Amicus Curiae Brief — Kokoszka v. Belford
Supreme Court brief1974
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APR 16 1974
Saunsmeemanmumnemill
—
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1973
No. 73-5265
HENRY A. KOKOSZKA, Bankrupt,
Petitioner,
RICHARD BELFORD, Trustee in Bankruptcy of the
Estate of Henry A. Kokoszka, Bankrupt,
Respondent.
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF OF AMICUS CURIAE IN SUPPORT OF
THE JUDGMENT BELOW
Of Counsel: BENJAMIN R. CIVILETTI
JAMES L. LEKIN VENABLE, BAETJER AND HOWARD
HARRY D. SHAPIRO 2 Hopkins Plaza
Venable, Baetjer and Baltimore, Maryland 21201
Howard Amicus Curiae
Washington, D.C. © CLB PUBLISHERS © LAW PRINTING CO. e (202) 393-0625
a ONE AT eT NEON AEP RY WE DEE WES —
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TABLE OF CONTENTS
PRELIMINARY STATEMENT ...................... Z
QUESTIONS PRESENTED «26k since wee e es et eee es ds 2
SUMMARY OF ARGUMENT 66.66 ieee eeee ete deers 2
ARGUMENT:
I. THE LEGISLATIVE HISTORY OF
SECTION 70a(5) OF THE BANKRUPTCY
ACT MANIFESTS AN INTENT BY CON-
GRESS TO GIVE THE TERM “PROPERTY”
A BROAD DEFINITION AND CONGRESS
INTENDED TO PROTECT THE INTER-
ESTS OF THE BANKRUPT THROUGH
SECTION 6 OF THE BANKRUPTCY ACT ......... >
A. Legislative Background of Section 70a(5)
of the Bankruptcy Act .................... 5
B. Legislative Background of Section 6 of
the Bankruptcy Act ...................... 10
Il. A TAX REFUND IS “PROPERTY” WITH-
IN THE MEANING OF SECTION 70a(5)
OF THE BANKRUPTCY ACT .................. 17
A. The development of the “fresh start”
_ doctrine prior to Segal v. Rochelle and
Dee Y: PIOGONEE oe 5k a ese pee es ee hee 17
B. Segal v. Rochelle and Lines v. Frederick......... 24
C. The conflicting holdings of Cedor,
Kokoszka and Gehrig ...................-.. 28
D. Application of Segal and Lines ............... 31
Il]. THE EXEMPTION OF THE INCOME TAX
REFUND FROM THE BANKRUPT’S
ESTATE IS BEING CONSIDERED BY THE
COMMGRESS «sk oh cde ss oniege ns onde asa nes 38
A. Bankruptcy Commission ................... 38
B. Legislative Recommendations ................ 38
‘ = PRR, SRM tage — A SOLES ERS LLG IES JRLIIE DPE DOWEL IIE EEO LYLE OLED DLO
(ii)
IV. THE CONSUMER CREDIT PROTECTION
ACT DOES NOT PRECLUDE’ THE
TRUSTEE FROM OBTAINING THE EN-
TIRE INCOME TAX REFUND WITHIN
THE BANERUPICY ESIALE 662.4 e6s0sc wens 43
COMO. 6566555 abe w say eee eens enue es 50
TABLE OF AUTHORITIES
Page
Cases:
Aveni, In re, 458 F.2d 972 (6th Cir.), cert. den.
BOF TI BAN) 65 os 5555 5.5264 8 eee eee 33
Burlingham v. Crouse, 228 U.S. 459 (1913) ........... 18,19
Cedor, In re, 337 F.Supp. 1103 (N.D. Cal. 1972),
aff'd sub nom. In re James, 470 F.2d 996 (9th
Cir, 1972), cont. dea. 411 US. 973 (1973) ss 25 ens 28,44
Fuentes v. Shevin, 407 U.S. 67 (1972) ..... Pee mewn er 33
Gehrig, In re 1974 CCH Bankruptcy Reports
965,116 (60 Ch. 1974) anc PE eS sh Sd ee es 30, 44
Hanover Nat’l Bank v. Moyses, 186 U.S. .............. 12, 21
Holden v. Stratton, 198 U.S. 202 (1905) ............. 16,17
James v. Strange, 407 U.S. 128 (1972) ................ 33
Kingswood, In re 343 F.Supp. 498 (C.D. Calif. 1972) ...... 24
Kokoszka, In re, 479 F.2d 990 (2d Cir. 1973) ........... 29
Legg v. St. John, 296 U.S. 489 (1936) ......... .3,22.31,37
Lines v. Frederick, 400 U.S. 18 (1970) ............. passim
Local Loan Co. v. Hunt, 292 U.S. 234 (1934) ........ passim
Lynch v. Household Finance Corp., 405 U.S. 538 (1972)... . 33
Perry, In re, 225 F.Supp. 481 (N.D. Ohio 1963) .........
