United States v. Kalishman

• Citation: 346 F.2d 514
• Decision Date: 04 June 1965
• Docket Number: No. 17780.,17780.
• Parties: UNITED STATES of America, Appellant, v. Jerome KALISHMAN, Trustee in Bankruptcy of Seymour Wallas and Company, Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

346 F.2d 514 (1965)

UNITED STATES of America, Appellant, v. Jerome KALISHMAN, Trustee in Bankruptcy of Seymour Wallas and Company, Bankrupt, Appellee.

No. 17780.

United States Court of Appeals Eighth Circuit.

June 4, 1965.

COPYRIGHT MATERIAL OMITTED

Karl Schmeidler, Atty., Tax Div., Dept. of Justice, Washington, D. C., made argument for appellant and filed brief with Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys., Tax Div., Dept. of Justice, Washington, D. C., and Richard D. FitzGibbon, Jr., U. S. Atty., and Harold F. Fullwood, Asst. U. S. Atty., St. Louis, Mo.

Harry S. Gleick, St. Louis, Mo., made argument for appellee and filed brief.

Before VOGEL, MATTHES and RIDGE, Circuit Judges.

RIDGE, Circuit Judge.

The sole question presented by this appeal is whether the United States is entitled to interest until date of payment of withholding taxes which accrued against the debtor while in possession of the business under an arrangement proceeding, and the interest did not begin to run on the tax until after the final adjudication in bankruptcy. Despite this simple statement of the problem here confronting us, the present case requires an exhaustive analysis of the present state of the law regarding post-bankruptcy interest claims. As appellee admits that "Appellant's statement of the case is essentially correct," the following facts are culled therefrom.

Seymour Wallas and Company, a corporation, filed a petition for an "arrangement" on June 24, 1960. Thereafter, it was adjudicated a bankrupt on March 16, 1961, having failed to submit an acceptable plan. On September 15, 1961, the United States filed a claim for taxes, separated into two claims — one for taxes accruing before the arrangement proceeding, — the other for taxes accruing during the arrangement. The latter claim is the only one in issue here. It was for assessed withholding taxes of $6,602.89 for the first quarter of 1961, plus $202.38 interest to the date of filing the claim, and interest of $1.06 per day thereafter until payment of the principal was made — ultimately on May 6, 1964. These taxes were not required to be reported or paid until April 30, 1961, subsequent to the adjudication in bankruptcy after failure of the arrangement proceeding; hence the interest here did not begin to accrue until that date. The Referee allowed the tax claim in the principal amount of $6,602.89 as an expense of administration of the arrangement proceeding but denied the claim for interest, basing his decision on City of New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949). On petition for review, the District Court affirmed in an unreported order. This appeal followed.

At the outset we are met with a jurisdictional question, raised by appellee in view of § 24, sub. a of the Act,¹ which limits appeals in bankruptcy proceedings to matters involving more than $500.00 unless prior allowance of the appeal has been granted by the Court of Appeals. (See Rule 25 of this Court, 28 U.S.C.A., Rules, 8 Cir.) Since appellant claims interest to date of payment, it is readily apparent that substantially more than $500.00 is in issue here, even though the amount claimed was less than that sum at the time of filing the claim.² Regardless, this is an appeal which we can, and should, hear in our discretion, in the interest of substantial justice. R.F. C. v. Prudence Group, 311 U.S. 579, 61 S.Ct. 331, 85 L.Ed. 364 (1941); New York Credit Men's Adjustment Bureau, Inc. v. Strauss & Co., 296 F.2d 702 (2 Cir., 1961). It is of sufficient importance to the future administration of the Bankruptcy Act (hereinafter denominated Act) to warrant our consideration thereof on its merits. State of California v. Fred S. Renauld & Co., 179 F.2d 605 (9 Cir., 1950).

Neither party questions the allowance of the principal amount of the taxes here considered as a proper expense of administration of the arrangement proceeding, entitled to a first priority under §§ 64, sub. a³ of the Act. They are taxes incurred while the property of the debtor was in custodia legis under the administration of the bankruptcy court, and thus are clearly expenses of administration as that term has long been understood. Cf. Dayton v. Standard, 241 U.S. 588, 36 S.Ct. 695, 60 L.Ed. 1190 (1916); State of Missouri v. Gleick, 135 F.2d 134 (8 Cir., 1943); United States v. Sampsell, 266 F.2d 631 (9 Cir., 1959). See also, 3 Collier on Bankruptcy § 64.105, p. 2088. It is appellant's contention that since under normal circumstances interest on unpaid taxes is considered an integral part of a tax liability itself, the interest here in issue should equally share that preferred status unless the fact of bankruptcy on the part of the taxpayer requires a different result.

In bankruptcy matters the Bankruptcy Act takes precedence over other statutes, and governs in any case where there might be conflict. Guarantee Title & T. Co. v. Title Guaranty & S. Co., 224 U.S. 152, 32 S.Ct. 457, 56 L.Ed. 706 (1912); Adams v. O'Malley, 182 F.2d 925 (8 Cir., 1950); United States v. Wood, 290 F. 109 (2 Cir., 1923), aff'd 263 U.S. 680, 44 S.Ct. 134, 68 L.Ed. 503. Thus, in the matter of priorities the courts are bound by the terms of the Act, regardless of other statutory preferences. State of Missouri v. Ross, 299 U.S. 72, 57 S.Ct. 60, 81 L.Ed. 46 (1936); Davis v. Pringle, 268 U.S. 315, 45 S.Ct. 549, 69 L.Ed. 974 (1925). Present § 64 sub. a of the Act, supra, represents a clear departure from pre-Chandler Act practice, in that it reduces all costs and expenses of administration to a parity; that is, taxes no longer have a special priority over any other expenses of administration, all of which now share the same priority on an equal basis. State of Missouri v. Earhart, 111 F.2d 992 (8 Cir., 1940); In re Columbia Ribbon Co., 117 F.2d 999 (3 Cir., 1941). Therefore, our consideration of post-bankruptcy interest in this tax claim can be no different than that of interest accruing generally as cost of administration on other like claims.

Considering interest in connection with bankruptcy, it appears that there is a "* * * long-standing rule against post-bankruptcy interest * * * implicit in our current Bankruptcy Act." New York v. Saper, 336 U.S. 1. c. 332, 69 S.Ct. 1. c. 556. In Vanston etc. Committee v. Green, 329 U.S. 156, 1. c. 163, 67 S.Ct. 237, 240, 91 L.Ed. 162 (1946), the Court stated: "The general rule in bankruptcy * * * has been that interest on the debtors' obligations ceases to accrue at the beginning of proceedings." As said in Bruning v. United States, 376 U.S. 358, at 361-362, 84 S.Ct. 906, at 11 L.Ed.2d 772: "As to claims against the trustee in bankruptcy, the general rule for liquidation of the bankruptcy estate has long been that a creditor will be allowed interest only to the date of the petition in bankruptcy. * * *" and that Saper, supra, makes the general rule (applicable) "to claims against the trustee for taxes as well as for other debts." As the Court, in Vanston etc. Committee v. Green, pointed out, this is a matter of equity * * * the delay in distribution being caused by law, and the estate should not be penalized for the delay by additional interest. In this connection, see Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244 (1911); United States v. Bass, 271 F.2d 129 (9 Cir., 1959); Massachusetts v. Thompson, 190 F.2d 10 (1 Cir., 1951); 3 Collier on Bankruptcy, § 63.16, p. 1858. There is also a matter of administrative convenience, as the very purpose of a "cutoff" or "bar" date would be thwarted if obligations are allowed to accrue past that date, continuing the vicious circle which bankruptcy was designed to terminate. This is not to say that such post-bankruptcy interest may never be allowed, for it is settled that the creditors' rights thereto will be recognized should the estate subsequently prove to be solvent, or should the estate itself subsequently receive income in the form of interest. United States v. Harrington, 269 F.2d 719 (4 Cir., 1959). We realize that the foregoing cases deal with interest which began to accrue prior to bankruptcy, on debts likewise accruing. Be that as it may, we think the broad policy and reasons therefor, toward post-bankruptcy interest, should be kept in mind in the consideration of the specific issue in question here.

In the instant case we deal with a debt incurred as an expense of administration by a debtor in possession, the interest on which did not begin to accrue until after a subsequent adjudication in bankruptcy. By virtue of § 378(2)⁴ of the Act, the abortive arrangement proceeding and the subsequent bankruptcy are considered parts of a single proceeding so far as possible, and we must not consider the debt here incurred by the debtor in possession as though it were contracted by the trustee during bankruptcy.

There is no question, of course, that a trustee is liable for taxes incurred during the administration of the estate, whether resulting from continuing to do business, or simple ad valorem taxes on the property in the estate. Boteler v. Ingels, 308 U.S. 57, 60 S.Ct. 29, 84 L.Ed. 78 (1939); In re Chicago & N. W. Ry. Co., 119 F.2d 971 (7 Cir., 1941); State of Missouri v. Earhart, supra. Here, the question very simply is whether the Government is entitled to interest on such taxes after straight bankruptcy has been adjudicated, until the date of payment of the taxes accruing during a prior arrangement proceeding.

In 1949, the Supreme Court handed down the decision in City of New York v. Saper, supra. Since that time, the Saper decision has been variously considered in lower federal courts on numerous occasions. Such cases, of which the present is apparently the latest, involved the contention that the very broad language of Saper should be restricted to the specific situation involved there, but it should be noted that in each case thereafter the courts have taken the language of Saper at face value and accepted...