# Petitioners Brief — Oliver v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petitioners Brief
- **Published:** January 1, 1925
- **Citation:** 268 U.S. 1

## Text

he
SP

Subject Index.

Pages

I. STATEMENT OF THE CASE 1
Il. Sratures INvoLvep 3
III. QUESTIONS PRESENTED 3
IV. ARGUMENT 4

1. A reasonable construction of Section 64, Subdivi-
sions ‘‘A’’ and ‘‘B’’ of Bankruptcy Act, estab-
lishes the following order of priority in the dis-
tribution of the estate:

(1) Expenses of preserving estate. See. 64b (1)

(2) Filing fees. Sec. 64b (2)
(3) Expenses of administration. See. 64b (3)
(4) Wages. Sec. 64b (4)

(5) Debts entitled to priority by the
laws of the United States or of
the various states, such as attach-

ment costs. Sec. 64b (5)
(6) Taxes. Sec. 64a
(7) General creditors. . 4

2. See. 3466, Revised Statutes, has no application... 17

3. The question of priority between sovereign and
subject is not involved... 17

V. ConcLusion ..... eahibdadisaatie 21

Table of Cases.

In re Amoratis, 178 Fed. 919
In re Baltimore Pearl Homing Co. (D. C. Md. 1923)

294 Fed. 921 16, 19
City of Richmond v. Bird (1919), 43 Am. B. R. 260,

369 U. 8. 174, 39 Bup. Ct. 186 4,9, 12, 13, 15
In re Cramond (D. C. N. Y. 1906), 17 Am. B. R. 22,

145 Fed. 966 15
In re Enterprise Brass Foundry (1923), 293 Fed. 69.. 14
In re A. E, Fountain (D. C. 8. D. N. Y.), 2 Am. B. R,

N. S. 455 14, 16,17
In re General Film Corporation (C. C. A. 2nd Cir.

1921), 48 Am. B. R. 149, 274 Fed. 903.0 16, 18

Guarantee Title and Trust Co. v. Title Guaranty and
Surety Co. (1912), 224 U. S. 152, 27 Am. B. R.
873, 32 Sup. Ct. 457, 56 Law Ed. 706... 10, 11, 13,14
15, 17, 18, 19, 20

In re Halsey (D. C. N. J. 1909), 23 Am. B. R. 401,

163 Fed. 118 15
In re Hessler Foundry and Mfg. Co. (Ref. N. D. N. Y.

920), 45 Am. B. R. 382 16, 18
In re Jacobson (C. C. A. 7th Cir. 1920), 45 Am. B. R.

1, 263 Fed. 883 16

In re Kittenplan (1922), 49 Am. B. R. 410, 285 Fed. 62 14
New Jersey v. Lovell (C. C. A. 3rd Cir. 1910) 24 Am.

B. R. 562, 179 Fed. 321 12,15
In re Oxley (D. C. Wash. 1913), 30 Am. B. R. 406,

) rea 16
Polk County v. Burnes (C. C. A. 8th Cir. 1917), 40

Am. B. R. 727, 247 Fed. 399... 16
In re Prince and Walter (D. C. Pa. 1904), 12 Am.

B. R. 675, 131 Fed. 546 15

In re A. J. Waterman Mfg. Co. (S. D. Me. 1923), 291
Fed. 589 oan 14, 16, 17
In re Weiss (D C. N. Y. 1908), 20 Am. B. R. 247, 159
Fed. 296 ........ 15

In re Wyley Co. (D. C. N. D. Ga. 1923), 292 Fed. 900 16

_ aeemmamas

No. 574

In the Supreme Court

OF THE

United States

OcToBeR TERM, 1923

A. J. OLIVER, as Trustee in Bankruptey
of the Estate of West Coast Rubber
Corporation, Oscar CourtiIn, Doro-

THY EK. KNicut, et al.,
Petitioners,
Vs.

THe Unirep States or AMERICA, and
THE City anD County oF San FRAN-
CISCO, a municipal corporation,

seeponsonts.

Certiorari to the United States Circuit Court of
Appeals for the Ninth Circuit.

BRIEF FOR PETITIONERS.
i.
STATEMENT OF THE CASE.
This matter comes before the Supreme Court upon
certiorari to the Circuit Court of Appeals for the
Ninth Circuit.