od PELL LENS LEP ge Me OEY
(iti)
Page
Segal v. Rochelle, 382, U.S. 375 (1966) ............ passim
Sniadach v. Family Finance Corp., 395 U.S. 337 (1969) .... 33
Stellwagen v. Clum, 245 U.S. 605 (1918) ........... 19,21
Wetmore v. Markoe, 196 U.S. 68 (1904) ............ 17,19
Williams v. U.S. Fidelity Co., 236 U.S. 549 (1915). ...... 19, 21
Statutes in effect:
PUI ee. wees Fae be ee eee ees passim
DO Sica eee h ees ce ee veers Bee eae ees 10
OG TTOR 6g oe ee eae eens ean passim
iS USC. See. AGNAG?T cn chic hha eek 5 hee bese 43,47
OG. 1002 4 oak 6 eee oh eee oe eee 43
OG. 1G) co oea os dc aces yee tes te mcaee s 44
Bankruptcy Act of July 1, 1898, c. 541, 30 Stat.544 .7,9,12,17
Bankruptcy Act Amendments of June 22, 1938, c.
= ee Yo ae ed a ee 7, 16,38
Bankruptcy Act Amendments of July 7, 1952, c.
S19, OO OED x x oa ee KES See ESET Se 8
Internal Revenue Code of 1954, §3401(fW{1) ......... 28, 29
Internal Revenue Code of 1954, §3402(f{(2) ............ 35
Internal Revenue Code of 1954, §6012(a).............. 33
Revenue Act of 1971, Public Law 92-178 .............. 29
Conn. Gen. Stat. §§52- 352 .. 2... ccc esc cece ccees 31
Superseded statutes:
Bankruptcy Act of April 4, 1800, 2 Stat. 19 ........ 5,9, 11
Bankruptcy Act of August 19, 1841, 5 Stat. 440 ..... 6,8, 11
Bankruptcy Act of March 2, 1867, c. 176,14 Stat.517 ..6,12
Current Tax Payment Act of 1943, 1943 Cum. Bull.
(iv)
Page
Resolutions:
Senate Joint Resolution No. 88, 91st Congress,
PUBIC LAW 91-396: 5 6 kw oe se Hee eee eee HESS RES 38
Regulatory Materials:
Income Tax Regulations §1.6411-1(a) and (b) .......... 24
Income Tax Regulations §31.3402(f((2}1 ........... 28,35
Rev. Rul. 72-387, 1972-2 Cum. Bull. 632 ........... 24, 28
Congressional Debate, Hearings and Reports:
BD. 1a O00 CONE. 20 SO. bce ee ccs as wee eee 9,12
H. Rept. No. 1409, 75th Cong., Ist Sess. ............. 15
H. Rept. No. 401, 78th Cong., Ist Sess. .............. 10
S. Rept. No. 221, 78th Cong., Ist Sess... ............. 10
H. Rept. No. 1040, 90th Cong., 2nd Sess. ............. 45
H. Rept. No. 92-533, 92nd Cong., Ist Sess. ............ 29
H.R. 10792, 93rd Cong., Ist Sess. ..........2... 39, 39,41
S.-2565, 93rd Cong., Ist Sess. .....%4.......... 38, 39,41
Hearings on H.R. 6439, June 1-9, 1937............. 14, 16
31 Cong. Rec. 1787 (1898) ...................02.. 14
31 Cong. Rec. 1788 (1898) ..................0.0.. 9
Texts and Secondary Sources:
Calverly, Income Tax Refunds Due Wage Earners,
39 J. of Natl. Assn. of Ref. in Bankruptcy 8
CGMS 9GS) oo te bee eae ee eee eee ee 24
Collier, Bankruptcy (14th Ed. 1971 and 1974).......... 5,8
Comment, Aspects of the Chandler Bill to Amend the
Bankruptcy Act, 4 U. Chicago L.R. 369 (1936-37)...... 8
Comment, Bankruptcy Exemptions: Critique and
Suggestions, 68 Yale L.J. 1459 (1959) ........0.0... 8
(v)
Page
Comment, Bankruptcy Exemptions: A Full Circle
Back to the Act of 1800? 53 Cornell L.R. 663 (1968) .. 8
Comment, Title to Property - Employee Bankrupt’s
Income Tax Refunds, 47 Am. Bankr. L.J. 239 (1973) . 28
New York Times (March 27, 1974) ................. RY
Comment, The Income Tax Refund as a Possible
Asset of a Wage Earner’s Bankruptcy Estate, 87
Pee. BR 8 CS. go ke oe hs teh eae coves 28
Note, The Withholding Tax in the Bankruptcy Con-
test - Brooklyn L.Rev. (1974 - to be published) ........ 28
Note, Treatment of Income Tax Refunds in
Bankruptcy After Lines v. Frederick, 72 Mich.
LR SS CIGIS). oes ee ee eee ee ee eee 28
Report of the Commission on Bankruptcy Laws of
the United States .................... 39,40, 41,42
Vukowich, Debtor’s Exemption Rights, 62 Geo. L.J.
TOSI ao oe eee eee eee eee eeneeess 39
Warren, Bankruptcy in United States History,
Harvard University Press, 1935 ................. 8,11
No aot ka
ay
YN Te Shee
iy
SRE ONY
—
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1973
No. 73-5265
HENRY A. KOKOSZKA, Bankrupt,
Petitioner,
RICHARD BELFORD, Trustee in Bankruptcy of the
Estate of Henry A. Kokoszka, Bankrupt,
Respondent.
