United States v. Clover Spinning Mills Company

• Decision Date: 09 December 1966
• Docket Number: No. 10529.,10529.
• Citation: 373 F.2d 274
• Parties: UNITED STATES of America, Appellant, v. CLOVER SPINNING MILLS COMPANY, Inc., South Carolina Employment Security Commission, South Carolina Tax Commission, and The County Treasurer of York, South Carolina, and the Town of Clover, South Carolina, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

373 F.2d 274 (1966)

UNITED STATES of America, Appellant, v. CLOVER SPINNING MILLS COMPANY, Inc., South Carolina Employment Security Commission, South Carolina Tax Commission, and The County Treasurer of York, South Carolina, and the Town of Clover, South Carolina, Appellees.

No. 10529.

United States Court of Appeals Fourth Circuit.

Argued October 6, 1966.

Decided December 9, 1966.

John C. Eldridge, Atty., Dept. of Justice (John W. Douglas, Asst. Atty. Gen., and Morton Hollander, Atty., Dept. of Justice, and John C. Williams, U. S. Atty., on brief), for appellant.

Joseph C. Coleman, Asst. Atty. Gen. of South Carolina (Daniel R. McLeod, Atty. Gen. of South Carolina, on brief), for appellee South Carolina Tax Commission.

Nolen L. Brunson, Rock Hill, S. C. (John M. Spratt, York, S. C., James M. Dickson, Clover, S. C., and Hayes, Hayes & Brunson, Rock Hill, S. C., on brief), for appellees County Treasurer of York, S. C., and Town of Clover, S. C.

Before BOREMAN, J. SPENCER BELL and WINTER, Circuit Judges.

J. SPENCER BELL, Circuit Judge:

The United States appeals from an order of the district court. In 1959, Clover Spinning Mills Company, Inc., a Delaware corporation with its principal place of business at Clover, South Carolina, borrowed $300,000.00 from the Small Business Administration, evidenced by a note secured by two mortgages. One mortgage covered the real estate and the other the chattels of the mortgagor corporation located in the town of Clover, York County, South Carolina. In 1961, the corporation borrowed an additional $50,000.00 which was also secured by a mortgage covering both its realty and chattels. These mortgages were properly recorded on December 16, 1959, and March 27, 1961, respectively.

In April 1962 the debtor defaulted on these loans whereupon, under the terms of both loans, the entire balance became due and payable. On November 30, 1962, the United States commenced an action in the district court alleging that the mortgagor was insolvent and seeking the appointment of a receiver to take possession of the property, sell the same under the mortgages, and apply the proceeds to the debt of the United States. No answer was ever filed to this complaint. On November 16, 1962, the mortgagor filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-799 (1964). Pursuant to this petition, the court enjoined the foreclosure and authorized the operation of the mill. On October 25, 1963, the plan of arrangement having failed, the injunction was dissolved and the plaintiff authorized to proceed with its foreclosure. On December 6, 1963, the referee terminated the bankruptcy proceedings. On April 8, 1964, the court entered judgment for the United States in the principal sum of $263,436.56. The property brought approximately $160,130.00 from which must be deducted the receiver's expenses. This appeal involves the priority of certain claims against the proceeds which were filed in the foreclosure action by the South Carolina Tax Commission for unpaid withholding taxes and by the County of York and the town of Clover for unpaid personal property taxes.

The determination of the relative priority of the claims here involved is a federal question and this is true whether the debt owed to the federal government is based upon taxes or money loaned through some government program. United States v. Security Trust & Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53 (1950); United States v. Waddill, Holland & Flinn, Inc., 323 U.S. 353, 356, 65 S.Ct. 304, 89 L.Ed. 294 (1945). This court has held that the priority of debt claims or lien claims of the Small Business Administration vis-a-vis the claims of private individuals or state agencies is determined by federal law. W. T. Jones & Co. v. Foodco Realty, Inc., 318 F.2d 881, 887 (4 Cir. 1963). We think it clear that the federal insolvency statute applies and that it is fatal to the claim of the South Carolina Tax Commission for income taxes to be withheld from the wages of the debtor corporation's employees. The district court's conclusion to the contrary is in error.

