Mr. Martin Gendel, of Los Angeles, Cal., for petitioner.
Mr. Edward M. Belasco, of Los Angeles, Cal., for respondent.
Mr. Robert W. Ginnane, of Washington, D.C., for The United States, as amicus curiae, by special leave of Court.
Mr. Justice BURTON delivered the opinion of the Court.
This case deals with the question whether 67, sub. c of the Bankruptcy Act, 1 in determining priorities in the payment of claims, speaks as of the time of filing the petition [336 U.S. 118 , 120] in bankruptcy. The precise issue presented is whether a tax claim of the United States, secured by a lien perfected before the bankruptcy of the taxpayer and accompanied, at the time of the filing of the petition in bankruptcy, by the Collector of Internal Revenue's actual possession of the bankrupt's personal property, is required by 67, sub. c of the Bankruptcy Act to be postponed in payment to debts owed by the bankrupt for wages to claimants specified in clause (2) of 64, sub. a of that Act, 2 because the Col- [336 U.S. 118 , 121] lector later relinquished possession of such property to the trustee of the bankrupt's estate for sale by him. We hold that the lien was valid and entitled to priority of payment as against the wage claims at the date of bankruptcy and that the Collector's relinquishment of ossession of the bankrupt's property did not change the result.
The facts are undisputed. Before March 26, 1946, a Collector of Internal Revenue of the United States per- [336 U.S. 118 , 122] fected a statutory lien upon the personal property of the Kessco Engineering Corporation, a California corporation, and took actual possession of such property pursuant to that lien. He attempted to sell such assets and received bids for them but did not complete the sale because the price obtainable was unsatisfactory to him. He instituted a second sale but abandoned it when he relinquished possession of the property to the trustee of the bankrupt's estate. On March 26, 1946, the corporation filed its voluntary petition in bankruptcy in the United States District Court for the Southern District of California, was adjudicated a bankrupt and George T. Goggin (who later became the trustee of the bankrupt's estate and is the petitioner herein) was appointed receiver. Having qualified as receiver on March 28, 1946, he communicated with counsel for the Collector as to the Collector's turning over to him the bankrupt's personal property. In this connection, the referee in bankruptcy later made a finding of fact which was adopted by the District Court and is as follows:
"Reference to telephone conversation today with Mr. Webb (member of the Los Angeles office of Internal Revenue) relative to Kessco Engineering Corporation, Bankrupt, no objection by this office to Collector relinquishing personal property to Trustee for sale. Government's lien to attach to proceeds from sale subject to Trustee's expenses including costs of sale.
"J. P. Wenchel, Chief Counsel." [336 U.S. 118 , 123] Goggin, in his final capacity as trustee for the bankrupt, caused these assets to be sold at public auction, pursuant to order of court. Having liquidated all assets which had come into his possession, he had on hand, on December 12, 1946, about $31,206.20, which the referee certified was insufficient to pay in full the expenses of administration, the lien claims, the prior labor claims and prior tax claims in the case. The gross amount of the amended claim of the Collector for taxes, penalties and interest was $78,865.03. The prior wage claims totaled $3,424.87. The Department of Employment of the State of California also filed a tax claim for $15,135, which was recorded as a lien on or about December 24, 1945. Neither the validity nor the amount of any of these claims is in issue here. 3
The present proceeding originated in a petition filed with the referee in bankruptcy by the trustee, seeking an order to show cause why the order of priority of the payment of the tax and prior wage claims and the expenses of administration should not be determined by the District Court. The referee made findings of fact and reached conclusions of law upon the basis of which he ordered that, from the monies in the possession of the trustee, [336 U.S. 118 , 124] there first be paid the expenses of administration and that the balance of such funds then in the hands of the trustee be paid to the Collector of Internal Revenue in partial payment of the Government's tax claims and the interest thereon as prescribed by law. 4 The District Court adopted the findings of fact and conclusions of law of the referee and entered judgment thereon. The Court of Appeals for the Ninth Circuit reversed that judgment and held that, by virtue of the Collector's relinquishment of his possession of the personal property of the bankrupt, the taxes due to the United States must be postponed, in payment, to the debts of the bankrupt for certain wage claims, pursuant to 67, sub. c of the Bankruptcy Act. 165 F.2d 155. Because of the importance of the issue in the administration of the Bankruptcy Act, we granted certiorari. 333 U.S. 860 .
The bankrupt filed its petition and was adjudicated a bankrupt on March 26, 1946. The personal property of the bankrupt was then subject to the perfected statutory lien of the United States for taxes and that lien was accompanied by the actual physical possession of the property by a Collector of Internal Revenue on behalf of the United States. Those facts completely satisfy 67, sub. c of the Bankruptcy Act. 5 Subsequent events, such as the relinquishment of his possession by the Collector in favor of the trustee of the bankrupt's estate for the purpose of facilitating a sale of the property by the trustee, are not material to the determination of the [336 U.S. 118 , 125] issue before us. 6 The terms under which the Collector's possession was relinquished are consistent with and support this result but the Government's right to payment ahead of the wage claims was determined at the time of bankruptcy and did not arise out of the arrangement under which possession was relinquished to the trustee.