The bankrupt estate of the West Coast Rubber
Corporation was administered before A. B. Kreft,

2

Esq., referee in bankruptcy at San Francisco. Cer-
tain labor claims were filed against the estate and
the referee allowed them for the total sum of $917.85
as entitled to priority of payment under the pro-
visions of Sec. 64b (4) of the bankruptcy act. These
claimants also presented claims for costs incurred
in attachment suits commenced prior to bankruptcy
in an endeavor to collect their claims. These at-
tachment costs claims were allowed for the total sum
of $99.70 as entitled to priority of payment under
the provisions of See. 64b (5) of the bankruptcy
act, as the same was construed by the Circuit Court
of Appeals for the Ninth Circuit in the case of In
re Amoratis, 178 Fed. Rep. 919.

The United States Government presented a claim
for manufacturer’s excise tax which was finally al-
lowed by the referee for $1851.66. The City and
County of San Francisco, a municipal corporation,
presented a claim for personal property taxes, which
was finally allowed for $904.26.

It appeared that there was not enough money in
the estate to pay all of these claims in full, although
there was sufficient to pay either the tax claims in
full or the labor and attachment costs claims in full.
The question then arose as to what claims should be
paid first.

The referee decided that labor and attachment
costs claims should be paid first. This decision was
affirmed by District Judge Dooling of the Northern

3

District of California, but was reversed by the
Circuit Court of Appeals for the Ninth Circuit,
which held that the tax claims should be paid be-
fore the labor and attachment costs claims. The ref-
eree, in his order, set out in detail his views upon
the legal questions involved (Trans. of Record, pp.
34-50). On review of the referee’s decision he filed
his certificate, wherein he discussed further the
legal matters involved (Trans. of Record, pp. 53-
56). Judge Dooling, in connection with his decision,
wrote a short opinion (Trans. of Record, p. 57). The
opinion of the Circuit Court of Appeals appears in
Trans. of Record, pp. 61-63.

II.
STATUTES INVOLVED.

The case at bar involves the construction of Sees.
64a and 64b (4) and 64b (5) of the Bankruptcy Act.

ITI.
QUESTION PRESENTED.

The sole question presented is whether the tax
claims referred to in Sec. 64a of the Bankruptcy
Act are to be paid prior to the labor claims referred
to in Sec. 64b (4) of the act, and attachment costs
claims in California covered by Sec. 64b (5) of the
‘act as construed in the case of In re Amoratis, 178
Fed. Rep. 919, by the Court of Appeals for the Ninth
Circuit.

4

ARGUMENT.

IV.

1. A RBEASONABLE CONSTRUCTION OF SECTION 64, SUB-
DIVISIONS “A” AND “B” OF BANKRUPTCY ACT, Es-
TABLISHES THE FOLLOWING ORDER OF PRIORITY
IN THE DISTRIBUTION OF THE ESTATE:

(1) Expenses of preserving estate. Sec. 64b (1).

(2) Filing fees. Sec, 64b (2).

(3) Expenses of administration. Sec. 64b (8).

(4) Wages. Sec. 64b (4).

(5) Debts entitled to priority by the laws of the United
States or of the various states, such as attachment costs.
Sec. 64b (5).

(6) Taxes. Sec. 64a.

(7) General creditors.

We think the disposition of the case at bar turns

upon the meaning of the words “dividends to cred-
itors’’ used in See. 64a.

In the concluding paragraph of his opinion
(Trans. of Record, p. 58), J udge Dooling, after re-
ferring to the case of

City of Richmond v. Bird (1919), 43 Am.
B. R. 260, 249 U. S. 174, 39 Sup. Ct. 186,

wherein the Supreme Court stated that the word
““dividends”’ as commonly used throughout the act,
means partial payment to general creditors, states:

“‘The ordinary rules of construction support
the ruling of the referee. The taxes in question
are given priority only over ‘dividends to cred-
itors.’ Everywhere else in the act the word
‘dividend’ means a partial payment to general °
creditors. There is no reason why a different
meaning should be assigned to it here.’’ (Italics
ours. )

5

In their opinion, the Circuit Court of Appeals say
(Trans. of Record, p. 62):

“It is true that the term ‘dividend to ecredi-
tors’ ordinarily refers to dividends to general
creditors, but it does not necessarily have that
meaning. A dividend is that which is to be di-
vided. In bankruptcy it is the sum of money
which is to be divided among two or more
creditors. It is not necessarily a partial pay-
ment. It is obvious that it may at times be a
payment in full even as to general creditors.”

What provisions are contained in the act that sup-
port these respective views?
Sec. la (9), which defines the term ‘‘ereditor,”’

is as follows:

“Creditor shall include anyone who owns a
demand or claim provable in bankruptcy * * .”’

See. la (11):

‘*Debt shall include any debt, demand or claim
provable in bankruptcy.’’