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF OF AMICUS CURIAE IN SUPPORT OF
THE JUDGMENT BELOW
INTEREST OF AMICUS CURIAE
This brief is submitted pursuant to the Court’s invita-
tion of March 4, 1974 to the undersigned to brief and
argue this.case as Amicus Curiae in support of the judg-
ment below.
—
; Respondent adopts the material in Petitioner’s brief
* under the headings “OPINIONS BELOW”, “JURISDIC-
TION”, “STATUTES INVOLVED” and “STATEMENT
OF THE CASE”.
2
PRELIMINARY STATEMENT
Haine ateauais ae dh diny Sn |
QUESTIONS PRESENTED
; 1. Is an income tax refund due Petitioner-bankrupt
+ “property” which passes to the trustee under Section
70a(5) of the Bankruptcy Act?
2. If the income tax refund is “property” within the
meaning of Section 70a(5) of the Bankruptcy Act, do
the garnishment provisions of the Consumer Credit
Protection Act preclude the bankruptcy trustee from
taking the entire refund?
ee
SUMMARY OF ARGUMENT
NER RW aR de I a it ape al cal le gh bag a
I. and II. Legislative history and relevant decisions of
this Court support a broad interpretation of what is
. “property” within the meaning and scope of Section
j 70a(5) of the ‘Bankruptcy Act. The Bankruptcy Act
+ permits the bankrupt to withhold from his creditors
those assets which are exempt under (1) the laws of the
state where he resides and (2) statutes of the United
States. The State of Connecticut does not exempt an
income tax refund from the claims of creditors. Likewise,
there is no Federal statue providing for such an exemp-
tion.
The “fresh start’? doctrine embodies the benefits
flowing to the debtor from bankruptcy — relief from
—
3
the obligation of pre-bankruptcy debts, retention of
exempt property provided in Section 6 of the Act, and
freedom to accumulate future wealth. None of the
relevant cases decide, or even suggest, that a “fresh
start” permits a bankrupt to withhold from the trustee
what would otherwise be “property” unless the asset is
exempt or some right is provided in Section 70a — the
bankrupt can acquire his life insurance policy from the
trustee by paying the cash surrender value. Moreover,
Legg v. St. John, 296 U.S. 489 (1936), holds that the
“fresh start” doctrine is inapplicable to a situation in
principle the same as the one presented before this
Court.
An income tax refund which was due as of the date
of bankruptcy is “property” within the meaning of
Section 70a(5) of the Bankruptcy Act. Segal v.
Rochelle, 382 U.S. 375 (1965), involved a similar issue
and this Court determined that income tax refunds
relating to taxable events occurring before bankruptcy
were “sufficiently rooted in pre-bankruptcy past and so
little entangled with the bankrupts’ ability to make an
unencumbered fresh start that it should be regarded as
“property” under §70a(5)’. The decision in Lines v.
Frederick, 400 U.S. 18 (1970), is inapplicable and
distinguishable because vacation and layoff pay accrued
but unpaid at the time of bankruptcy, was determined
by this Court to be “future wages”. One of the
bankrupts could collect the sum either during the
annual period when his employer shut down the plant,
or on termination of his employment. The other
bankrupt could draw it either on termination or under
a conventional voluntary vacation plan. According to
this Court, without the layoff or vacation pay, the
bankrupts would not achieve the “new opportunity in
PBI EMA CP LESS GED IGE LVI LEGLELOE LS LNI OE ETP MIS Fi
—_ To
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4
life and [the] clear field for future effort, unhampered
by the pressure and discouragement of pre-existing
debt”’.
III. Petitioner requests this Court to amend judicially
the present Bankruptcy Act by (1) determining that an
income tax refund is not “‘property” within the meaning
of Section 70a(5) or (2) ruling that an income tax refund
is ““exempt’’, contrary to Section 6 of the Bankruptcy
Act and the laws of the State of Connecticut. Further- -
more, the proposed Bankruptcy Act of the Commission
on the Bankruptcy Laws of the United States, pending in
the Congress, offers a more preferable and traditional
method of amending the Bankruptcy Act.
IV. The Consumer Credit Protection Act (“CCPA”)
does not preclude the trustee from taking the entire
refund within the bankruptcy estate. The legislative
history of the CCPA clearly indicates an intent to correct
problems and abuses through garnishment of an em-
ployee’s wages outside a bankruptcy proceeding. An
income tax refund is not “earnings” or “disposable
earnings” within the definitions of Section 1672(a) and
(b) of the CCPA. Moreover, the trustee’s taking of the
refund is not “garnishment” within the definition of
Section 1672(c) of the CCPA.
———.
5
ARGUMENT
THE LEGISLATIVE HISTORY OF SECTION 70a(5)
OF THE BANKRUPTCY ACT MANIFESTS AN
INTENT BY CONGRESS TO GIVE THE TERM
“PROPERTY” A BROAD DEFINITION AND CON-
GRESS INTENDED TO PROTECT THE INTERESTS
OF THE BANKRUPT THROUGH SECTION 6 OF
THE BANKRUPTCY ACT.
A. Legislative Background of Section 70a(5) of
the Bankruptcy Act.
In order to gain a proper perspective of the meaning
of “property” as the word is used in Section 70a of the
Bankruptcy Act, one must journey through the history
of bankruptcy legislation in the United States. The
Bankruptcy Act of 1800 represented the nation’s first
Federal bankruptcy legislation.’ Among other provi-
sions, the Act provided that upon a declaration that the
debtor was bankrupt, duly appointed commissioners of
the bankrupt were empowered to take into their
possession ‘“‘all the estate, real and personal, of every
nature and description to which the said bankrupt may
be entitled, either in law or equity, in any manner
whatsoever’, excluding certain specified Federal exemp-
tions of “necessary wearing apparel” and “necessary
beds and bedding”.? The estate of the bankrupt also
included all debts due to such bankrupt or to any other
person for the bankrupt’s use or benefit. If any estate,
'4A Collier, Bankruptcy, P. 23, §70.02[2](14th Ed. 1971)
(hereinafter called “‘Collier’’).
? Act of April 4, 1800, §5, 2 Stat. 19. Each of the United States
Bankruptcy Acts is set forth in 10 Collier, Appendix.
31d. §13. :
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:
6
real or personal, descended, reverted to, or became
vested in any person after being declared a bankrupt
and prior to that person obtaining a certificate of
discharge, such estate vested in the commissioners.‘
This Act was repealed in 1803.
The next Federal bankruptcy statute was the
Bankruptcy Act of 1841.5 Like its predecessor, the Act
of 1841 broadly described the assets of the bankrupt
which vested in the trustee (termed the “‘assignee”’) as
“all the property and rights of property, of every name
and nature, and whether real, personal, or mixed’’.®
Specified household articles and wearing apparel were
exempted, along with other articles not to exceed the
sum of $300.00 in the discretion of the assignee.’
There was no definition of the term “property”. This
Act also was shortlived and was repealed in 1843. The
next bankruptcy act — the Act of 1867 — likewise
failed to define “‘property” but described the “prop-
erty” and “estate” of the bankrupt in similarly broad
terms.* The ‘Act of 1867 was repealed in 1878.
In 1898, the present Section 70a was enacted.
Entitled “title to Property”, Section 70a, as enacted,°
provided generally that the trustee of the estate of a
bankrupt was vested by operation of law with the title
of the bankrupt, as of the date he was adjudged a
4 Id. §50.
5 Act of August 19, 1841, 5 Stat. 440.
Sid. §3.
"Id.
8 Act of March 2, 1867, §15, C. 176, 14 Stat. 517.
* Act of July 1, 1898, §70a, C. 541, 30 Stat. 544, as amended,
11 U.S.C. §110.
“a
« 7
bankrupt, to all assets and property as _ specified
thereafter. The relevant portion of the provision,
subsection (5), described the bankrupt’s estate as all
“property which prior to the filing of the petition [the
bankrupt] could by any means have transferred or
which might have been levied upon and sold under
judicial process against him.’’® Again, there was no
definition of the term “property”’.
Section 70 was substantially amended by the Act of
1938, popularly known as the Chandler Act."!
Specifically the wording of Section 70a was modified to
provide that the trustee of the estate was vested by
operation of law with the title of the bankrupt as of
the date of the filing of the petition in bankruptcy.'?
Under subsection (5) of Section 70a, the trustee was
vested with all “‘property, including rights of action,
which prior to the filing of the petition [the bankrupt]
could by any means have transferred or which might
have been levied upon and sold under judicial process
against him.”’ (emphasis added)'? There were other
changes relating to: (1) property rights which vested
within six months after bankruptcy through bequest,
devise, or inheritance, and (ii) property in which the
bankrupt had on the date of bankruptcy an estate or an
interest by the entirety.'*
107q., subsection 5.
Act of June 22, 1938, C. 575, 52 Stat. 879, amending, 11
U.S.C. §1 et seq. :
'21d.81; The Act of 1898 provided that the property vested “‘as
of the date [the bankrupt] was adjudged a bankrupt”.
137d.
141d.
B) :
—_ SS ee 22 RESTA REO PRE ATP A RY SEE EL I Te NR
8
Section 70a was further amended in 1952 to vest in
the trustee by operation of law all property of the
bankrupt wherever located.'5 Otherwise, Section 70a
has remained unchanged since the Chandler Act became
law. ~
The history of bankruptcy legislation indicates that
Congress never attempted to define specifically the
word “property” in the context of bankruptcy
legislation. Past bankruptcy legislation does reveal,
however, that Congress intended the word to have a
very broad defintion, so as to effect a transfer of all of
the bankrupt’s assets, whether in the form of tangible
goods or rights, to the trustee for distribution to
creditors.'® In fact, “‘property” first appeared in the
; 1841 Act as part of a phrase “property of every name
} and nature”.'” Section 70a of the present Act provides
» creditors with their primary remedy under the Act and,
>; in that sense, the Section can be said to be creditor
? oriented.'® Had Congress intended to withhold certain
:
$
'
4
'
SAct of July 7, 1952, §23, C. 579, 66 Stat. 429, amending, 11
U.S.C. §1 et seq.
