Segal v. Rochelle

• Decision Date: 12 October 1964
• Docket Number: No. 21043.,21043.
• Citation: 336 F.2d 298
• Parties: Gerald SEGAL, Individually and d/b/a Segal Cotton Products, et al., Appellants, v. William J. ROCHELLE, Jr., Trustee, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

336 F.2d 298 (1964)

Gerald SEGAL, Individually and d/b/a Segal Cotton Products, et al., Appellants, v. William J. ROCHELLE, Jr., Trustee, Appellee.

No. 21043.

United States Court of Appeals Fifth Circuit.

September 9, 1964.

Rehearing Denied October 12, 1964.

Henry Klepak and Roy J. True, Dallas, Tex., for appellants.

William J. Rochelle, Jr., Dallas, Tex., for appellee.

Before RIVES, BELL and WRIGHT,^* Circuit Judges.

GRIFFIN B. BELL, Circuit Judge.

This appeal presents a question of prime importance in the administration of the Bankruptcy Act. At issue is whether loss-carryback refunds forthcoming under the federal income tax statutes¹ and arising from losses sustained prior to but in the year of bankruptcy go to creditors or the bankrupt.

Gerald Segal and Sam Segal, as individuals, filed voluntary petitions in bankruptcy on September 27, 1961. On the same date Segal Cotton Products, a partnership composed of Gerald Segal and Sam Segal, filed a voluntary petition in bankruptcy. The trustee here was duly appointed and qualified in all three proceedings.

Segal Cotton Products incurred losses during the year 1961 prior to the filing of the petition on September 21. The trustee filed claims for loss-carryback adjustments with the Internal Revenue Service in light of income taxes having been paid by the individual partners for the two preceding years. Tax refunds were obtained pursuant thereto, and these were the subject matter of claims filed on behalf of Gerald and Sam Segal which were denied by the Referee.² The District Court affirmed, holding that the refunds were assets of the trustee for the benefit of creditors. This holding was contrary to that of the Third Circuit, on similar facts, in the case of In re Sussman, 3 Cir., 1961, 289 F.2d 76, 77, and that of the First Circuit in Fournier v. Rosenblum, 1 Cir., 1963, 318 F.2d 525. This appeal followed.

The question presented is whether the rights to the loss-carryback adjustments passed to the trustee. The bankrupts contend that the rights accrued after the date of bankruptcy since applications for refunds, resting as they must on the results of the whole taxable year, could not have been filed until the end of the year. The answer depends on whether such a right to refund or adjustment is transferable property within the meaning of § 70, sub. a(5) of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. a(5), in pertinent part as follows:

"(a) The Trustee of the estate of a bankrupt * * * shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title * * * to all of the following kinds of property wherever located * * * (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered: * * *".

It is to be noted that the term "property" as used in this section includes rights of action which could have been transferred prior to the filing of the petition.³ The court held in Sussman, supra, that the right to a loss-carryback adjustment is not property as defined in § 70, sub. a; and further, if property, because of the proscription contained in the Assignment of Claims Act, 31 U.S. C.A. § 203, it could not have been transferred prior to the filing of the petition in bankruptcy. In Fournier v. Rosenblum, supra, the court went only so far as to hold that the right was not embraced in the concept of property as used in § 70, sub. a. With deference, and after careful consideration of the reasoning of these respected sister courts, we find ourselves unable to follow their decisions. We hold that the right to a loss-carryback refund or adjustment, although contingent as to amount, is transferable property within the meaning of § 70, sub. a(5), and affirm.

We begin with the proposition that it was the intent of Congress to secure to creditors all property of a bankrupt. The refunds here in question will pass to the bankrupts freed from claims of their creditors if such a right is outside the scope of the definition of property as used in the Act. This will be the result in spite of the fact that the refunds arose as a result of losses in the partnership business which in the first place caused the claims of the creditors to come into existence. This windfall to the bankrupts at the expense of the creditors was recognized by the court in Sussman, and Fournier v. Rosenblum, but each court felt that it was a matter which required legislative correction.

