In re Wells, 7150

• Decision Date: 03 October 1933
• Docket Number: No. 7150,7178.,7150
• Citation: 4 F. Supp. 329
• Parties: In re WELLS. In re MEYERS.
• Court: U.S. District Court — District of Maryland

4 F. Supp. 329

In re WELLS In re MEYERS.

Nos. 7150, 7178.

District Court, D. Maryland.

October 3, 1933.

Michael J. Hankin, Asst. City Sol., of Baltimore, Md., for mayor and city council of Baltimore, petitioner.

Nathan Hamburger, of Baltimore, Md., for Meyers' trustee.

John H. Hessey, of Baltimore, Md., for Wells' trustee.

CHESNUT, District Judge.

The petitions to review the conclusions and orders of the Referee in the above cases present two somewhat different phases of the same legal problem. In both cases the Mayor and City Council of Baltimore filed a claim for allowance, prior to payment of dividends to general creditors, for tangible personal property tax bills against the bankrupt for the year 1933. The Referee disallowed the claims in both cases, and the City has petitioned for review.

In both cases the petitions in bankruptcy and the adjudication occurred after October 1, 1932, and before January 1, 1933. The cases differ, however, in one aspect — in the Wells case the tangible personal property, on which the tax bill was based, was sold and delivered by the trustee prior to January 1, 1933; while in the Meyers case it was held by the trustee until after January 1, 1933, being sold and delivered on January 9th of that year. It will be noted that the claim as presented is for the City taxes only, there apparently being no claim for State taxes although in current practice the two are usually rendered on one bill by the City Tax Collector. The amounts involved are comparatively small ($217.26 in the Wells case and $58 in the Meyers case); but the principle involved is of importance not only to Baltimore City but in the administration of the Bankruptcy Act. It is a matter of some surprise that although the present bankruptcy law and the present statutory provisions for taxation in Baltimore City (with some recent amendments) have been in force for approximately thirty-five years, it appears that the questions now raised have never heretofore been presented for adjudication in this court.

The claim of the City to priority in payment is based on section 64a of the Bankruptcy Act, which, as amended by the Act of May 27, 1926, § 15 (11 USCA § 104 (a), reads as follows:

"(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 the order of priority as set forth in paragraph (b) hereof."

As the Referee disallowed the claims entirely there is no question presented as to the order of priority of payment, but it is to be noted that if the claims are entitled to be allowed at all their relative priority is determined by clause 6 of paragraph (b) of section 64 of the Act, as amended, 11 USCA § 104 (b) (6), which includes "taxes payable under paragraph (a) hereof."

