Messrs. W. R. Montgomery, of New York City, and John W. Dinkelspiel, of San Francisco, Cal., for petitioner. [314 U.S. 564, 565] Mr. John J. Dailey, of San Francisco, Cal. (Mr. Maurice P. McCaffrey, of Sacramento, Cal., of counsel), for respondent.
Mr. Justice JACKSON delivered the opinion of the Court.
The petitioner is the trustee of a bankrupt which was indebted to the California Unemployment Reserves Commission for contributions which had accrued under the California Unemployment Reserves Act. Section 45 of that Act provided that in the event of default in payment [314 U.S. 564, 566] of contributions due the employer '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.' Deering's Cal. Laws 1937, Act 8780d, 45. The Commission filed proof of a priority claim in the bankruptcy proceeding for the principal amount of the accrued contributions and interest thereon at the rate of twelve per cent.
The trustee paid the principal sum with interest at six per cent, but refused to pay more, relying on 57, sub. j, of the Bankruptcy Act, 11 U. S.C. 93, sub. j, 11 U.S.C.A. 93, sub. j, which provides that 'Debts owing to the United States, a State, a county, a district, or a municipality as a penalty or forfeiture shall not be allowed, except for the amount for 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 thereon according to law.' The trustee asserted that any exaction in excess of six per cent, which he claimed was the 'reasonable and customary rate of interest,' was a penalty; the bankruptcy court decreed that all above seven per cent (a common, though not an invariable, legal rate in California) was a penalty and refused to allow so much of the claim; and the Circuit Court of Appeals for the Ninth Circuit reversed on the ground that no part of the twelve per cent was a penalty. 116 F.2d 330. We granted certiorari because of the conflict between this decision and that of the Circuit Court of Appeals for the Third Circuit in In re Pressed Steel Car Co. of New Jersey. 1
Petitioner seeks to establish that the twelve per cent exaction here in question is not 'interest' by pointing to Article XX, Section 22 of the California Constitution, which [314 U.S. 564, 567] provides that, except for specified institutions, the rate of interest on loans, and on accounts after demand or judgment, shall be seven per cent, and leaves the parties free to contract in writing for a rate not exceeding ten per cent. 2 We do not understand that as a matter of State law the California legislature was thereby forbidden to prescribe the higher rate here involved. And the mere difference in rates does not establish that the twelve per cent rate is not 'interest' within the meaning of 57, sub. j, of the Bankruptcy Act.
It is common knowledge that interest rates vary not only according to the general use value of money but also according to the hazard of particular classes of loans. Delinquent taxpayers as a class are a poor credit risk; tax default, unless an incident of legitimate tax litigation, is, to the eye sensitive to credit indications, a signal of distress. A rate of interest on tax delinquencies which is low in comparison to the taxpayer's borrowing rate-if he can borrow at all-is a temptation to use the state as a convenient, if involuntary, banker by the simple practice of deferring the payment of taxes.
Another variable is the amount necessary to compensate for the trouble of handling the item. The legislature may include compensation to the state for the increased costs of administration in the exaction for delay in paying taxes without thereby changing it from interest to penalty. [314 U.S. 564, 568] These factors-risk, and the expenses of handling-are reflected in the interest rates permitted by California to certain types of financial institutions: for example, credit unions may charge interest at the rate of one per cent per month;3 pawnbrokers, at two per cent per month on the first one hundred dollars of indebtedness;4 and personal property brokers, two and one-half per cent per month on the first three hundred dollars. 5 A differentiation of treatment for particular types of loans similar in principle is commonly made by other states. 6
People of State of New York v. Jersawit, 263 U.S. 493 , 44 S.Ct. 167, is thought by petitioner to require a decision in his favor. That was involved a New York statute visiting tax delinquents with an additional liability of ten per cent of the tax, and adding thereto a further liability of one per cent per month, which was not denominated interest. The Circuit Court of Appeals had held that such provision was penal, but had allowed interest at the usual legal rate on the theory that it represented actual damage. In re Ajax Dress Co., 2 Cir., 290 F. 950. This Court, speaking through Mr. Justice Holmes, said:
Here the exaction computed according to lapse of time is not lumped together with another percentage computed without reference to lapse of time; here the exaction is denominated interest by the statute, and there it was not; and we cannot be so confident here that twelve per cent 'is more than the value of the use of the money,' or of the validity of the implied major premise that an exaction in excess of such value cannot be merely an interest charge. 7
The decision which controls here is the more recent one of United States v. Childs, 266 U.S. 304 , 45 S.Ct. 110, where the statute separately denominated a flat five per cent exaction as a penalty, and an additional one of one per cent a month as interest. The latter was held to be 'interest' within the meaning of 57, sub. j, of the Bankruptcy Act. The distinction from the fact that the exaction in that case was by the United States and in this case by a State calls for no difference in result. We must give credit to a state legislature acting within its Constitutional sphere like that accorded to Congress acting in its Constitutional [314 U.S. 564, 570] sphere. And the distinction which Congress made in the legislation considered in the Childs case and in other revenue legislation between penalty as a fixed ad valorem amount taking no account of time, and interest which does depend on time, is persuasive that its use of the word 'penalty' in the Bankruptcy Act will bear a like differentiation from interest.
Finally, it may be observed that Congress itself has provided in the District of Columbia Unemployment Compensation Act that in the event contributions are not paid when due 'there shall be added, as part of the contributions, interest at the rate of 1 per centum per month.' (Italics supplied.) D.C.Code (Supp. V, 1939) tit. 8, 314(c).
Mr. Justice ROBERTS took no part in the decision of this case.
[ Footnote 2 ] This reads in part as follows:
Expressly excepted are building and loan associations, industrial loan companies, credit unions, pawnbrokers, personal property brokers, State and National Banks, and cooperative associations.
[ Footnote 3 ] Deering's Cal.Laws Supp.1939, Act 1887 3(5), as amended, 1939.
[ Footnote 4 ] Deering's Cal.Laws Supp.1939, Act 5826 2, as amended, 1939.
[ Footnote 5 ] Deering's Cal.Laws Supp.1939, Act 5825(2d) 17, as amended, 1939.
[ Footnote 6 ] Clark, Financing the Consumer (1933), Appendix I.
[ Footnote 7 ] Compare the following exactions, provided by the various Unemployment Compensation Acts for non-payment of contributions due: