findings that the fair market value of the average stock on hand in 1938 and 1939 was less than the assessed valuations for those years.

I. I rule that the first proviso under 64, sub. a (4), does not preclude or limit the payment from the general estate in bankruptcy of taxes assessed prior to petition filed upon personal property of the bankrupt which by reason of a prior sale or other disposal never became a part of the estate in bankruptcy.

The act after giving express recognition of an unqualified priority for "taxes legally due and owing by the bankrupt to the United States or any State or any subdivision thereof" sets forth a stated exception, viz., "Provided, That no order shall be made for the payment of a tax assessed against any property of the bankrupt in excess of the value of the interest of the bankrupt estate therein as determined by the court."

It will be noted at the outset that the exception does not expressly cover a tax assessed against property of the bankrupt which never came into the estate. Rather, the language seems adapted to cover property in which an "interest" passed to the estate, thus importing the existence of other interests, such as liens, outstanding in others than the trustee. To be sure, the proviso might be construed to cover property never passing to the trustee on the theory that in such property the "interest" of the estate was zero. But if such was the legislative intent, surely the language used was singularly oblique to accomplish the intended result. And the proviso, stating as it does an exception to the broad enacting clause, will be strictly construed. 59 C. J. 1089.

The proviso was first inserted into the Bankruptcy Act by the Amendment of 1926 (Sec. 64, sub. a), except that there it was confined to taxes assessed against real estate of a bankrupt. In all the years since 1926, there seems to have been no case in which the court was concerned with a possible application of the proviso to taxes against real estate finally disposed of by the bankrupt before petition filed. Rather it has been availed of in cases in which real estate passing to the trustee was so incumbered with mortgages and tax liens that the equity therein of the bankrupt estate was without value. These cases give us no help in construing the proviso now that it is expanded to cover taxes on personal property which generally, as here, are not secured by lien. And my inquiry of the learned Editor of Collier's Fourteenth Edition discloses that there is apparently a complete dearth of Congressional committee reports such as might give a clue to the legislative intent in this respect.

Without the proviso, it is wholly clear that taxes assessed against property, either real or personal, are entitled to a priority which is not affected by the fact that the property assessed never comes to the bankrupt estate. City of Waco v. Bryan, 5 Cir., 127 F. 79; City of Chattanooga v. Hill, 6 Cir., 139 F. 600, 3 Ann.Cas. 237; In re Weissman, D.C., 178 F. 115. The suggestion has been made that under this rule it was unfair to general creditors that the general estate should be depleted by payments on account of taxes long overdue, especially when the assets upon which the taxes were assessed never became part of the estate. This point of view finds vigorous expression in the Weissman case, supra. And at first glance, it might be thought that the proviso under consideration was a piece of legislation in direct response to the invitation to legislative action contained in such cases as In re Weissman.

But on the other hand, there is nothing to show that Congress considered this situation as either unfair or improper. Before extending credit, creditors, at least through the intercession of a taxpayer, Gen. Stat. § 1215, may inquire of the tax collector whether a prospective customer has paid his taxes; if they extended credit when taxes were in arrears, Congress may have considered it not unfair that the taxes should be satisfied out of the general estate. And if the validity of a common claim does not depend upon a contribution to the general estate directly traceable from the common creditor, it is difficult to see that any consideration of "fairness" requires the application of such a test as a condition of priority. Moreover, there is a long history behind the Act which shows a continuous recognition of the importance and propriety of according substantial priorities to tax claims, state and federal. Throughout, the policy of priority has been in conflict with the policy of generosity to general creditors. If a broad solicitude for general creditors lay behind the proviso, one would not have expected it to be restricted, as it expressly is, to taxes assessed against property; we would rather have expected it to include all taxes unpaid after a specified period and thus cover income taxes, excise taxes and sales taxes, etc.

In the light of these considerations, I have come to the conclusion that taxes assessed on property of the bankrupt disposed of prior to bankruptcy fall well within the sweeping language in which the priority is granted and not within the limited and oblique language of the exceptive proviso.

I recognize that my ruling may occasionally produce a result apparently anomalous. Thus where an incumbered asset is transferred prior to bankruptcy the general estate will have to pay the entire tax assessed thereon against the bankrupt; this might occasionally constitute a greater sum than the payment as limited by the proviso which would be in order if the asset had become a part of the estate. But such occasions would be very rare. In respect of real estate, the taxes assessed thereon are generally secured by lien; the existence of the remedy in rem thus afforded generally makes it unnecessary for the taxing authorities to assert a remedy in personam against the general estate. This probably explains the absence of reported cases under the 1926 amendment concerned with taxes on real estate sold prior to bankruptcy. In respect of personal property, which generally is not subject to lien on account of property taxes, as a matter of commercial practice it is seldom that incumbrances accumulate to such an extent that the value of the equity therein is less than the accumulated taxes thereon. And State policy seems not to favor contractual incumbrances on personal property. Thus only rarely will a greater payment be required of the general estate in respect of taxes on assets disposed of before bankruptcy than would have resulted if the assets in question had become a part of the estate.

Perhaps the possibility of such occasional anomalies may have a tendency opposed to my conclusion. But on the whole, this possibility has a weight so slight as not to support a statutory construction which works a radical change fraught with very substantial consequences to the taxing authorities and the public bodies for which they stand.

II. I rule that under the applicable State law the personal property of the bankrupt merchant which was the subject matter of the taxes here involved must be viewed as an aggregate mass having a continuing entity irrespective of the fluctuations of its component items and its aggregate dimensions.

The taxing statute of the State here involved is Gen.Stats.Conn., Section 1152; Section 1152 contains a reference to Gen. Stats. § 1197, of which more anon.

Section 1152 provides: "The property of any trading, mercantile, manufacturing or mechanical business shall be assessed in the name of the owner or owners in the town, city or borough where the business is carried on * * *. The average amount of goods kept on hand for sale during the year, or during any portion of it when the business has not been carried on for a year, previous to the first day of October, except as otherwise specially provided by law, shall be the rule of assessment and taxation; but merchants shall also be liable to be assessed for any amount due them from responsible persons, beyond their liabilities; and any merchant may have a deduction from his list for debts owing by him, in the same manner and to the same extent as is provided in section 1197." By amendment in 1939, Cum.Supp., Section 323e, the average amount of goods kept on hand for sale was amended to read: "the average amount of goods kept on hand."

It thus appears that Section 1152 as it appears in the General Statutes and even more so in its amended form includes a conglomerate and heterogeneous mass of property — not only tangible property but also choses in action. But it will be observed that, unlike the general property tax Statute, Gen.Stats. § 1147, Section...