In considering the question presented it is to be importantly noted in the first place that we are dealing here with that class of taxes which is known as taxes on individual persons as distinct from corporations and imposed with respect to the ownership of tangible personal property. The local law applying to this class of taxes is set out in the Referee's memorandum opinion in the Wells case. But reference should also be made to the Maryland Acts 1929, ch. 226, amending the general law of taxation of the State (1929 Supplement to Bagby's Annotated Code of Maryland, art. 81) and particularly to sections 2 (22), 3 (e), and section 11 (as amended by chapter 214 of Maryland Acts of 1933); sections 28 (b), and 48 (a). In substance the local tax system with respect to this class of taxes is that October first of each year is fixed as the "date of finality" for valuation and assessment of property to control for the ensuing calendar year. The taxable basis being thus fixed as nearly as possible, an "ordinance of estimates" is then passed, and, as soon as practicable thereafter in the month of November, there is another ordinance fixing the rate of taxation for the ensuing year. The City taxes become "due and payable" on January 1st of each year and become in arrears on July 1st thereafter. While October 1st preceding the calendar tax year is made the "date of finality" so far as possible for the valuation of property and the liability of the assessed individual to pay taxes thereon for the following year, it has been clearly decided by the Court of Appeals of Maryland that the taxes are not "due and payable" until January 1st of the following year. Bamberger v. Mayor & City Council of Baltimore, 125 Md. 431, 94 A. 8; Lotterer v. Leon, 138 Md. 318, 320, 325, 113 A. 887. Thus, while the bankrupt had an underlying and apparently inescapable obligation on October 1st, 1932, for the payment of some tax thereafter, the exact amount was not known until the levy was thereafter made prior to January 1st next and there was no debt for the taxes on October 1st or at the time of the filing of the petitions in bankruptcy in these cases. This consideration apparently was the controlling basis of the Referee's decision that the tax claim in both cases should be disallowed. This presents at once sharply the question as to whether the proper construction of section 64a of the Bankruptcy Act in providing that "the court shall order the trustee to pay all taxes legally due and owing by the bankrupt" means to limit the payment to those taxes only which were legally due and owing at the time of the filing of the petition, or does it require the payment of all taxes which may have become legally due and owing at the date of the order of the court with respect to the claims in the course of the administration of the case, which in both cases was after July 1, 1933, when the taxes were not only "due and payable" but also in arrears. The particular question was clearly and sharply presented in the case of In re F. G. Borden Co. (C. C. A. 7) 275 F. 782, 785, where it was held that the phrase "all taxes legally due and owing by the bankrupt" is referable to the date of the order of court relating to payment, and thus includes and requires the payment of taxes which may have become due subsequent to the adjudication. The decision was based in large part on Dayton, Trustee, v. Standard, 241 U. S. 588, 36 S. Ct. 695, 60 L. Ed. 1190, affirming (C. C. A.) 220 F. 441, where the trustee was ordered to pay taxes levied and assessed subsequent to adjudication.

This authority is, I think, sufficient to justify and require the payment by the trustee of the City's tax bill in the Meyers case. Moreover, the conclusion is supported by authorities approaching the matter from a somewhat different standpoint. Admittedly in the Meyers case, the trustee held the property until after the taxes thereon had become payable for the current calendar year. It has been held in numerous federal decisions that the bankruptcy law does not have the effect of withdrawing property in the hands of a bankruptcy trustee from the reach of the sovereign's general power of taxation, and therefore taxes accruing on the property in the hands of the bankruptcy trustee must be paid by him. Swarts v. Hammer (C. C. A.) 120 F. 256; Id., 194 U. S. 441, 24 S. Ct. 695, 48 L. Ed. 1060. And the law has been so applied by the Circuit Court of Appeals for this Fourth Circuit in Henderson County, N. C., v. Wilkins, 43 F.(2d) 670, 671, where it was held that:

"Although the property in question was in the hands of the bankruptcy court when the taxes for 1927 and 1928 were levied, it was subject to taxation by the authorities of the county and municipality. Swarts v. Hammer, 194 U. S. 441, 24 S. Ct. 695, 48 L. Ed. 1060; Dayton v. Stanard, 241 U. S. 588, 36 S. Ct. 695, 60 L. Ed. 1190."

The 13th Edition of Collier on Bankruptcy, Vol. II, page 1454, in discussing the subject says:

"Taxes upon property in the hands of the trustee accrued since the proceedings were instituted, do not fall within the strict letter of the law, but the bankruptcy act does not withdraw the assets of bankrupts from the reach of the taxing power, and they are subject, in consequence, to the payment of taxes imposed while in the hands of the trustee." This text is supported by the citation of numerous decisions including most of those above referred to, to which may be added, In re Fisher & Co. (D. C. N. J.) 148 F. 907; In re Ponzi (D. C. Mass.) 6 F.(2d) 324; In re Conhaim (D. C. Wash.) 100 F. 268; People of State of New York v. Hopkins (C. C. A. 2) 18 F.(2d) 731, 733. Compare In re Mason Tire & Rubber Co. (D. C. Ohio) 39 F.(2d) 462, 464, where a contrary suggestion was advanced but was not made the basis of the decision. See, also, In re Davenport Dry Goods Co. (D. C. Iowa) 9 F.(2d) 477.

It is recognized in the decisions that the purpose of the Bankruptcy Act in making this special provision for the payment of taxes, coupled with the provision in section 17...