See. 39a (1):

“Referees shall declare dividends and prepare
and deliver to trustees dividend sheets showing
the dividends declared and to whom payable.”’

Sec. 47a (9):

“Trustees shall * * * pay dividends within
ten days after they are declared by the ref-
erees.”’

See. 53a:

“The Attorney-General shall annually lay be-
fore Congress statistical tables showing for the

6

whole country, and by states, the number of
cases during the year of voluntary and invol-
untary bankruptcy ; the amount of the property
of the estates; the dividends paid and the ex-
penses of administering such estates; and such
other like information as he may deem impor-
tant.”’

Sec. 56a:

‘Creditors shall pass upon matters submitted
to them at their meetings by a majority vote in
number and amount of claims of all creditors
whose claims have been allowed and are present,
except as herein otherwise provided.’’

See. 56b:

**Creditors holding claims which are secured
or have priority shall not, in respect to such
claizus, be entitled to vote at creditors’ meetings,
no shali such claims be counted in computing
either the number of creditors or the amount of
their claims, unless the amounts of such elaims
exceed the values of such securities or priorities,
and then only for such excess.”’

Sec. 57e:

‘“‘Claims of secured creditors and those who
have priority may be allowed to enable such
creditors to participate in the proceedings at
creditors’ meetings held prior to the determina-
tion of the value of their securities or priorities,
but shall be allowed for such sums only as to
the courts seem to be owing over and above the
value of their securities or priorities.’’

Sec. 57h:

‘The value of securities held by secured cred-
itors shall be determined by converting the same

gaara pease ee

7

into money according to the terms of the agree-
ment pursuant to which such securities were de-
livered to such creditors or by such creditors
and the trustee, by agreement, arbitration, com-
promise, or litigation, as the court may direct,
and the amount of such value shall be credited
upon such claims, and a dividend shall be paid
only on the unpaid balance.”’

. OT-l:

“*Whenever a claim shall have been reconsid-
ered and rejected, in whole or in part, upon
which a dividend has been paid, the trustee may ~
recover from the creditor the amount of the di-
vidend received upon the claim if rejected in
whole or the proportional part thereof is reject-
ed only in part.”’

Sec. 58a (5):

‘Creditors shall have at least ten days’ notice
by mail, to their respective addresses as they
appear in the list of creditors of the bankrupt,
or as afterwards filed with the papers in the
cases by the creditors, unless they waive notice
in writing, of * * * the declaration and
time of payment of dividends * * * |”

See. 65a:

“Dividends of an equal per centum shall be
declared and paid on all allowed claims, except
such as have priority or are secured.’’

See. 65e:

“The rights of creditors who have received
dividends, or in whose favor final dividends have
been declared, shall not be affected by the proof
and allowance of claims subsequent to the date
of such payment or declarations of dividends;

8

but the creditors proving and securing the al-
lowance of such claims shall be paid dividends
equal in amount to those already received by
the other creditors if the estate equals so much
before such other creditors are paid any further
dividends. ”’

Sec. 65d:

‘Whenever a person shall have been adjudged
a bankrupt by a court without the United
States and also by a court of bankruptcy, credi-
tors residing within the United States shall first
be paid a dividend equal to that received in the
court without the United States by other credi-
tors before creditors who have received a divi-
dend in such court shall be paid any amounts.”

While it is to be noted that in the sections we
have quoted the word ‘‘dividend” is not defined,
still the language contained in See. 65a,

“Dividends of an equal per centum shall be
declared and paid on all allowed claims, except
such as have priority or are secured,’

is equivalent to a definition to the effect that “‘divi-
dend’’ means partial payments to general creditors.
We find that nowhere in the act is the word “‘divi-
dend”’ referred to in any manner other than as par-
tial payment to general creditors.

We cannot find anything in the act that indicates
that payments on claims which are to be paid in full
are to be treated as dividends to creditors within
the meaning of Sec. 64a. Lending strength to the
distinction between dividends to be paid to general
creditors and payments to creditors who are to be

9

paid in full are the provisions of Sees. 56a, 56b and
57 to the effect that creditors who are to be paid
in full or are secured have no voice in voting upon
matters concerning the administration of the estate.

In City of Richmond v. Bird, supra, the Supreme
Court notes particularly Sections 65b and 64a. The
court, at page 262 of 43 Am. B. R. states:

“Sec. 64a directs that taxes be paid in advance
of dividends to creditors; and ‘dividend’ as -
commonly used throughout the act means par-
tial payment to general creditors. In Sec. 65b
(Comp. St., See. 9649), for example, the word
occurs in contrast to payment of debts which
have priority.”’

