Matter of Jack Lopez Wholesale Shirt Laundry

• Decision Date: 14 June 1977
• Docket Number: Civ. A. No. 76-984.
• Citation: 435 F. Supp. 1031
• Parties: In the Matter of JACK LOPEZ WHOLESALE SHIRT LAUNDRY, INC., Bankrupt. UNITED STATES of America v. ROYAL GLOBE INDEMNITY COMPANY.
• Court: U.S. District Court — Eastern District of Pennsylvania

435 F. Supp. 1031

In the Matter of JACK LOPEZ WHOLESALE SHIRT LAUNDRY, INC., Bankrupt UNITED STATES of America v. ROYAL GLOBE INDEMNITY COMPANY.

Civ. A. No. 76-984.

United States District Court, E. D. Pennsylvania.

June 14, 1977.

Robert N. DeLuca, Asst. U. S. Atty., Philadelphia, Pa., Joseph M. Gontram, Trial Atty., U.S. Dept. of Justice, Tax Div., Washington, D. C., for plaintiff.

S. Gordon Elkins, Philadelphia, Pa., for defendant.

MEMORANDUM

CAHN, District Judge.

Before the court are cross motions for summary judgment. This controversy involves a claim by the United States of America ("Government") on a surety bond issued by Royal Globe Indemnity Company ("Royal"). The facts are not in dispute, and therefore, the matter is ripe for summary judgment.

On November 28, 1969, Jack Lopez Wholesale Shirt Laundry, Inc., filed a petition for a Chapter XI Arrangement pursuant to the Bankruptcy Act, 11 U.S.C. § 701 et seq. On December 1, 1969, William E. Chambers, Esquire, was appointed Receiver for the debtor and was ordered to give bond in the amount of $10,000. On the same date, Chambers as principal and Royal as surety posted a bond in the amount of $10,000. The condition of the bond provided:

THE CONDITION OF THIS OBLIGATION IS SUCH that whereas the above-named William E. Chambers, Esq. was, on the 1st day of December, 1969, appointed Receiver in the case pending in bankruptcy in said Court, wherein Jack Lopez Wholesale Shirt Laundry, Inc., T/A Pierce Laundry the bankrupt and he, the said William E. Chambers, Esq. has accepted said trust with all the duties and obligations pertaining thereunto:

NOW, THEREFORE, if the said William E. Chambers, Esq. as aforesaid, shall obey such orders as said Court may make in relation to said trust, and shall faithfully and truly account for all the moneys, assets and effects of the estate of the said bankrupt which shall come into his hands and possession, and shall in all respects faithfully perform all his official duties as said ____, then this obligation to be void; otherwise to remain in full force and virtue.

The order appointing Chambers as Receiver specifically authorized him "to pay all wages, salaries and compensation to managers, agents and employees of the debtor ... and to pay all taxes lawfully incurred in the operation of the business ..."

The Receiver operated the business for approximately two months. The Receivership was unsuccessful, and on February 27, 1970, the Chapter XI proceedings were converted to straight bankruptcy and the debtor was adjudicated a bankrupt. Chambers was subsequently appointed Trustee of the bankrupt's estate.

The dispute in this case arises because the Receiver, during the period he operated the business of the debtor, paid certain wages to employees but failed to pay over to the Government, taxes imposed under the Federal Unemployment Tax Act (FUTA), 26 U.S.C. § 3301 et seq., and deductions withheld for federal income taxes and FICA (Federal Insurance Contributions Act, 26 U.S.C. § 3101, et seq.) taxes. The net wages paid by the Receiver during the period of operation exceeded $30,000.

On November 24, 1970, the Government made assessments against the Receiver for unpaid taxes, penalties and interest in the total amount of $12,937.39. On November 25, 1970, the Government filed a claim in the Bankruptcy Court in the amount of $8,235.64 and sought priority as an expense of administration. This claim is less than the assessment made the previous day because the later claim did not include an additional assessment of taxes for the fourth quarter of 1969 and omitted interest.

