Jaylaw Drug, Inc., In re

• Decision Date: 05 May 1980
• Docket Number: D,No. 974,974
• Citation: 6 B.C.D. 392,621 F.2d 524
• Parties: 80-1 USTC P 9408, 6 Bankr.Ct.Dec. 392, Bankr. L. Rep. P 67,426 In re JAYLAW DRUG, INC., Debtor. JAYLAW DRUG, INC., Plaintiff-Appellant, v. UNITED STATES INTERNAL REVENUE SERVICE, Defendant-Appellee, and Empire National Bank, Defendant. ocket 79-5062.
• Court: U.S. Court of Appeals — Second Circuit

Page 524

621 F.2d 524

80-1 USTC P 9408, 6 Bankr.Ct.Dec. 392,

Bankr. L. Rep. P 67,426

In re JAYLAW DRUG, INC., Debtor.

JAYLAW DRUG, INC., Plaintiff-Appellant, v. UNITED STATES INTERNAL REVENUE SERVICE, Defendant-Appellee, and Empire National Bank, Defendant.

No. 974, Docket 79-5062.

United States Court of Appeals, Second Circuit.

Argued April 7, 1980.

Decided May 5, 1980.

Harvey S. Barr, Barr & Faerber, Spring Valley, N. Y., for plaintiff-appellant.

Stuart M. Bernstein, Asst. U. S. Atty., New York City (William M. Tendy, U. S. Atty. for the Southern District of New York, and Michael H. Dolinger, Asst. U. S. Atty., New York City, of counsel), for defendant-appellee.

Before FRIENDLY, FEINBERG and TIMBERS, Circuit Judges.

FRIENDLY, Circuit Judge:

Jaylaw Drug, Inc. (Jaylaw), a debtor which has been rehabilitated as a result of proceedings under Chapter XI of the Bankruptcy Act, appeals from a ruling of Bankruptcy Judge Schwartzberg, which was affirmed by Judge Cooper in the District Court for the Southern District of New York, 1 B.R. 512. The effect of the decision was to allow the Government to collect post-petition interest and pre- and post-petition penalties on a federal tax claim.

The facts are undisputed: Jaylaw filed a petition for an arrangement under Chapter XI on May 1, 1975. Thereafter the Government filed a proof of claim for withholding and Federal Insurance Contribution (FICA) taxes, which was amended several times. In the last amendment interest of $28.12 was calculated to the date of the Chapter XI petition. The proof of claim, which was an official Internal Revenue Service (IRS) form, contained a printed line reading "Dollar amount per day at which interest will accrue after date of this statement." In a box at the end of the line was typed the word "None".

On March 15, 1976, Jaylaw submitted a proposed plan of arrangement. This recited that the debtor in possession had "obtained a third party who will finance the said Plan, provide the appropriate funding and support necessary to effectuate the Plan and operate the business of the debtor in possession" and that "(t)he debtor, through the assistance of the third party will secure the cooperation of the secured creditor who possesses a security interest in all of the assets of the debtor in possession." The plan provided that the claims of priority creditors should be paid in full upon confirmation or upon such other terms as might be agreed upon between the debtor in possession and any priority creditor. Unsecured debts were to be paid only to the extent of 20% without interest over a four year period.

The plan was confirmed on April 13, 1978, and on May 11, 1978, the Government, as a priority creditor, was paid the full amount of its claim, including pre-petition interest. Nearly a year later the Government levied on a bank account of Jaylaw's for post-petition interest and penalties of $766.88 and pre-petition penalties of $142.27. Jaylaw applied to the bankruptcy court for relief against the assessment. Although the Government questioned the court's jurisdiction, the bankruptcy judge proceeded to the merits and in a reasoned opinion ruled in the Government's favor. On appeal to the District Court for the Southern District of New York, Judge Cooper, also in a reasoned opinion, affirmed his ruling. This appeal followed.

It is common ground that the filing of a Chapter XI petition suspended the running of interest against the estate, despite the tax claim's priority status. New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949), and Nicholas v. United States, 384 U.S. 678, 86 S.Ct. 1674, 16 L.Ed.2d 853 (1966), held as much with respect to the filing of an ordinary bankruptcy petition, and the summary affirmance in United States v. General Engineering & Manufacturing Co., 342 U.S. 912, 72 S.Ct. 358, 96 L.Ed. 682 (1952), aff'g 188 F.2d 80 (8 Cir. 1951), extended this rule to Chapter XI proceedings. However, in Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11 L.Ed.2d 772 (1964), a case of the ordinary bankruptcy of an individual, the Court held that post-petition interest could be collected from the bankrupt after termination of the proceedings. The Court's reasoning was that under § 17a(1) the tax claim was not dischargeable and the rule barring the collection of interest from an estate was based on administrative convenience and the avoidance of unfairness among creditors in the distribution of the estate, but did not eliminate the claim, citing American Iron & Steel Mfg. Co. v. Seaboard Air Line R. Co., 233 U.S. 261, 266-67, 34 S.Ct. 502, 504, 58 L.Ed. 949 (1914) (equity receivership where estate proved sufficient to pay all debts) and Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 164, 67 S.Ct. 237, 240, 91 L.Ed. 162 (1946). See also Nicholas v. United States, supra, 384 U.S. at 682-89, 86 S.Ct. at 1678-82.