Before the bankrupt estate is ready to pay divi-
dends to general creditors, its property must be
sold and all payments required by Sec. 64 com-
pleted. If Congress intended that taxes should
precede the payments required by See. 64b, or some
of them, why were the words ‘‘in advance of divi-
dends to creditors” used? There is apparently no
purpose in their use except to indicate that taxes
are to be paid just prior to payments to general
creditors, because the words “‘in advance of”’ really
mean “‘next preceding’’, so that, if we give See.
64a this construction, it would read, in the light of
the expression of the Supreme Court in City of
Richmond v. Bird, supra:

“‘The court shall order the trustee to pay all
taxes legally due and owing by the bankrupt
to the United States, state, county, district or
municipality next preceding partial payments
to general creditors,’’

10

The Circuit of Appeals in its decision, while re-
ferring to the language of the Supreme Court in
City of Richmond v. Bird, supra, relies upon the fol-
lowing language in the prior Supreme Court case of
Guarantee Title & Trust Co. v. Title Guaranty &
Surety Co. (1912), 224 U. S. 152, 27 Am. B. R. 873,
32 Sup. Ct. 457, 56 L. ed. 706, wherein the court, at
page 879 of 27 Am. B. R., said:

“‘Labor claims are given priority and it is
provided that debts having priority shall be paid
in full. The only exception is ‘taxes legally due
and owing by the bankrupt to the United States,
state, county, district or municipality’. ”’

It seems to us that the Supreme Court in Guaran-
tee Title & Trust Co. v. Title Guaranty & Surety Co.,
supra, in saying that the only exception is taxes, had
in mind the words of subdivision (b) of Sec. 64:
“‘the debts to have priority except as herein provid-
ed.”’ Sce. 64 contains no exception unless it be
taxes. We think that the Supreme Court, not hav-
ing before it the matter of an exact construction of
the words ‘‘in advance of dividends to creditors,”
thought that the words ‘‘except as herein provided”
referred to the taxes specified in subdivision (a). If
the words ‘‘except as herein provided”’ in fact refer
to taxes, the whole provision becomes ambiguous,
because, if reference is to taxes, there would be no
necessity of placing in subdivision (a) the words
‘in advance of payment of dividends to creditors.”
If such exception is not contained in Sec. 64, but

11

reference is made to other provisions of the act, the
whole Sec. 64 becomes harmonious.

It is conceded in the case at bar that costs of pre-
serving the estate, and expenses of administration,
take precedence over taxes. If the words of subdivi-
sion “‘b,’’ “except as herein provided”’ refer to the
taxes specified in subdivision ‘fa,’’ where are taxes
to be placed in subdivision “b’’? This must, of
course, be somewhere after subdivision (3), as the

priority of (1), (2) and (3) are conceded. The
wages in question in the case at bar are covered by
subdivision (4), Therefore, if the decision of the
Circuit Court of Appeals is correct, the place for
taxes is between (3) and (4). If taxes are superior
to (4) then they are also prior to (5) which em-
braces a debt due the government.

Guarantee Title & Trust Co. v. Title Guar-

anty & Surety Co.

The Supreme Court, in that case, directly decided
that labor claims are prior to a debt due the United
States. If it was the intention of Congress to place
taxes between (3) and (4) it would be hard to con-
ceive of a more awkward way of expressing such
intention. If such was the intention, the obvious
and natural way would have been to insert the tax
provision at (4) instead of wages. In Guarantee
Title & Trust Co. v. Title Guaranty d: Surety Co.,
supra, the Supreme Court further states:

“The act takes into consideration, we think,
the whole range of indebtedness of the bankrupt

NN ae eae na mPa

ae

national, state and individual, and assigns the
order of payment.’’

What is this range of indebtedness and what is
the order of payment? We would say:

First. Liens not affected by the act as covered
by Sec. 67d. The Supreme Court, in City of Rich-
mond v. Bird, supra, decides that taxes (where no
lien is given by law therefor) are inferior to liens
protected by Sec. 67d, which are superior to every-
thing.

Second. The payments provided for, in the order
fixed, in subdivisions (1), (2), (3), (4) and (5) of
Sec. 64b.

Third. Taxes.

Fourth. General creditors.

The language of the Court of Appeals for the
Third Cireuit, in
New Jersey v. Lovell (1910), 24 Am. B. R.