On September 12, 1973, the Receiver filed the Operating Receiver's Report and the Operating Receiver's First & Final Account. On the same date Chambers, in his capacity as Trustee, filed the Trustee's First and Final Account showing a balance for distribution of $3,100.39. On October 17, 1973, a final meeting of creditors was held. At that meeting, an attorney for the Internal Revenue Service presented the claim in the amount of $8,235.64 and also made an oral motion to surcharge the Receiver. The Bankruptcy Court would not entertain the oral surcharge motion and directed the attorney for the Internal Revenue Service to file a written motion if he so desired. No written motion to surcharge the Receiver was ever filed with the Bankruptcy Court. The claim of the Internal Revenue Service was allowed and accorded priority as an administrative expense. All Chapter XI claims given priority as an administrative expense were paid on a pro rata basis of 16.106%. The Government received $1,326.43.

Thereafter, William E. Chambers died, and on February 15, 1974, an order was entered appointing Fred Zimmerman as substituted Trustee. The substituted Trustee and his surety were discharged on March 10, 1976. Neither William E. Chambers nor his personal representative was ever discharged as Receiver or Trustee, and Chambers' surety, Royal, has not been released from liability on its bond. The failure of the surety to obtain a discharge of its obligation on the Receiver's bond is a fact which cannot be emphasized too strongly.

Neither the Government nor the I.R.S. took an appeal from or filed exceptions to the bankruptcy proceedings. In fact, no other action to collect the taxes due the Government has been taken except the institution of this suit on March 30, 1976.

Royal first suggests that this court lacks jurisdiction over the Government's claim. Royal's reasoning in this regard is somewhat confused because it is based on Bankruptcy Rule 11-20(d) under which the debtor may be required to post security to indemnify or protect the estate. A debtor's bond is authorized by § 326 of the Bankruptcy Act, 11 U.S.C. § 726. That type of bond is not involved in this case. The bond in this case is posted by the Receiver, not by the debtor, pursuant to Bankruptcy Rule 11-20(a). In any event, a suit by the Government on the surety bond is properly cognizable in the United States District Court without the usual jurisdictional requirements of diversity of citizenship and amount in controversy. Collier on Bankruptcy ¶ 50.091. Jurisdiction is not limited to the Bankruptcy Court. Although a Bankruptcy Court has jurisdiction pursuant to 11 U.S.C. § 78(n) to adjudicate claims made against a Receiver's surety, a United States District Court also has plenary jurisdiction to entertain such suits. See footnote 3, In Re Martinez, 311 F.Supp. 317, 319 (D.P.R.1970).

Royal's second argument is that the bond provides indemnification to the estate but not to a creditor of the estate. Royal's reliance on this argument arises from its failure to distinguish between a bond posted by the debtor under Rule 11-20(d) and the bond posted by the Receiver under Rule 11-20(a). In regard to bonds posted by Receivers, it is clear that an individual suitor may proceed in the name of the United States against the surety and the United States may so proceed where it has an actual beneficial interest. In this regard Collier, supra, states:

Although an action on a bond may be brought either by the United States for the use of third persons or by an individual suitor in the name of the United States, it should be remembered that the United States has no actual beneficial interest in the enforcement of these bonds.

However, the exception set forth in footnote 6 is important. Footnote 6 provides:

Except of course where the United States, like any other party, has an actual beneficial interest. (Emphasis supplied.)

The surety's reliance on the cases of Martin v. National Surety Corporation, 437 Pa. 159, 262 A.2d 672 (1970) and VanCor, Inc. v. American Casualty Co. of Reading, 417 Pa. 408, 208 A.2d 267 (1965) is misplaced. In the Martin case, the bond was issued to cover indemnification to the Commonwealth of Pennsylvania, who had paid over to the surety company the entire sum due under nine highway construction contracts. Clearly, that case has nothing to do with the procedure...