Unemployment Reserves Commission v. Meilink

• Decision Date: 10 March 1941
• Docket Number: No. 9501.,9501.
• Citation: 116 F.2d 330
• Parties: UNEMPLOYMENT RESERVES COMMISSION OF CALIFORNIA v. MEILINK.
• Court: U.S. Court of Appeals — Ninth Circuit

116 F.2d 330 (1940)

UNEMPLOYMENT RESERVES COMMISSION OF CALIFORNIA v. MEILINK.

No. 9501.

Circuit Court of Appeals, Ninth Circuit.

December 12, 1940.

Rehearing Denied March 10, 1941.

Earl Warren, Atty. Gen., State of California, and John J. Dailey, Deputy Atty. Gen. (Maurice P. McCaffrey and Glenn V. Walls, both of Sacramento, Cal., of counsel), for appellant.

Dinkelspiel & Dinkelspiel and Grant H. Wren, all of San Francisco, Cal. (James M. Conners, of San Francisco, Cal., of counsel), for appellee.

Before WILBUR, GARRECHT, and HEALY, Circuit Judges.

WILBUR, Circuit Judge.

This is an appeal from an order of the bankruptcy court denying a claim for a portion of the interest included in the appellant's claim for taxes or "contributions" to unemployment reserves and for interest thereon due to it as an agency of the state of California. The amount of the "contribution" by the appellant was $822.40 in 1937. The trustee paid $936.35, principal and interest, on February 13, 1939. The amount of unpaid interest (5 per cent) was $156. The trustee filed objections to the claim of priority for the balance of the unpaid interest (6 per cent) which he objected to on the ground that it constituted a penalty within the meaning of § 57, sub. j of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. j, prohibiting approval of claims of states for penalties in greater amounts than the loss incurred by the debtor's default.¹ The referee in bankruptcy sustained the objection of the trustee as to 5 per cent but allowed 1 per cent additional, making the total allowance of 7 per cent on said overdue "contributions", or taxes. The District Court affirmed the order of the referee and this court allowed the appeal, the amount of interest involved being less than $500. 11 U.S.C.A. § 47, sub. a, 52 Stats. p. 854, ch. 575, § 1.

The California statute fixing the tax, or "contribution" (Cal.Stats.1935, ch. 352, p. 1234, § 45; Deerings General Laws of 1937, Act 8780d, § 45) provides for the payment of interest thereon as follows:

"If any employer fails to make any payment required of him, or fails to deduct and pay to the commission the contributions of his workers, in accordance with the provisions of this act and of the rules and regulations adopted by the commission, he shall become additionally liable for interest on such payments at the rate of twelve per cent per annum from the date such payment becomes due, both principal and interest being payable in the same manner as the contributions. Such payment and interest shall be collectible in the name of the commission in any manner practicable, including civil action by the commission against the defaulting employer."

There is no justification on the face of the California statute for treating the 12 per cent as anything other than interest. It is so characterized in the statute and the amount payable depends upon the lapse of time between the accrual of the obligation and its payment, which lies wholly in the control of the taxpayer. The Supreme Court, in the case of United States v. Childs, 266 U.S. 304, 45 S.Ct. 110, 69 L.Ed. 299, had occasion to construe the provisions of the Bankruptcy Act (§ 57, sub. j, 11 U.S. C.A. § 93, sub. j) with reference to the allowance of interest upon income taxes which was claimed to be excessive and therefore a penalty. The United States statute imposing the income tax (Sec. 14 (a) T.I., part II, Revenue Act 1916, 39 Stat. 772) there under consideration, provided that: "* * * after ten days' notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due."

The government conceded that the 5 per cent charge was a penalty and, consequently, was not payable by the bankrupt's estate, but it urged its claim for the charge of 1 per cent per month as interest. The referee therein had held that the 1 per cent per month interest, as well as the 5 per cent charge was a penalty and, therefore, was not a claim which could be allowed against the estate under the provisions of § 57, sub. j, of the Bankruptcy Act. He allowed 6 per cent interest only. The District Court and the Circuit Court of Appeals affirmed this order for the same reason, In re J. Menist & Co., 2 Cir., 290 F. 947, but the Supreme Court reversed its decision and held that the government was entitled to have its claim allowed for the 1 per cent per month designated as interest on the revenue law imposing the tax (§ 14(a), supra). In ruling upon the question the court said 266 U.S. 304, 45 S.Ct. 111, 69 L.Ed. 299:

"A penalty is a means of punishment; interest a means of compensation. Bouvier defines it to be `a consideration paid for the use of money or forbearance in demanding it when due.' 1 Bouv.Law Dict., Rawle's Third Revision, p. 1642. * * *

"The imposition of a tax is certainly a function of government and creates an obligation, and the power that creates the obligation can assign the measure of its delinquency — the detriment of delay in payment, and section 14 (a) has done so in this case, and explicitly done so. Five per centum penalty is the cost of delinquency, and interest upon the amount due at 1 per cent. per month — 12 per cent. a year. There is no ambiguity in the declaration nor the distinction made. * * * The Circuit Court of Appeals considered that the 1 per cent. was involved, as well as being in effect penalty and not saved by its name, though it was imposed by the Legislature and within the legislative power, and notwithstanding that taxes are treated as debts within the meaning of the Bankruptcy Act. * * *

"The Circuit Court of Appeals adjudged the tax in the present case a debt and assigned against it interest at 6 per cent.; the court considering that that interest was compensation for the delinquency, anything in excess becoming penalty and within the prohibition of section 57 sub. j. The court said: `On the point at bar (1 per cent. interest, as the price of the delay being penalty) we are in accord with In re Ashland, etc., (D.C.) 229 F. 829, and hold that, there being no evidence of any injury or damage to the government by the withholding of this tax, except that which flows from the nonpayment of a just debt, anything in excess of the legal rate of interest is to be treated as a penalty and not allowed.'

"We are unable to concur. It makes the rate of interest that of a particular locality, differing with the locality — in New York, as said by the government, 6 per cent.; in the Middle West, 8 per cent.; and on the Pacific Coast, 10 per cent. — and abridges or controls a federal statute by a local law or custom, and takes from it uniformity of operation. Besides, the federal statute is precise, and it is made peremptory by the distinction between `penalty' and `interest,' and if it may be conceded that the use of the latter word would not save it from condemnation if it were in effect the former, it cannot be conceded that 1 per cent. per month — 12 per cent. a year — gives it that illegal effect, certainly not against legislative declaration that is within the legislative power, there being no ambiguity to resolve."

The Supreme Court also pointed out that its decision was not inconsistent with its prior decision in New York v. Jersawit, 263 U.S. 493, 44 S.Ct. 167, 68 L.Ed. 405, relied upon by the appellee herein, in that the statute of New York there involved required the corporation to pay the tax plus 10 per cent thereof, plus 1 per cent per month "for each month the tax remains unpaid". It was there held that the monthly installments must be added to the 10 per cent penalty and must be treated as a part of one corpus and must fall with it. After pointing out these distinctions the court added: "The tax in this case is one on income; a burden imposed for the support of the government. Interest is put upon it and so denominated, distinguished from the 5 per cent. as penalty, clearly intended to compensate the delay in the payment of tax — the detriment of its nonpayment, to be continued during the time of its nonpayment — compensation, not punishment."

It will be observed that the reasons advanced by the Supreme Court in support of the 12 per cent as a charge of interest and not penalty were twofold: first, the matter lay within the legislative power of the government to fix a rate of interest to be charged upon delinquent taxes; and second, that to construe the Bankruptcy Act so as to permit this statutory rate to be ignored would result in the substitution of a rate which was dependent in each case upon the value of the use of money in the different localities. Both arguments apply with equal force to the 12 per cent interest charge fixed by the legislature of the state of California in the instant case. It is expressly stated to be a rate of interest to be charged and computed as such. To fix a rate of interest other than that fixed by law would be a departure from the legislative mandate in the sphere in which the legislature is supreme. It would also result in equality for not only might a different rate be fixed in different communities in California, but different rates might be fixed in the same community by different referees in bankruptcy or by the same referee if in his judgment the value of the use of money had fluctuated from time to time in the community in which he was exercising his judicial functions. This decision of the Supreme Court (United States v. Childs, supra) has been construed and applied by a number of the Circuit Courts of Appeals.

In the case of In re Semon, 80 F.2d 81, 82, the Second Circuit had occasion to pass upon the question of the right of the United States to recover 12 per cent as interest upon unpaid income taxes due the government of the United States from the bankrupt. It was sought by the trustee in bankruptcy to distinguish the question there involved from...