562, 179 Fed. 321,
is enlightening:

‘‘Now, while the relative order in which sub-
divisions ‘a’ and ‘b’ are placed is not happy,
and indeed tends to mislead, yet the general in-
tent of the section is clear. In subdivision ‘b’
we find the general scheme of awarding priority
in advance of dividend creditors. That subdi-
vision makes provision for paying such costs,
fees and liens as are therein provided, and if
there are no outstanding taxes the fund is then
paid to creditors. But before paying creditors,
subdivision ‘a’ intervenes and makes provision

13

Later, in that decision, the court states that the
question in the case at bar here was not decided,
but the reasoning of the court certainly supports our
position.

The point we desire to make plain here is that
the words: “except as herein provided’’ do not
refer to paragraph ‘‘a”’ relating to taxes, but to
exceptions elsewhere found in the act, and especially
embracing that very important class of debts not
affected by the act and covered by Sec. 67d. viz.,
claims resting upon valid substantive liens, These
words really mean “except as in this act otherwise
provided”. Language is used elsewhere in the act
similar to the words “except as herein provided,”’

tained in the section in which the words appear, and
in each case the apparent meaning of the words is
“except as in this act otherwise provided. See Sees,
21 (b), 38 (4), and 56a.

We respectfully submit that the expression of the
Supreme Court, in Guarantee Title & Trust Co. v.
Title Guaranty & Surety Co., supra, that the only
exception is taxes is based upon the inadvertent as-
sumption that the words “except as herein provid-
ed’’ refer to taxes, and was obiter dicta, and that the
later expression of the court in City of Richmond v.

EE

14

Bird, supra, (also stated by the Court of Appeals
to be obiter dicta), is the correct construction of
the act as to when taxes are payable.

There is nothing in the scheme of payment pro-
vided for by Sec. 64 which warrants the assumption
that it was the intention of Congress to insert taxes
between (3) and (4) of subdivision ‘‘b,’’ If any
doubt exists as to the order of payment that doubt
is whether taxes precedes everything mentioned in
‘**bh”’ or follows everything therein.

There have been only a few decisions affecting the
question at issue. In the Matter of Enterprise
Brass Foundry (1923), 293 Fed. Rep. 69, Judge
Neterer of the District Court for the Western Dis-
trict of Washington took Judge Dooling’s view that
wages should be paid ahead of taxes. In the Mat-
ter of Kittenplan (1922), 49 Am. B. R. 410, 285 Fed.
62, Judge Knox of the District Court for the South-
ern District of New York held that taxes were prior
to labor claims. He referred to only a few of the
cases bearing upon the question and relied on Guar-
antee Title & Trust Co. v. Title Guaranty & Surety
Co., supra, and did not mention City of Richmond
v. Bird, supra. In the Matter of A. J. Waterman
Mfg. Co. (1923), 291 Fed. 589, Judge Hale for the
District Court of the Southern District of Maine,
held, although by way of dicta, that taxes were first.
He did not discuss any of the cases bearing upon the
question. In the Matter of A. E. Fountain (1924),
2 Am. B. R., N. S., 455, Judge Augustus N. Hand

—

of the District Court for the Southern District of
New York held that taxes are to be paid prior to
labor claims. He rests his decision upon the hold-
ing of the Circuit Court of Appeals in the case at
bar, and accepts their interpretation of the effect
of City of Richmond v, Bird, supra, and Guarantee
Title & Trust Co. v. Title Guaranty & Surety Co.,
supra.

Several early cases held that, inasmuch as “a”?
precedes “‘b’’, and taxes were not to be considered as
debts, taxes were to be paid even in advance of ex-
penses of administration. See

In re Prince and Walter (D. ©. Pa. 1904), 12
Am. B. R. 675, 131 Fed. Rep. 546;

In re Weiss (D. 0. New York, 1908), 20 Am.
B. R. 247, 159 Fed. Rep. 295;

In re Cramond (D. ©. N. Y¥. 1906), 17 Am.
B. R. 22, 145 Fed. Rep. 966,

The case of City of Chattanooga v. Hill (C. C. A.
8th Cir. 1905), 15 Am. B. R. 195, 139 Fed. Rep. 600,
is sometimes referred to as supporting this doctrine,
but an examination of the case shows that the court
expressly refrained from passing upon the question.