This general point of view in interpreting the Bankruptcy Act is one of long standing. In Everett v. Judson, 228 U.S. 474, 479 , 569, 46 L.R.A.,N.S., 154, this Court said:
While 67, sub. c was added to the Bankruptcy Act by the Chandler Act in 1938, we find nothing in it or in its legislative history to suggest an abandonment of the underlying point of view as to the time as of which it speaks and the general purpose of Congress to continue to safe- [336 U.S. 118 , 127] guard intere ts under liens perfected before bankruptcy. City of Richmond v. Bird, 249 U.S. 174 ; In re Knox-Powell- Stockton Co., 9 Cir., 100 F.2d 979; In re Van Winkle, D.C., 49 F.Supp. 711. While 64, as amended, somewhat readjusts priorities among unsecured claims, 67 continues to recognize the validity of liens perfected before bankruptcy as against unsecured claims. Section 67, sub. b has clarified the validity of statutory liens, including those for taxes, even though arising or perfected while the debtor is insolvent and within four months of the filing of the petition in bankruptcy. It expressly recognizes that the validity of liens existing at the time of filing a petition in bankruptcy may be perfected under some circumstances after bankruptcy. Section 67, sub. c, as amended in 1938, does, however, introduce a new postponement in the payment of certain claims secured by liens to the payment of other claims specified in clauses (1) (for certain administrative expenses, etc.) and (2) (for certain wages) of 64 sub. a. This subordination is, however, sharply limited. For example, it does not apply to statutory liens on real property, or to those actually enforced by sale before bankruptcy, or, in general, to liens on personal property when accompanied by actual possession of such property. The background of 67, sub. c suggests a conscious purpose to give a narrowly limited priority to administrative expenses and to certain wage claims, at least in instances disclosing accumulations of unpaid taxes the priority of which wage earners had no good reason to suspect, and which might absorb the entire estate of the bankrupt unless postponed by these provisions. 8 The [336 U.S. 118 , 128] purpose of 67 in requiring a public warning of the existence of an enforceable statutory lien for taxes was served in the instant case not only by the steps taken to perfect [336 U.S. 118 , 129] the Government's lien but by the Collector's seizure and actual possession of the personal property of the taxpayer before the filing of the taxpayer's petition in bankruptcy. [336 U.S. 118 , 130] The validity of the lien for taxes as against the wage claimants was thus established at the time of the filing of the petition in bankruptcy and the Collector's possession of the personal property of the bankrupt excluded the application of 67, sub. c which otherwise would have postponed the payment of the tax claims to the payment of the claims for administrative expenses and wages specified in clauses (1) and (2) of 64, sub. a. By his subsequent arrangement with the trustee for the sale of the bankrupt's property, the Collector did not lose the right to priority of payment accorded to the perfected tax liens, at the time of bankruptcy, as against the wage claims.
The arrangement between the Collector and the trustee was a natural and proper one. While the ame ded claim for taxes, penalties and interest, dated August 28, 1946, amounted to $78,865.03, the original claim, filed with the notices of lien prior to March 26, 1946, amounted to only $40,921. 94 (even including the interest and costs later computed to August 21, 1946). Of this sum the taxes themselves amounted only to $34,848.04. To meet this, the trustee of the bankrupt's estate, on December 12, 1946, had on hand $31,206.20, evidently derived from the sale of the property originally held by the Collector. These figures, accordingly, suggest the possibility that, in March, 1946, it reasonably may have been supposed that a surplus above the amount of the Government's tax claim might be realized from the sale of the assets then in the possession of the Collector. In that event, it would have been the obviously appropriate procedure for the trustee to sell that property free and clear of liens and encumbrances and then distribute the proceeds to the rightful claimants. Even though there was little or no prospect of realizing such a surplus, it was reasonable and appropriate for the trustee, with the consent of the lien holder, thus to sell the property and distribute its proceeds. See Van Huffel v. Harkelrode, 284 U.S. 225, 78 A.L.R. 453; 6 [336 U.S. 118 , 131] Remington on Bankruptcy 2577-2578, 4th Ed. 1937.9 The propriety of the present conclusion is emphasized by the fact that the opposite conclusion would, in many other cases, operate to the detriment both of unsecured creditors and of the statutory lien holders. It would compel a lien holder to retain his actual possession of the property in order to be sure of his full priority in the payment of his tax claim. He would be compelled to do this, even though by doing so the bankrupt's property probably would yield a smaller sales price than if sold by the trustee. Furthermore, the lien holder would be brought into sharp conflict with the trustee whenever there was reason to suppose that the proceeds of the sale might equal or exceed the tax claims secured by the lien. Under such circumstances the bankruptcy court generally may order the sale of the bankrupt's property by the trustee, free and clear of liens and encumbrances. See 4 Collier on Bankruptcy 70.97, 70.99, 14th Ed. 1942; 6 Remington on Bankruptcy 2583, 4th Ed. 1937. Accordingly, we find no substantial support for the argument that the lien holder's voluntary relinquishment of his possession of the bankrupt's property, in favor of the bankrupt's trustee, for the purpose of permitting the trustee to sell the property in this case, must carry with it, as a matter of law, a postponement of the payment of the lien holder's tax claim to that of the claims for wages here presented.