Our conclusion stems from a construction which gives effect to the congressional intent. It is true that the refunds flow from newly created rights in the sense that the loss-carryback provision came into the law in 1942, after the enactment of § 70, sub. a(5) in 1898. Moreover, such refunds may not be sought until the end of the taxable year in which the losses arise, and thus the realization of the right is not only deferred but a contingency is posed as to the amount of the loss since conceivably the applicable losses may be reduced or increased after the date of the filing of the petition in bankruptcy.

There is nothing in the language of the statute to indicate that the scope of the definition of property is to be limited to property rights existing when the statute was enacted. This conclusion must be coupled with the fact that the concept of property as used in the Bankruptcy Law has been held, over a long period of years, to include rights depending on contingencies. In Williams v. Heard, 1891, 140 U.S. 529, 11 S.Ct. 885, 35 L.Ed. 550, the predecessor bankruptcy statute provided that all of the "estate, debts, and effects" of the bankrupt were to be recovered for the creditors. This was said to embrace his whole property. The facts were that during the Civil War the bankrupts had paid extra insurance premiums to cover war risks created by Confederate ships sponsored by Great Britain. In 1871, the United States secured an international reparations award of 15 million from Great Britain to be distributed by Congress as it saw fit. Congress set up a commission to determine distribution of the fund in 1874, and the bankruptcy occurred in 1875. No steps were taken to recover an award for the extra premiums paid until 1882 when Congress expressly provided for such recovery, and the award was made in 1886. The question was presented of ownership of the award as between the assignee of the bankrupts and them individually, they having been discharged in 1877.⁴ The court held that the bankrupts had at the time of bankruptcy a possibility, coupled with an interest, of recovering the premiums, and that such property within the meaning of the Act which had passed to the assignee of the bankrupts.

The case of In re Dorgan's Estate, S.D., Iowa, 1916, 237 F. 507 involved an Iowa will giving the residue to the wife for life, with "full power to use the same * * * as she may see fit," and at the wife's death, remainder to bankrupt of "all the proceeds * * * left." The petition in bankruptcy was filed during the lifetime of the wife. Under Iowa law, this will created a life estate in the wife, with a vested remainder, subject to divestment, in the bankrupt. The court held that the bankrupt's interest passed to the trustee, saying "Such interest is a property right — contingent, it is true, as to the amount and value thereof, and subject to be entirely defeated, but nevertheless a property right, the value of which may be in a way approximated by taking into account the age of the widow and the prospective necessities of her life."

The case of Kleinschmidt v. Schroeter, 9 Cir., 1938, 94 F.2d 707, presented a situation where the bankrupt was engaged in a joint mining venture, advanced part of his contribution to the venture, but defaulted on the rest. Under the joint venture agreement he thereby forfeited all interest in the venture, except the conditional right to a return of his prior contribution if the venture made a profit or was sold at a profit. The court held that the conditional right of the bankrupt to a return of his contribution passed to the trustee in bankruptcy by operation of § 70, sub. a.

See also Chandler v. Nathans, 3 Cir., 1925, 6 F.2d 725, which based the passing of an income tax refund claim pending when the bankruptcy petition was filed on the premise that it was a right of action arising from the unlawful taking or detention of property of the bankrupt within the meaning of § 70, sub. a(6) of the Act. And cf. In re Kepp Elec. & Mfg. Corp., D.Minn., 1951, 98 F.Supp. 51, a Chapter XI arrangement proceeding, where the debtor transferred various assets to a receiver, including all tax refunds due and owing the debtor from the United States government. The assignment of loss-carryback claims was prior to the end of the taxable year. The Commissioner of Internal Revenue maintained that the transfer of the refund claim was void as violating the Assignment of Claims Act. It was held that this Act did not apply to assignments which occur through operation of law, and that a Chapter XI transfer to a receiver occurs by operation of law. Apparently no question was presented as to whether the assignment might be invalid because of its being contingent, and there was no contest between the receiver and an assignee as distinguished from the government.

Thus it is that these authorities have considered contingent rights as property under the Bankruptcy Act. They are applicable and persuasive by analogy. We hold that the right to claim loss-carryback refunds under the circumstances of this case is property as that term is used in § 70, sub. a(5), notwithstanding that the claim is subject to adjustment in the event the taxpayer has other losses or earnings during the balance of the year, and the claim may not be filed until the end of...