15

The later cases have all repudiated this doctrine.
See

In re Halsey (D. C. N. J., 1909), 23 Am. B.
R. 401, 163 Fed. Rep. 118;

State of New Jersey v. Lovell (C. C. A. 3rd
Cir., 1910), 24 Am. B. R. 562, 179 Fed. Rep.
321;

16

In re Oxley (D.C. Wash. 1913), 30 Am. B. R.
406, 204 Fed. Rep. 826;

Polk County v. Burnes (C. C. A. 8th Cir.
1917), 40 Am. B. R. 727, 247 Fed. Rep. 399;

Matter of Jacobson (C. C. A. Tth Cir. 1920),
45 Am. B. R. 1, 263 Fed. Rep. 883;

In re General Film Corporation (C. C. A.
2nd Cir. 1921), 48 Am. B. R. 149, 274 Fed.
Rep. 903;

In re Hessler Foundry & Mfg. Co. (Ref. N. D.
N. Y., 1920), 45 Am. B. R. 382;

In re Wyley Co. (D. C. N. D. Ga., 1923), 292
Fed. Rep. 900;

In re Baltimore Pearl Hominy Co. (D. C.
Md., 1923), 294 Fed. 921;

In-re A. J. Waterman Mfg. Co. (D. C. Me.
S. D., 1923); 291 Fed. 589;

In re A. E. Fountain (D. C. N. Y. S. D, |
1924), 2 Am. B. R. N. S. 455.

As was said in Matter of Jacobsen, supra, it is
hardly conceivable that Congress would confer upon
the bankruptey court the power to sequester and
preserve property and administer bankrupt estates
and yet deny to the court the power to protect its
officers in the performance of their duties, notwith-
standing such performance of duties and such ad-
ministration of the insolvent estate is for the benefit

of the taxing powers even more than it is for the
general creditors, by reason of the priority given
taxes over the claim of general creditors.

17

2. SEC. 3466, REVISED STATUTES, HAS NO APPLICATION.

This section is continually referred to and relied
upon by the United States Government in its claims
for taxes filed against bankrupt estates, but it has
no application as it has been superseded by the
Bankruptcy Act. This section would apparently
give priority to tax claims over labor claims, and
provides:

‘‘Whenever any person indebted to the
United States is insolvent, or whenever the es-
tate of any deceased debtor, in the hands of the
executors or administrators, is insufficient to
pay all the debts due from the deceased, the
debts due to the United States shall first be sat-
isfied; and the priority hereby established shall
extend as well to cases in which a debtor, not
having sufficient property to pay all his debts,
makes a voluntary assignment thereof, or in
which the estate and effects of an absconding,
concealed or absent debtor are attached by pro-
cess of law, as to cases in which an act of bank-
ruptey is committed.”’

The following cases hold that the section does not
apply to bankruptcy proceedings:
Guaranty Title & Trust Co. v. Title Guaranty
& Surety Co., supra;
In re Fountain, supra;
In re A. J. Waterman Mfg. Co., supra.

8% THE QUESTION OF PRIORITY BETWEEN SOVEREIGN
AND SUBJECT IS NOT INVOLVED.

The soverign has enacted its own bankruptcy laws
and instituted its own bankruptcy courts. The Con-

—

18

stitution of the United States gives Congress con-
current powers to impose and collect taxes and to
establish a uniform bankruptcy law, and if Con-
gress, in exercising these powers, establishes certain
priorities of payment, and relegates taxes to an in-
ferior position, no one can be heard to complain be-
cause Congress is only doing what the soverign gave
it the right to do.

In the Bankruptcy Act of 1898, Congress departed
very considerably from the principles of public pol-
icy theretofore prevailing as to the rights of the
sovereign. The sovereign is expressly referred to in
Sec. 64a of the act and this section is binding upon
the various governments because they are named
therein.

Guarantee Title & Trust Co. v. Title Guar-
anty & Surety Co., supra;

In re Hessler Foundry & Mfg. Co., supra.

In re General Film Corporation, supra;

In re Wyley Co., supra.

In the case of in re Wyley Co., supra, Judge Sib-
ley for the District Court for the Northern District
of Georgia, said at page 901 of 292 Fed. Rep.:

‘‘Taxes due the United States and bankrupt-
cies are alike wholly subject to the power of
Congress. Congress may make such provision
for the one through the other as it sees fit. A
tax has such lien and priority, and only such,
as-is given it by statute. 37 Cyc. 1138, 1143.
The common-law preference of the sovereign is
said not to exist in favor of the United States,

19

save as continued by statutes. United States v.
Bank of North Carolina, 6 Pet, 29, 8 Law. Ed.
308.

See also

In re Baltimore Pearl H ominy Co., 294 Fed.
921, 924.

In the case of Guarantee Title & Trust Co. v. Title
Guaranty & Surety Co., supra, Justice McKenna

said on behalf of the Supreme Court (p. 879 of 27
Am. B. R.):

‘“‘The act takes into consideration, we think,
the whole range of indebtedness of the bank-
rupt—national, state, and individual—and as-
signs the order of payment. The policy which
dictated it was beneficent and might well in-
duce a postponement of the claims, even of the
sovereign, in favor of those who necessarily de-
pended upon their daily labor. And to give
such claims priority could in no case seriously
affect the sovereign. To deny them priority
would in all cases seriously affect the claim-
ants.’’ (Italics ours.)