It is true, of course, that not only must the debtor be insolvent but the "insolvency" contemplated by 31 U.S.C. § 191 (1964)¹ must be manifested by one of the acts specified in the statute, i. e., an act of bankruptcy, a voluntary assignment of the debtor's property, or an attachment of the property of an absconding, concealed, or absent debtor. W. T. Jones & Co. v. Foodco Realty, Inc., supra. No one disputes the fact that the debtor was insolvent, and this record makes it abundantly clear that it was insolvent both in the sense that it could not pay its current debts and in the bankruptcy sense that its liabilities greatly exceeded its assets. We think this record also discloses at least two acts of the debtor, either of which brings it within the statute. By suffering the appointment of a receiver to take charge of all of its property while insolvent and unable to pay its debts, the debtor here committed the fifth act of bankruptcy, 11 U.S.C. § 21 (a) (5) (1964). We are aware that a receivership of a specific property for purposes of foreclosure as distinguished from a general receivership has been held not to constitute the fifth act of bankruptcy. Elfast v. Lamb, 111 F.2d 434, 436 (2 Cir. 1940). We think, however, that the receivership to which the debtor here submitted was for all practical purposes a general receivership and therefore clearly distinguishable on its facts from that line of cases.

The debtor's mortgages to the Small Business Administration covered its plant and machinery, which for all practical purposes were its total assets at the time this action was begun. Furthermore, a receivership upon the motion of a mortgagee, incidental to the enforcement of its lien where other creditors intervene and the receiver takes charge of all the debtor's assets in the jurisdiction for the benefit of its creditors is thereby converted into a general receivership which falls within the fifth act of bankruptcy. Cf. State of Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 67 S. Ct. 340, 91 L.Ed. 348 (1946);² United States v. State of Texas, 314 U.S. 480, 488, 62 S.Ct. 350, 86 L.Ed. 356 (1941). In the instant case other creditors did intervene and the receiver took over the entire assets of the debtor which consisted of its mill and machinery at Clover, South Carolina.

Secondly, we think the case is brought within 31 U.S.C. § 191 by the fact that the officers and managers abandoned the debtor's property and absented themselves from the state long before the receiver assumed possession. The property of "an absconding, concealed or absent debtor" is made subject to the statute's provisions. The officers and managers of the debtor corporation had for several months before the appointment of a receiver abandoned operations and left the plant and equipment standing idle and unattended.³

In its order appointing a receiver, the district court found that the debtor's property was idle and unprotected by insurance from fire and other hazards. At no time did the debtor deny the allegations of the petition alleging insolvency nor after the failure of its Chapter XI petition did it resist the appointment of a receiver to take over what amounted to the total assets of the corporation.

Although the debtor's president was served by mail in New York, neither he nor any employee of the debtor ever appeared in the case. While we do not rely upon the point, we think also that the tacit consent of the debtor to the appointment of a receiver by its failure to file answer or appear in the suit was in law equivalent to a voluntary assignment of its assets within the intent and meaning of the statute. Cf. People of State of New York v. Maclay, 288 U.S. 290, 291, 53 S.Ct. 323, 77 L.Ed. 754 (1933); United States v. Butterworth-Judson Corp., 269 U.S. 504, 513-514, 46 S.Ct. 179, 70 L.Ed. 380 (1926); Price v. United States, 269 U.S. 492, 502, 46 S. Ct. 180, 70 L.Ed. 373 (1926).⁴ We hold, therefore, that 31 U.S.C. § 191 does apply, and we now turn to the question of whether the waiver of that priority by Congress under the provisions of 15 U.S. C. § 646 (1964)⁵ applies with respect to the South Carolina Tax Commission's claim for unpaid withholding taxes.

We think the state's concession in its brief that its claim for unpaid income taxes which under state law should have been withheld from employees' wages did not constitute "taxes due on the property" within the meaning of 15 U.S.C. § 646 is fatal to its claim. In re Lehigh Valley Mills, Inc., 341 F.2d 398 (3 Cir. 1965). We are unable to follow the state's contention that its tax statutes, which provide that income taxes withheld under its statutes shall be "deemed" held in trust by the employer for the state, could defeat the federal priority statute. Whatever might have been the result had the state been able to point to any sum or sums actually withheld by the employer for this purpose, no such fund here existed, and in the absence of any res,⁶ no trust existed which could defeat the federal government's claim. A careful reading of the state statutes does not indicate an intent to create a "trust" for the benefit of the state in other property of an employer who fails to perform his withholding obligation.⁷ We need not, therefore, consider the relative rights of the parties in this case if such had been the purport of the statute.

We now turn to the claims of the County of York and the town of Clover for unpaid ad valorem taxes assessed against the realty and chattels of the debtor for the years 1962 and 1963. They concede and we agree that the legal position of the two local authorities in this action is identical, and we shall, therefore, consider them together. The Government has conceded that the real property taxes of the two for the years involved did constitute a lien upon the debtor's assets superior to...