'©For general background and the legislative history of bank-
ruptcy laws in the United States, see 1 Collier, Pars. 0.01 through
0.08 and Charles Warren, Bankruptcy in United States History,
j Harvard University Press, 1935; see also Comment, Aspects of the
: Chandler Bill to Amend: the Bankruptcy Act, 4 University of
Chicago L.R. 369 (1936-37); Comment, Bankruptcy Exemptions:
Critique and Suggestions, 68 Yale L.J. 1459 (1959); and Comment,
Bankruptcy Exemptions: A Full Circle Back to the Act of 1800?
53 Cornell L.R. 663 (1968).
'7Note 5, supra.
'8In this sense, Section 70 can be contrasted with the
“exemption” (Section 6) and “discharge” (Section 14) sections of
the Act which provide protection to the bankrupt.
_—
9
property interests from creditors —as it did by creating
exemptions — one would imagine that these interests
‘would be specifically enumerated.
Other forms of legislative history are less helpful in
ascertaining the scope of Section 70a. Specifically,
Congress made no effort in legislative reports or debates
to detail the types of interests or rights which should
be included within the term “‘property’’. Congressional
debate on the present Bankruptcy Act, however, at
least indicates a Congressional intent to preserve in that
Act the inclusive definition given to “property” in
earlier acts. Senate Bill 1035,'? which became the
Bankruptcy Act of 1898, was reported from Committee
in the House of Representatives by Representative
Henderson of Iowa, Chairman of the Committee on the
Judiciary. In explaining Section 70 under the general
heading, ““The Estate’, Representative Henderson noted
that “property of every kind and description which
prior to the filing of the petition might by any means
have been transferred by the bankrupt or which might
have been levied upon and sold under judicial process
against him, will vest in the trustee”. (emphasis
added)?°
In conclusion, the legislative history of bankruptcy
statutes from the Bankruptcy Act of 1800 to the most
recent amendments of. the present Act does not address
the precise question of whether a tax refund due a
bankrupt is “property” within the meaning of §70a(5).
The Federal income tax laws did not provide for
1955 Cong., 2d Sess. (1897).
7°31 Cong. Rec. 1788 (1898) (Remarks of Representative
Henderson).
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10
withholding of income taxes until 1943,7' and since
1943, as indicated above, there has been virtually no
legislation dealing with Section 70a. One thing is clear,
however. The word — “property” — within the context
of Section 70a and preceding bankruptcy acts has been
given as broad a meaning as possible.
B. Legislative Background of Section 6 of the
Bankruptcy Act.
Congress’ intent to give the term “property” a very
broad construction becomes more apparent when
Section 70a is read in conjunction with Section 6 of
the Bankruptcy Act, -— entitled “Exemptions of.
Bankrupts’’.2? Section 70a is essentially a creditor-
oriented provision securing to the creditors the property
of the bankrupt. The bankrupt’s interests are then
brought to bear through Section 6.
The purpose of Section 6 is to exempt certain
property of the bankrupt from seizure by his creditors,
giving him the property exemptions in force in his
domiciliary state, together with any applicable Federal
exemptions. The protective effect of Section 6 is
reflected in Section 70a of the Act, which excludes
exempt property from the bankrupt’s estate.
The history of the Bankruptcy Act and_ its
predecessor acts make clear that Congress included
Section 6 in the Act to assure that bankrupts would
have an opportunity to make a “fresh start”,
21Current Tax Payment Act of 1943, 1943 Cum. Bull. 1239; H.
Rept. No. 401, 78 Cong., Ist Sess., 1943 Cum. Bull. 1283; S. Rept.
No. 221, 78th Cong., Ist Sess., 1943 Cum. Bull. 1314.
211 U.S.C. §24.
i
11
unencumbered by their prior debts. Congress decided
that this purpose could best be achieved through
incorporation of the individual exemption laws of the
various states. .
This purpose of Section 6 becomes obvious when the
Section is read in historical context. Each of the United
States bankruptcy statutes, beginning with the Bank-
ruptcy Act of 1800, made some provision for
protecting certain items of property from seizure by
creditors.
As previously noted, the Act of 1800, and the
subsequent Bankruptcy Act of 1841, dealt with
exemptions by specifying items of property which
could be retained by the bankrupt. No reference was
made to state law. Both of these acts, however, had
very short duration?* and during the interim periods
when no Federal bankruptcy statutes were in effect, the
individual states adopted their own insolvency laws to
deal with creditor-debtor problems.%* These statutes
generally listed homestead and other real and personal
property which were exempt from seizure by creditors.
These listings varied widely from state to state.?*
In the 1860's, following the financial panic of 1857,
pressure again mounted for a Federal bankruptcy
statute. In order to gain support from western states,
which generally had adopted broad exemptions in their
insolvency laws, Congress incorporated state exemptions
within the context of a Federal bankruptcy statute —
As previously noted, the Bankruptcy Act of 1800 was
repealed in 1803 and the Bankruptcy Act of 1841 was repealed in
1843.
*Warren, supra, noted 16, at 91.
57d. at 100.
PRL LSI SEE OLY I SEP IO IES
omni
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12
which became the Bankruptcy Act of 1867.7° This
same concept was repeated when Section 6 was adopted
in the present Bankruptcy Act of 1898.