In that case the Supreme Court finds that the
Bankruptey Act of 1898 departs very considerably
from the Bankruptcy Act of 1867, and expresses a
new intent. Debts owing to the government are to
be subordinated to labor claims. If such intent ap-
pears, we see no distinction between obligations due
the governn ut for a debt or for a tax.

In that case, the question at issue was whether a
debt due the United States had priority over a labor

20

claim. The government contended that its claim
superseded other claims as it was the claim of the
sovereign, while the labor claimant asserted that his
claim was covered by Sec. 64b (4), that of the gov-
ernment by Sec. 64b (5), and his section was prior.
The court held with the labor claimant. It is diffi-
cult to see how there is any difference between taxes
due the United States and a debt due the same. Both
are obligations of the citizen, and, when paid, go
to the support of the government. It is true that
taxes are not dischargeable, while debts due the
United States are, yet the situation is not altered
because Congress has full power, under the rights
conferred upon it by the Constitution relating to
bankruptcies, to discharge one kind of obligation
and decline to discharge another. See in re Wyley
Co., supra.

We believe that undue emphasis is attached to a
tax claim as such. The government has not seen fit
to even create a lien in favor of the tax involved in
the case at bar, and, except for the provisions of the
Bankruptcy Act, the claim of the government would
be in the position of an ordinary creditor unless
priority be given for taxes as a debt under Sec. 3466
R. S., supra, and if so given priority, would under
the decision of Guarantee Title & Trust Co. v. Title
Guaranty & Surety Co., supra, be subordinated to
labor claims.

ee

21

If Congress had intended that tax claims should
be paid before labor or attachment costs claims, it
could have said so in so many words. The right to
establish a uniform bankruptcy law throughout the
United States having been conferred upon Congress
by the Constitution, Congress has the power to treat
tax claims in any manner that it may see fit so far
as the distribution of the bankrupt estate is con-
cerned, even to the extent of giving taxes priority
over everything else or postponing them to every-
thing else. The taxing powers have the right to make
taxes a lien upon the property of the subject, but
unless the taxing power by law creates such a lien
which has attached to the property of the insolvent
before he goes into bankruptcy, tax claims stand irt
no better position than claims of general creditors,
except for such priorities as are established by the
Bankrupt Act itself.

In the case at bar, it is conceded that no such lien
exists and that the taxes have no priority except
such as is given by Sec. 64a.

V.

CONCLUSION.

We submit that, in view of the foregoing consid-
erations, Congress clearly intended and the Bank-
ruptey Act clearly provides that tax claims precede
in order of payment only dividends to general credi-

22

tors and are inferior to labor claims and attachment
costs claims, and the judgment of the Circuit Court ©
of Appeals for the Ninth Circuit should be reversed, -

Respectfully submitted,

REUBEN G. Hunt,
Attorney for Petitioners.
Dated: May 1, 1924.

~~
ee

a OD awe 8 ER ge a

Ce RE ee se a

Inthe Supreme Court of the Gnited States.

Ocroser TERM, 1928.

A. J. Ourver, as TRUSTEE IN Bank- }
ruptey of the Estate of West Coast
Rubber Corporation, Inc. (a corpora-
tion), and Oscar Courtin, Dorothy E.
Knight, D. C. Tuhey, H. Black, and
Hugh V. Casserly, petitioners, LNo. 574.

v.

Unirep Sratres oF AMERICA (A SOVER-
eign corporation) and City and County
of San Francisco (a municipal cor-
poration), respondents. F

PETITION FOR WRIT OF CERTIORARI TO THE UNITED
STATES CIRCUIT COURT OF APPEALS FOR THE NINTH
CIRCUIT.

BRIEF ON BEHALF OF THE UNITED STATES IN
OPPOSITION.

STATEMENT OF THE CASE.

- Inthe bankruptcy matter of the West Coast Rubber

Corporation, Ine., pending before A. B. Kreft, Esq.,
- @Referee in Bankruptcy of the United States District
Gourt for the Southern Division of the Northern
(1)

2

District of California, there were filed during the
course of administration claims for manufacturers’
excise tax and penalties due the United States Gov-
ernment, a claim for personal property taxes and
penalties due the City and County of San Francisco,
and a claim for labor wages.