For these reasons the judgment of the Court of Appeals is reversed.
[ Footnote 1 ] As 67, sub. b is referred to in 67, sub. c and is material to its interpretation, both subdivisions of 67 are quoted below:
[ Footnote 2 ] Not only the portions of 64, sub. a specifying the wages here in controversy but those otherwise related to the issues of this case are quoted below:
[ Footnote 3 ] There is no issue here as to the amount of penalties or interest included in the Collector's claim for taxes or as to the date to which interest on such claim shall be computed. There is no issue here as to any difference between statutory liens which were perfected more t an four months before the filing of the petition in bankruptcy or those perfected within less than that time. As the lien claimed by the United States exceeds the funds available, it has filed its brief in this Court as the sole real party in interest and in opposition to the wage claims. The respondent, Division of Labor Law Enforcement of the State of California, appears on behalf of all of the labor claimants. There also is no issue here as to the amount to be paid for the expenses of administration or the items which such expenses may include in addition to the costs of the sale made by the trustee.
[ Footnote 4 ] Provision, not material here, was made that, if additional money came into the possession of the trustee, the court, upon notice to all necessary and proper parties, should determine the respective liens or priorities, if any there be, of the Collector of Internal Revenue, the prior labor claimants, the Department of Employment of the State of California and other tax claimants entitled to be heard.
[ Footnote 5 ] See note 1, supra.
[ Footnote 6 ] See Davis v. City of New York, 2 Cir., 119 F.2d 559. In that case the City perfected its lien for retail sales taxes by seizure of assets of the taxpayer, May 16, 1939. An involuntary petition in bankruptcy was filed June 7, 1939. against the taxpayer, and it was adjudicated a bankrupt, June 17, 1939. The assets were thereafter sold in execution of the warrant issued by the city treasurer. The levy was held to be a valid statutory levy as against the trustee of the bankrupt's estate and the City was allowed to retain the proceeds of the sale, under 67, sub. b and 67, sub. c of the Bankruptcy Act, as amended in 1938. For a converse si uation see City of New York v. Hall, 2 Cir., 139 F.2d 935. In that case the City perfected its lien on personal property of the taxpayer, arising out of long delinquent business and sales taxes, by the delivery of warrants on January 14, 1943, at 10:15 a.m., to the city's warrant agent for execution and levy on the property. The actual levy on, and inventory of, the property and the posting of notices of sale were not effected until shortly after 4:30 p.m. In the meantime, at 4:22 p.m., an involuntary petition in bankruptcy was filed against the taxpayer and upon this he was adjudicated a bankrupt. Pursuant to an order of the bankruptcy court, a receiver sold the property and the court declined to order the net proceeds to be turned over to the City. The City was the holder of a statutory lien but, at the time of the filing of the petition in bankruptcy, the lien was not accompanied by actual possession of the personal property to which it attached. It, therefore, was subordinated, under 67, sub. c of the Bankruptcy Act, to the administration expenses and wages covered by clauses (1) and (2) of 64, sub. a. 'Notwithstanding the admonition of Section 67, sub. c, the City chose to slumber on its rights. Congress intended to penalize such somnolence.' 139 F.2d at page 936.
[ Footnote 7 ] 'Section 1. Meaning of Words and Phrases.-The words and phrases used in this Act and in proceedings pursuant hereto shall, unless the same be inconsistent with the context, be construed as follows:
8. These provisions apparently originated in Amendments proposed by the National Bankruptcy Conference which were before Congress in a Committee Report Analysis of H.R.12889, 74th Cong., 2d Sess. (1936). This report states that the bill was introduced by Mr. Chandler, May 28, 1936, containing Amendments proposed by the National Bankruptcy Conference, and the several Sections are ac-
companied by explanatory notes. Section 67, sub. c, as there proposed, resembles substantially the Section as finally enacted. The note explanatory of it is attributed to Jacob I. Weinstein, a member of the Conference, includes the following statement:
At that time the bill did not also except from subordination statutory tax liens on personal property 'accompanied by possession of
such property.' The addition of that clause gives it special emphasis and suggests its appropriate effect as a warning to other claimants that the property, so possessed, will not be available in the first instance for the administrative expenses and wage claims specified in clauses (1) and ( 2) of 64, sub. a.
The report filed by Mr. Chandler for the Committee on the Judiciary, July 29, 1937, to accompany the bill then known as H.R.8046 merely stated: 'In subdivisions b and c statutory liens are protected and permitted to be perfected if the time allowed by law for perfecting them has not expired.' H.R.Rep.No.1409, 75th Cong., 1st Sess. 34 (1937), and see references to 64 and 67, sub. c on pages 9, 15, 16.
See also, Weinstein, The Bankruptcy Law of 1938 (1938):
[ Footnote 9 ] The only question then arising would be as to the extent to which the trustee might deduct from those proceeds his general expenses of administration, as well as the costs of the sale itself. This question was touched upon in the agreement with the trustee but no issue is presented here as to it.