A great deal of Congressional concern was expressed
in 1867 and 1898 that the Acts, by incorporating state
exemptions, would not meet the constitutional require-
ments of uniformity.?2”7 This concern was apparent in
the speech of Representative Henderson, Chairman of
the. Committee on the Judiciary, when he opened the
debate on S.B. 103578 which was enacted to become
the Bankruptcy Act of 1898, as follows:
“The exemptions of the bankrupt will be allowed
as prescribed by the State laws in force at the time
of the filing of the petition in the State wherein
he had his domicile for six months, or the greater
portion thereof, immediately preceding the filing
of the petition.
“It has been suggested that since the exemption as
provided by each of the States is different from
those provided by every other State, a law which
does not interfere with them may be unconstitu-
tional because not uniform. There are two replies
to his suggestion: The first is that the last
bankruptcy law recognized the validity of the
exemption of the State laws as of a certain date
and notwithstanding such provision was held to be
constitutional by the courts.
“The second reply is, that the proposed law does
not undertake to confirm, or to in any sense
©The Bankruptcy Act of 1867 was repealed in 1878.
27The Supreme Court upheld the constitutionality of Section 6
in Hanover National Bank v. Moyses, 186 U.S. 181 (1901).
28Note 19, supra.
13
enact, the laws as in force in the several States,
but simply refuses to interfere with such laws or
to make any provision for providing other
exemptions for bankrupts. If the law should be
criticised in this, that it does not provide a
uniform exemption different from the States or
undertake to exercise any control over State
legislation upon that subject, the reply is that it is
not necessary for it to do so as a legal proposition,
and that it is impracticable for it to do so as a
matter of policy.
“The needs of the poor man in each of the States
is different from the needs of poor men similarly
situated in other States — that is to say, in order
for an insolvent debtor to protect his family from
want in, say Florida, he must have household
belongings of quite a different character than
would be necessary if he was a resident of, say,
Maine or Oregon. If it would undertake to provide
a uniform exemption in money value, the same
difficulties would be encountered.
“That is to say, the amount that would be
necessary to provide the modest belongings which
the insolvent debtor should have for the needed
protection of his family in, say, Connecticut,
would be very much less than would be required
for the same debtor to make like provision if he
were a citizen of Montana or Texas.
“In view of all which it has been thought
advisable by the committee not to endeavor to
utilize the bankruptcy law as a means of correcting
State legislation on this important subject. Those
who may fear that the bill on this account is
Ee Te SME |
Aa ET Nee eee © Oe Reg
J ge aden’
ali Na aes
14
unconstitutional may calm their fears, as there is
not the slightest danger in this respect.’’?®
The above remarks, appear from seeking to appease
those members of Congress who felt this section was
unconstitutional, give broad insight into Congress’ view
of the purpose of Section 6. Most. importantly,
Representative Henderson’s remarks establish that Con-
gress intended that the state exemptions authorized in
Section 6 be the only exemptions available to
bankrupts under the Act, i.e., Congress “refuses ... to
make any provision for providing other exemptions for
bankrupts”. Congress, for policy reasons, left to the
individual states the task of determining how much and
what type of property should be retained by the
bankrupt, and thereby reconciled the debtor and
creditor interests inherent in this decision.
The Chandler Act of 1938°°, which materially
amended the Act of 1898, made no basic change in
Section 6. An amendment was adopted which added to
Section 6 any exemption “prescribed by the laws of the
United States”. This amendment carried over to the Act
the exemptions for pensions, soldiers’ bonuses, and
other payments which were then contained in other
Federal statutes.*! Provisions were also added to
Section 6 which (1) provided that no exemption should
be taken out of fraudulently transferred property
2931 Cong. Rec. 1787 (1898) (Remarks of Representative
Henderson).
Note 11, supra.
31Remarks of Mr. Adair, Member, National Bankruptcy Com-
mittee, Hearings on H.R. 6439, Revision of the Bankruptcy Act,
before the House Committee, June 1-9, 1937.
15
recovered by the estate and (2) clarified the definition
of domicile for the bankrupt. No other Federal
exemption, general or otherwise, was added to the Act.
The 1938 Chandler Act was written by a group
known as the National Bankruptcy Conference in
conjunction with the House Committee on_ the
Judiciary.*2 The following remarks of one of the
Conference members, Mr. Jacob I. Weinstein, during the
1937 hearings on the legislation, are interesting insofar
as they express why the Conference decided not to
adopt national exemptions in place of the state
exemptions embodied in Section 6:
“The National Conference has given this subject
careful study. At one of its early sessions it
considered the- advisability, for the purposes of the
Bankruptcy Act, either establishing an absolute
uniformity of exemptions in disregarding the
varying State laws or of permitting the present
diversity of exemptions to remain, but with a
limitation upon the maximum amount of such
exemptions. It found, however, that the subject
necessarily involved a study of the exemption
statutes of each State and of the State decisions
thereunder, and ‘of the local conditions and
circumstances which give rise to these varying
exemption allowances. After a cursory examination
of the various exemption laws it being apparent to
us that in the present economic condition of the
country, it would be most inadvisable to attempt
_ any changes. It also occurred to us that any
limitation on the present exemption allowed under
_the bankruptcy law would be met with vigorous
political opposition, particularly from the repre-
et
°°H. Rept. No. 1409, 75th Cong., Ist Sess., 2-3 (1937).
