United States v. Harrington

Decision Date06 August 1959
Docket NumberNo. 7812.,7812.
Citation269 F.2d 719
PartiesUNITED STATES of America, Appellant, v. J. Allen HARRINGTON, Trustee, Appellee. In the Matter of G. N. CHILDRESS, dba Childress Transportation Company, Bankrupt.
CourtU.S. Court of Appeals — Fourth Circuit

Karl Schmeidler, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., James E. Holshouser, U. S. Atty., No. Wilkesboro, N. C., and Lafayette Williams, Asst. U. S. Atty., Greensboro, N. C., on brief), for appellant.

Richard L. Wharton, Greensboro, N. C. (C. R. Wharton, Greensboro, N. C., George M. McDermott, Orton J. Cameron, Sanford, N. C., Wharton & Wharton, Greensboro, N. C., and McDermott & Cameron, Sanford, N. C., on brief), for appellee.

Before SOBELOFF, Chief Judge, HAYNSWORTH, Circuit Judge, and BARKSDALE, District Judge.

SOBELOFF, Chief Judge.

In the distribution of a bankrupt's estate, what effect is to be accorded to a United States tax lien in respect to post-bankruptcy interest and tax penalties? This issue, not heretofore decided in this Circuit but extensively litigated elsewhere, is here presented for decision.

The context in which the question arises may be briefly summarized. On March 16, 1955, creditors of G. N. Childress, a motor carrier, filed a petition in the United States District Court for the Middle District of North Carolina seeking an adjudication of bankruptcy, and he was so adjudicated on March 24, 1955. Receipts from the sale of assets totaled $304,090.85. After payment of the costs of sale, mortgages, wage claims and preferred liens, but before payment of any other claims or administrative expenses, $127,391.94 remained. Out of this, the United States was paid $57,146.80 upon claims for unpaid taxes with respect to which it had filed notices of liens. The United States here claims in addition $11,455.67 for interest from March 16, 1955 until January 21, 1958 on its liened tax claims, and $3,085.81 in penalties. If the contested claims for post-bankruptcy interest and penalties are allowed, there will be less than $25,000 (after payment of remaining administrative costs) for claims of general creditors amounting to $70,276.22.

The Referee disallowed the Government's claims, and his action was affirmed by the District Court. The United States appeals, asserting error in the disallowance of both interest beyond the date of the filing of the petition and tax penalties, for which notices of liens had also been properly filed. For the reasons which we shall set forth, we agree with the District Court.

I. Interest

It has long been an established principle in bankruptcy and other insolvency proceedings that interest upon claims stops with the initiation of the proceedings. In Thomas v. Western Car Company, 1893, 149 U.S. 95, 116; 13 S.Ct. 824, 833, 37 L.Ed. 163, the Supreme Court said:

"* * * As a general rule, after property of an insolvent passes into the hands of a receiver or of an assignee in insolvency, interest is not allowed on the claims against the funds. The delay in distribution is the act of the law; it is a necessary incident to the settlement of the estate. * * *"

In bankruptcy cases, the courts have been unanimous in holding that, generally, interest upon claims does not accrue after the filing of the petition. This is true as to both unsecured and secured claims. Sexton v. Dreyfus, 1911, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244; Board of County Com'rs of Shawnee County, Kan. v. Hurley, 8 Cir., 1909, 169 F.2d 92; Brown v. Leo, 2 Cir., 1929, 34 F.2d 127; Littleton v. Kincaid, 4 Cir., 1950, 179 F.2d 848, 27 A.L.R.2d 572; 3 Collier on Bankruptcy (14th Ed.) Sec. 63.16.

To this rule there have been two well-established exceptions: (1) where the bankrupt ultimately proves to be solvent, and (2) where securities, held by the creditor, themselves produce income after the filing of the petition. The Government contends for the recognition of a third exception to the rule stopping interest at the date of bankruptcy. It maintains that post-bankruptcy interest is allowable to a secured creditor where the amount of his security is sufficient to satisfy both principal and interest on the secured claim. It is the Government's position that by virtue of having filed notices of tax liens prior to the petition, it is a secured creditor, and since the lien attaches to all of the property of the bankrupt, the entire estate is security for the tax claim. And, the argument continues, since the assets of the bankrupt are sufficient to pay the principal of the Government's tax claim plus interest until the date of payment, even though this will reduce the amount going to the other creditors, the Government is entitled to interest upon its tax claim until the date of payment.

