World Scope Publishers, Inc. v. United States, 348 F.2d 640, 2d Cir. (1965)
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Scribd Government DocsWorld Scope Publishers, Inc. v. United States, 348 F.2d 640, 2d Cir. (1965)
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Scribd Government Docs348 F.
2d 640
WORLD SCOPE PUBLISHERS, INC., Appellant,
v.
UNITED STATES of America, Appellee.
No. 409.
Docket 29461.
United States Court of Appeals Second Circuit.
Argued May 19, 1965.
Decided July 22, 1965.
Michael J. Crames, New York City (Levin & Weintraub, New York City,
on the brief), for appellant.
Karl Schmeidler, Atty., Dept. of Justice, Washington, D. C. (Louis F.
Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys.,
Dept. of Justice, on the brief; Joseph P. Hoey, U. S. Atty., Eastern Dist. of
New York, and Quenton H. Vaughan, Asst. U. S. Atty., of counsel), for
appellee.
Before WATERMAN, MARSHALL and ANDERSON, Circuit Judges.
MARSHALL, Circuit Judge:
This is an appeal from an order of the District Court for the Eastern District of
New York denying debtor-taxpayer's motion seeking, inter alia, to recover
money paid to the District Director of Internal Revenue that was applied toward
the payment of tax penalties owed by the debtor-taxpayer prior to filing a
petition under Chapter XI of the Bankruptcy Act. We affirm.
During the pendency of the Chapter XI proceedings the District Director filed a
claim against the debtor-taxpayer for $75,521.15, which included taxes, interest
and penalties then owing. Two stipulations were then entered. The first, dated
January 7, 1963, reduced the claim filed by the District Director "by the
amount of $5,888.47, which amount constitutes penalties, to the sum of
$69,632.68." The second, dated some ten days later, set up a schedule for
paying the balance, giving the District Director "the right to declare the
remaining installments due and payable" in the event of a default in any of the
installments. On February 1, 1963 the arrangement was confirmed by an order
of the District Court and the order stated that "the stipulations providing for
installment payments heretofore entered into between the debtor [and] * * * the
Director of Internal Revenue * * * are made a part of this order, as if fully set
forth therein."
3
By June 1963 the debtor-taxpayer defaulted in its payments to the District
Director required by the second stipulation and the remaining installments due
were accelerated. The balance was demanded and a lien was filed against the
property of the debtor-taxpayer. In August of that year, $42,530.30 was paid to
the District Director by a third party (Amsterdam Overseas Corporation) on its
behalf. In this appeal, a refund of $5,888.47 is sought from the District
Director. This amount was applied against the indebtedness owing for the prepetition penalties. Debtor-taxpayer does not maintain that the stipulation of
January 7, 1963 cancelled the indebtedness for the tax penalties then due.
Instead, its theory is that the indebtedness was discharged by operation of the
Bankruptcy Act, if not by any specific provision at least by the spirit and
purposes of the Act.
While section 367(1) of the Act, 11 U.S.C. 767(1), makes an arrangement,
upon confirmation binding upon all creditors, section 371, 11 U.S.C. 7711
specifically provides that a debt is not discharged by confirmation unless it is
"provided for by the arrangement." The debt for the pre-petition penalties was
not "provided for by the arrangement," as that phrase is used in the Bankruptcy
Act, see generally 9 Collier, Bankruptcy 9.32(4) (14th ed. 1964), and thus it
was not discharged by the confirmation of the arrangement. Section 57(j), 11
U.S.C. 93(j),2 is also of no avail to the debtor-taxpayer, even if it is assumed
(see California State Bd. of Equalization v. Goggin, 183 F.2d 489, 493 (9 Cir.),
cert. denied, 340 U.S. 891, 71 S.Ct. 207, 95 L.Ed. 646 (1950)) that it is
applicable in Chapter XI proceedings. It provides that penalties of this type
"shall not be allowed," not that they shall be (automatically) discharged
whenever the debtor-taxpayer is adjudicated a bankrupt.