P
Be... a saL RE AS ERRERRRER ERED RNNNENENENENN
cae CaS
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16
sentatives of farmer States. Therefore, we aban-
doned for the present the drafting of a uniform
exemption provision.’’**
In conclusion, the Congressional intent first expressed
by Congress in 1898 when it enacted Section 6 is still
embodied in that Section today. State exemptions™ are
the exclusive means by which Congress intended to
protect the property of bankrupts from seizure by
creditors.
In prior decisions, this Court has itself recognized
that Congress decided to rely on state exemption laws
rather than establishing general Federal exemptions. In
Holden vy. Stratton, 198 U.S. 202 (1905), the Court had
occasion to reconcile the exemption provisions of
Section 6 with the provisions of Section 70a(S) which
specifically dealt with the disposition of life insurance
policies. The question in that case was whether a life
insurance policy, admittedly exempt under Washington
state law, passed to the bankrupt by virtue of the state
exemption or to the trustee by virtue of the specific
proviso in Section 70a(5) dealing with life insurance.
The Court held that Section 6 qualified the entire
Section 70a, including the portion dealing with life
insurance, and the policy passed to the bankrupt. In so
holding, the Court noted that “[i]t has always been the
policy of Congress, both in general legislation and in
Hearing on H.R. 6439, note 31, supra at 388. Mr. Weinstein
introduced with his remarks a table comparing the various state
property exemptions then in force.
* As noted, the Chandler Act of 1938 added to Section 6 any
exemption “prescribed by the laws of the United States”. See note
31, supra.
17
bankrupt acts, to recognize and give effect to the state
exemption laws”. 198 U.S. at 213-214. .
The Court’s recognition of state exemptions as the
exclusive means by which bankrupts were allowed to
retain some property was set forth in Hanover Nationai
Bank v. Moyses, 186 U.S. 181 (1901). In that case, the
Court was faced with the contention that Section 6, by
incorporating various state exemptions into the Act,
rendered the 1898 Act unconstitutional as not being
“uniform” under the Constitution. The Court rejected
this argument stating that the Act was uniform “when
the trustee takes in each state whatever would have
been available to the creditors if the bankrupt law had
not been passed”. 186 U.S. at 190. This quote
implicitly recognized the absence of any general Federal
exemptions under the Act.
In sum, Congress’ decision to adopt state exemptions
within the context of the Bankruptcy Act represents an
obvious compromise between debtor and creditor
interests. On the one hand, such exemptions represent -
Congressional intent to preserve certain items of
property for the bankrupt. On the other hand, the very
existence of exemptions reaffirms the concept that all
property not exempt is to be vested in the trustee for
distribution to creditors.
’
Il.
A TAX REFUND IS “PROPERTY” WITHIN THE
_. MEANING OF SECTION 70a(5) OF THE BANK-
RUPTCY ACT’
A. The development of the “fresh start”
doctrine prior to Segal v. Rochelle and Lines
v. Frederick.
In Wetmore v. Markoe, 196 U.S. 68 (1904), this
Court held that alimony arrears awarded to a wife
LET ig ng ge ve
Pomae STS ewe ee
ye rere ery contr ae .
against her former husband for support of herself and
their children in accordance with a final decree of
absolute divorce was not a provable debt barred by
discharge in bankruptcy. After a discussion of the
merits of the case, the Court made the following
observation (at 77):
**... Systems of bankruptcy are designed to relieve
the honest debtor from the weight of indebtedness
which has become oppressive and to permit him to
have a fresh start in business or commercial life,
freed from the obligation and _ responsibilities
which may have resulted from business misfor-
tunes. Unless positively required by direct enact-
ment the courts should not presume a design upon
the part of Congress in relieving the unfortunate
debtor to make the law a means of avoiding
enforcement of the obligation, moral and legal,
devolved upon the husband to support his wife
and to maintain and educate his children.”
(Emphasis added.)
The “fresh start” sanctioned by this early decision
was to relieve a debtor from past debts which were
dischargeable in bankruptcy. It is submitted that this is
the very reason why the Petitioner, like other persons
who are financially distressed, file for bankruptcy.
In Burlingham v. Crouse, 228 U.S. 459 (1913) a
proviso of Section 70a of the Bankruptcy Act was
interpreted to permit a bankrupt to retain a life
insurance policy free from his creditors after he paid to
the trustee the cash surrender value (which is all that
could have been realized by the trustee for the
creditors). The Court also considered the fresh start
given the debtor as follows (at 473):
““... It is the twofold purpose of the Bankruptcy
Act to convert the estate of the bankrupt into
+
cash and distribute it among creditors and then to
give the bankrupt a fresh start with’ such
exemptions and rights as the statute left un-
touched ... We think it was the purpose of
Congress to pass to the trustee that sum which was
available to the bankrupt at the time of
bankruptcy, as a cash asset, otherwise to leave to
the insured the benefit of his life insurance.”
(Emphasis added.)