Available assets were insufficient to pay all of the
above claims in full, and the question arose as to
which had priority. The construction of Sections
64 (a) and 64 (b) of the Federal Bankruptcy Act is
the factor upon which the determination of the issue
hinges. The former section directs the court to
order the payment of—

all taxes legally due and owing by the bank-
rupt to the United States, state, county,

district or municipality in advance of the’
payment of dividends to creditors.

while the latter section provides—

The debts to have priority, except as herein
provided, and to be paid in full out of the
bankrupt’s estate * * * shall be [after
payment of costs of preserving the estate,
filing fees and costs of administration]; (4)
wages due to workmen, clerks, traveling or
city salesmen, or servants which have been
earned within three months, etc.

The Referee handed down an order on April 7,
1922, which gave labor claims priority. This ruling
received affirmation by the District Judge on July
8, 1922, but was reversed by the Circuit Court fo
Appeals for the Ninth Circuit on July 2, 1923, the
latter court holding that taxes should be paid first.

3

_ Petitioners’ Claim.

Petitioners rest their prayer for certiorari from this
court upon the following grounds:

That the phrase “dividends to creditors,’ as
used in Section 64~a, means partial payment to
general creditors, and as payment of taxes is di-
rected to be paid prior to the payment of such
dividends only, the intention was to give priority
to all preferred claims mentioned in 64-b.

That the words “except as herein provided,” as
used in 64—b, really mean “except as in the act
otherwise provided,”’ and refer to liens not affected
by the Act and which are protected by Section 67-d
of the Act and must be recognized in distribution
of the estate.

ARGUMENT.

Though the term “dividends to creditors” ordi-
narily refers to dividends to general creditors, it
does not necessarily have such a meaning. A
dividend in bankruptcy is a sum of money to be
shared among two or more creditors. It is not
necessarily a partial payment, as suggested by peti-
tioner, but may in some instances be a payment in
full, even to general creditors.

That phrase “except as herein provided”’ refers
unmistakably to taxes described in Section 64-a.
The intention on the part of Congress to except
“taxes” from the priority scale set forth in 64-b is
apparent. If it intended otherwise, why were the
two subjects segregated and given two separate sub-

4

divisions in the section in question? The con-
struction of the above term suggested by petitioners
clearly defeats the intention of the legislature.

This court has expressed itself relative to the
proper construction of the section of the Bankruptcy
Act under consideration in the case of Guaranty
Title & Trust Co. v. Title Guaranty & Surety Co.
(224 U. S. 152), wherein the following appears:

Labor claims are given priority and it is
provided that debts having priority shall be
paid in full. The only exception is tazes
legally due and owing by the bankrupt to
the United States, state, county, district, or
municipality. (Italics ours.)

The decision of the Circuit Court of Appeals for
the Ninth Circuit, which is made the basis of the
petitioners’ contentions herein set forth, is strictly
in line with those of other Federal Courts which
have had occasion to pass upon the questions in-
volved, as is indicated by the following citations:

In re Jacobson (263 Fed. 883), C. C. A. 7.

Polk County, Ia., v. Burns et al. (247 Fed.
$99), C.C. A. 8.

Stanard v. Dayton (220 Fed. 441), C.C. A. 8.

State of N. J. v. Lovell (179 Fed. 321),

C. C. A. 8.

City of Chattanooga v. Hill (139 Fed. 600),
C.C. A. 6.

City of Waco v. Bryan (127 Fed. 79),
C.C. A. 5.

Swarts v. Hammer (120 Fed. 256), C. C. A. 8.
In re Cramond (145 Fed. 966), N. Y.

5

In re Weissman (178 Fed. 115), Conn.

In re Weiss (159 Fed. 295), 8. D. N. Y.

In re Flynn (134 Fed. 145), Mass.

In re Brinker (128 Fed. 634), W. D. N. Y.

In re Prince & Walter (181 Fed. 550),
M. D. Pa.

In re Simms (118 Fed. 356), W. D. Ga.

In re Conhaim (100 Fed. 268), Wash.

The power to issue certiorari is exercised spar-
ingly by this court, and only in cases where the cir-
cumstances show that questions of importance are
involved or a diversity of decisions of lower courts
is presented. (Forsyth v. Hammond, 166 U. S. 506).
Admitting that this case is of importance to peti-
tioners, it presents no question of gravity or general
public importance upon which a conflict of judicial
opinion exists. On the contrary, the decision of the
Ninth Circuit to which petitioners take exception
is in harmony with the principles established in
every circuit that has so far considered the question.
This includes all but two circuits of the United
States.

JAMES M. Beck, Solicitor General.
MaBEL WALKER WILLEBRANDT,
Assistant Attorney General.
OcToBER, 1923.

O

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_0219%3A3. Public record. Not legal advice.