Debtor-taxpayer insists that even if the letter of the Bankruptcy Act does not
provide for the discharge, the general rehabilitative purpose of Chapter XI
proceedings would be frustrated if the liability for this debt were preserved
after confirmation. In support of this argument, we are referred to the Supreme
Court's declaration in Simonson v. Granquist, 369 U.S. 38, 41, 82 S.Ct. 537,
539, 7 L.Ed.2d 557 (1962), that the "enforcement of penalties against the
estates of bankrupts * * * would serve not to punish the delinquent taxpayers,
but rather their entirely innocent creditors." However, we find this general
policy argument most inapplicable since the District Director has not sought to
enforce this debt against a fixed bankruptcy estate that must be divided up
among creditors; this debt has been treated as a personal liability of the
rehabilitated debtor-taxpayer. A similar distinction was found intelligible by the
Supreme Court in Bruning v. United States, 376 U.S. 358, 84 S.Ct. 906, 11
L.Ed.2d 772 (1964), where the traditional rule disallowing post-petition interest
(on a tax debt) as against the bankruptcy estate was held not to discharge the
debtor from personal liability for such interest. Moreover, this general policy
argument is unpersuasive because it does not accord sufficient weight to the
legitimate interests to be served by collecting tax penalties. The deterrent
function served by penalties might be impaired by allowing a rehabilitated
debtor to avoid payment of the penalties that had accrued before it filed a
Chapter XI petition and there is no reason to believe that this deterrent function
is less worthy than the rehabilitative function served by Chapter XI
proceedings. It was post-petition rather than pre-petition penalties which were
held to be "nonexistent" in National Foundry Co. v. Director of Internal
Revenue, 229 F.2d 149, 150 (2 Cir. 1956).
6
In disposing of debtor-taxpayer's claim on the merits we should not be
understood as approving of the form into which these proceedings have been
cast. In September 1963, shortly after Amsterdam Overseas Corporation had
paid $42,530.30 to the District Director on behalf of the debtor-taxpayer, a
claim for refund was filed by the debtor-taxpayer. This claim was not honored.
Rather than commencing a plenary suit in a federal district court for a refund
under section 7422 of the 1954 Internal Revenue Code, on November 26, 1963
the debtor-taxpayer filed an application for an order to show cause in the
bankruptcy court which confirmed the arrangement (the District Court for the
Eastern District of New York). The application sought, among other things, a
refund for the amount applied against the pre-petition penalties. The
application was referred to a referee in bankruptcy and the debtor-taxpayer
renewed its request for the refund by way of a motion addressed to the Referee.
The Referee denied the motion and the debtor-taxpayer sought review of that
order by filing a petition to review under section 39(c) of the Bankruptcy Act,
11 U.S.C. 67(c). On June 29, 1964, Judge Abruzzo denied the debtortaxpayer relief on the ground that "this Court is without power to decide this
motion in a summary proceeding." However, three months later (on September
28, 1964) he went on to consider the merits and affirmed the Referee's denial of
the refund.
The debtor-taxpayer should have commenced a plenary suit for refund under
section 7422 of the 1954 Code rather than these proceedings in the bankruptcy
court. The power of the district court to conduct summary proceedings in
bankruptcy is strictly limited by statute, 11 U.S.C. 11, and it is impossible to
fit this motion for a refund into one of the jurisdictional pigeonholes. See
Ruhter v. Internal Revenue Service, 339 F.2d 575 (10 Cir. 1964). These
proceedings were commenced after the confirmation of both the arrangement
and the modification of the arrangement; the property in controversy was never
in the actual or constructive possession of the debtor-taxpayer; and the debtortaxpayer did not stake its claim for a refund on a provision of the arrangement.
The fact that the debtor-taxpayer has been rehabilitated under the Bankruptcy
Act and that it seeks the refund on the theory that the debt had been discharged
by operation of the Bankruptcy Act is not sufficient to vest the bankruptcy
court with the power to order the District Director to make a refund and to
conduct summary proceedings for this purpose. We decline to vacate the order
below, however, because in the special circumstances of this case, the relief
sought by the debtor-taxpayer having been denied, the distinction between a
plenary suit in a federal district court and summary proceedings in the
bankruptcy court is one of form rather than substance, not attendant here with
practical significance.
8
Affirmed.
Notes:
1
"The confirmation of an arrangement shall discharge a debtor from all his
unsecured debts and liabilities provided for by the arrangement, except as
provided in the arrangement or the order confirming the arrangement, but
excluding such debts as, under section 17 of this Act, are not dischargeable."
"Debts owing to the United States or to any State or any subdivision thereof as
a penalty or forfeiture shall not be allowed, except for the amount of the
pecuniary loss sustained by the act, transaction, or proceeding out of which the
penalty or forfeiture arose, with reasonable and actual costs occasioned thereby
and such interest as may have accrued on the amount of such loss according to
law."