Prior to the Bruning decision a divided panel of this court had held that Saper had the effect of preventing the collection of post-petition interest on a state tax claim by state remedies from an arranged debtor. Sword Line, Inc. v. Industrial Commissioner of New York, 212 F.2d 865, cert. denied, 348 U.S. 830, 75 S.Ct. 53, 99 L.Ed. 654 (1954). Later we reached the same result with respect to a federal tax claim. National Foundry Co. v. Director of Internal Revenue, 229 F.2d 149 (1956). When the issue arose after Bruning in In re Johnson Electrical Corporation, 312 F.Supp. 840 (S.D.N.Y.1970), the district judge adhered to National Foundry primarily on the basis, which had been recognized in In re Vaughan 292 F.Supp. 731 (E.D.Ky.1968), that, in contrast to Bruning, the tax claim in the bankruptcy proceeding had been fully paid. This court reversed, 442 F.2d 281 (1971). We held that the attempted distinction of Bruning was unconvincing since while the principal and pre-petition interest had been paid, Bruning had decided that interest continued to accrue until payment and thus survived a discharge as much as would a claim for principal. The briefs and the opinion contained relatively little discussion of a possible distinction between an ordinary bankruptcy such as that in Bruning and a proceeding for an arrangement under Chapter XI. Our decision in Johnson Electric was followed in Hugh H. Eby & Co. v. United States, 456 F.2d 923 (3 Cir. 1972), although the opinion speaks of "post petition interest claims payable out of assets acquired after confirmation of the plan of arrangement," id. at 926, without particularizing just what the nature of these assets was. The leading text considers that Sword Line and National Foundry have been "effectively overruled" by Bruning and regards the extension of the Bruning rule to debtors arranged under Chapter XI made by us in Johnson Electric and by the Third Circuit in Eby as "a natural corollary" of Bruning. 3A Collier, Bankruptcy P 63.16 at 1868-69 (1975). ¹

It is arguable that the extension of the Bruning principle to arrangements under Chapter XI was not quite so inevitable as we and the Third Circuit assumed. In ordinary bankruptcy there is a sharp distinction between the estate and the bankrupt. The estate, after payment of administration expenses, is distributed to creditors; the bankrupt emerges with none of the assets of the estate and continues with only exempt and after-acquired assets which had never formed part of it. In arrangements the situation is more complex. In some arrangements a major part of what had been the "estate" continues to remain in the hands of the arranged debtor. In such cases the rule that while post-petition interest cannot be collected from the "estate", it can be collected from the former debtor after the Chapter XI proceeding has terminated, may appear to be lacking in reality.

Despite this we see no sufficient reason to depart from our decision in Johnson Electric even if this panel had the power to do so, which it does not, see United States v. Fatico, 603 F.2d 1053, 1058 (2 Cir. 1979); Ingram v. Kumar, 585 F.2d 566, 568 (2 Cir. 1978), cert. denied, 440 U.S. 940, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979). Congress was at pains to exclude from § 371, the discharge provision of Chapter XI, "such debts as, under section 17 of this Act, are not dischargeable." Section 17, as the Supreme Court noted in Bruning, 376 U.S. at 361, 84 S.Ct. at 908, approving the language of the Ninth Circuit,

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).

As Judge Frank pointed out in his dissent in Sword Line, supra, 212 F.2d at 870-72, there are many nondischargeable claims, unknown to the debtor or its creditors, which can be asserted immediately against the rehabilitated debtor. ² Assimilation of Chapter XI proceedings to ordinary bankruptcy is natural since Chapter XI was enacted in substitution for the composition provisions, §§ 12 and 13, of the Bankruptcy Act of 1898. Furthermore the form of disposition wherein the Chapter XI debtor retains most of the property of the "estate" is by no means the only possible outcome of a Chapter XI proceeding. In some instances the assets will have been sold and any excess of the proceeds over the compromised claims will belong to the debtor. Cf. In re WNCN, Inc., 246 F.Supp. 30 (S.D.N.Y.1965). Moreover, the distinction drawn in Bruning between the collectibility of interest on tax claims from the estate and from the bankrupt was not based on any inherent difference between the two which can be said to be absent in the Chapter XI context....