Before 1949, the question of post-bankruptcy interest on tax claims was unsettled.1 In that year, however, the Supreme Court, in City of New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L. Ed. 710, held that because the amendment to the Bankruptcy Act of 1926, and later the Chandler Act, deprived taxes of their preferred status,2 there was no exception to the rule against post-bankruptcy interest for tax claims. The opinion of the Supreme Court in the Saper case seems to have been intended to put the question to rest once and for all.3 The Court in Saper, 336 U.S. at page 330, note 7, 69 S.Ct. at page 555, recognized the two exceptions to the rule disallowing post-bankruptcy interest mentioned above, i.e., where the bankrupt is solvent and where securities held by a creditor as collateral produced interest or dividends during bankruptcy, but the Court made no mention of the third exception asserted by the Government in the instant case.

In spite of the broad language of Saper, which appears to deny post-bankruptcy interest on all tax claims, the Government, as was pointed out by Judge Yankwich in In re Cameron, D.C.S.D. Cal.1958, 166 F.Supp. 400, 403, has attempted ever since, with little success, "to have the courts confine the Saper case ruling to the specific situation existing in that case." For example, in United States v. Edens, 4 Cir., 1951, 189 F.2d 876, 877, the Government tried to distinguish a Ch. X reorganization proceeding, 11 U.S.C.A. § 501 et seq. from an ordinary bankruptcy proceeding such as was involved in the Saper case, but this Court held that the rule against post-bankruptcy interest on tax claims applied in the former proceeding just as in the latter. Judge Parker said:

"The equitable considerations which justify denying post bankruptcy interest on tax claims in the case of reorganization proceedings are quite as strong as for denying it in straight bankruptcy proceedings. The real reason in either case is that the delay resulting from the institution of the proceeding should not be permitted to benefit one class of creditors at the expense of another, but that the rights of all should be determined as of the commencement of the proceeding. * * *"

Once more, in United States v. General Engineering & Mfg. Co., 8 Cir., 1951, 188 F.2d 80, the Court overruling the Government's attempt to limit Saper, held that the rule prohibiting post-bankruptcy interest on tax claims applies in a Ch. XI arrangement proceeding. 11 U.S. C.A. § 701 et seq. Again, in Sword Line v. Industrial Commissioner of State of N. Y., 2 Cir., 1954, 212 F.2d 865 and National Foundry Co. of N. Y. v. Director of Int. Rev., 2 Cir., 1956, 229 F.2d 149 the Court went further and held that post-bankruptcy interest on tax claims was not collectible in a direct action against a debtor after confirmation of arrangement in Ch. XI proceedings.

Finally, as to the Government's contention that the rule of the Saper case ought not to apply where tax claims have been reduced to liens, three District Courts have considered this contention and rejected it, while only one has upheld the Government's position.4 We think that as a result of the decision of the Supreme Court in Saper, and the later cases in lower Federal Courts denying post-bankruptcy interest on tax claims, it is now settled that interest on tax claims, whether liens have been perfected or not, is not collectible beyond the date of the filing of the petition in bankruptcy.

However, even if the Government is correct in its contention that the Saper case does not control where tax claims are secured by liens, we think that it is still not entitled to post-bankruptcy interest in this case. Let us turn again to the two clearly established exceptions to the rule that interest on both secured and unsecured claims stops with the filing of the petition in bankruptcy. The first, as we have seen, involves the unusual situation where the bankrupt is solvent and a surplus is left after all claims have been paid. In that situation, the law allows creditors post-bankruptcy interest on interest-bearing claims instead of turning over the entire surplus to the debtor. In Johnson v. Norris, 5 Cir., 1911, 190 F. 459, 462, the Court justified the exception on the ground that the reason for the rule against post-bankruptcy interest disappears where the estate is solvent. In such case there will be no inequality of distribution and other creditors will not suffer by allowing interest on claims after bankruptcy. To the same effect, see Brown v. Leo, 2 Cir., 1929, 34 F.2d 127 and Littleton v. Kincaid, 4 Cir., 1950, 179 F.2d 848, 27 A.L. R.2d 572.

The second exception, as above noted, is where the creditor holds a particular security which itself yields interest or dividends during the bankruptcy proceedings. The creditor is allowed to apply the income derived from the security to the payment of interest accruing on his claim after the filing of the petition. Sexton v. Dreyfus, 1911, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244. The reason for this exception also, apparently, is that other creditors will not...

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