In this context, a fresh start meant leaving the bankrupt
with exempt property and the right to redeem his
insurance policies under the proviso of Section 70a.
The Court decided that a discharge in bankruptcy
covered the express obligation of a bankrupt’s indemni-
fication of his surety for any loss sustained upon a
failure to perform a building contract. Williams v. U. S.
Fidelity Co., 236 U.S. 549 (1915). Even though the
surety did not sustain the loss and pay the damages
until after the bankruptcy petition had been filed, the
indebtedness was discharged. In reaching this conclu-
sion, the Court reasoned (at 554-555):
“It is the purpose of the Bankruptcy Act to
convert the assets of the bankrupt into cash for
distribution among creditors and then to relieve
the honest debtor from the weight of oppressive
indebtedness and permit him to start fresh free
from the obligation and responsibilities consequent
upon business misfortunes. Wetmore vy. Markoe,
196 U.S. 68, 77; Zavelo v. Reeves, 227 U.S. 625,
629; Burlingham v. Crouse, 228 U.S. 459, 473.”
(Emphasis added.) .
The application of the “fresh start” doctrine was also
referred to as “a new opportunity in life” in Stellwagen
v. Clum, 245 U.S. 605 (1918), as follows (at 617):
19
_ _— ieee Fe oo: a orn SLO LLL LOL REEL EEL LOLOL EGE
20
; “The federal system of bankruptcy is designed not
only to distribute the property of the debtor not
by law exempted, farily and equally among his
creditors, but as a main purpose of the act, intends
to aid the unfortunate debtor by giving him a
: fresh start in life, free from debts, except of a
certain character, after the property which he
; owned at the time of bankruptcy has been
administered for the benefit of creditors. Our
‘ decisions lay great stress upon this feature of the
law — as one not only of private but of great
public interest in that it secures to the unfortunate
debtor, who surrenders his property for distribu-
tion, a new opportunity in life.”
: When Local Loan Co. v. Hunt, 292 U.S. 234 (1934),
} was decided, there was ample precedent by this Court
+ that a bankrupt should not be denied a. “fresh start” or
new opportunity in life subsequent to his bankruptcy.
> However, the “fresh start” or “new opportunity in life”
accorded a bankrupt upon discharge, as the cases
discussed herein suggest, is not to the detriment of his
creditors. All of those decisions recognize that the
debtor’s fresh start is conditioned upon a transfer of _ -
“the property which he owned at the time of
bankruptcy. unless exempt, to the trustee for the
= benefit of creditors.
In Local Loan Co., supra, this Court ruled that a
state court could not enforce an assignment of future /
wages that had been made by the bankrupt prior to
filing a petition in bankruptcy. In an unanimous
decision, this Court reasoned (pp. 244-245):
“One of the primary purposes of the bankruptcy
act is to ‘relieve the honest debtor from the weight
of oppressive indebtedness and permit him to séart
afresh free from the obligations and responsibilities
”
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21
consequent upon business misfortunes.” Williams vy.
U.S. Fidelity & G. Co., 236 U.S. 549, 554-555.
This purpose of the act has been again and again
emphasized by the courts as being of public as
well as private interest, in that it gives to the
honest but unfortunate debtor who surrenders for
distribution the property which he owns at the
time of bankruptcy, a new opportunity in life and
a clear field for future effort, unhampered by the
pressure and discouragement of preexisting debt.
Stellwagen v. Clum, 245 U.S. 605, 617; Hanover
National Bank v. Moyses, supra; Swarts v. Fourth
National Bank, 117 Fed. 1, 3; United States v.
Hammond, 104 Fed. 862, 863: Barton Bros. vy.
; Texas Produce Co., 136 Fed. 355, 357; Hardie v.
Swafford Bros. Dry Goods Co., 165 Fed. 588,
591; Gilbert v. Shouse, 61 F.2d 398.... When a
person assigns future wages, he,%n effect, pledges
his future earning power. ... The new opportu-
nity in life and the clear field for future effort,
which it is the purpose of the bankruptcy act to
afford the emancipated debtor, would be of little
value to the wage earner if he were obliged to face
the necessity of devoting the whole or a
considerable portion of his earnings for an
indefinite time in the future to the payment of
indebtedness incurred prior to his bankruptcy.”
(Emphasis added.)
The Court determined that an assignment of future
wages made prior to bankruptcy could not be
sanctioned because such wages are not property of the
’ debtor at the time of bankruptcy.** In fact, the
assignment of future wages was given by the debtor as
35292 U.S. at 243.
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22
security for a loan made by Local Loan Company to
the debtor prior to bankruptcy, and the indebtedness
was discharged in the bankruptcy proceeding. Obvi-
ously, the enforcement of the assignment, sought by
the loan company in a post bankruptcy proceeding,
would have frustrated the fundamental purpose of a
bankruptcy discharge, namely to give the debtor a fresh
start unencumbered with debts and obligations in
existence at the time of bankruptcy.
While the Court has cited the “fresh start’’ doctrine
for the purpose of upholding the bankrupt’s right to
future wages and freedom from pre-bankruptcy debts
and obligations, it refused to apply the doctrine, in a
very difficult factual situation. In Legg v. St. John, 296
U.S. 489 (1936), it was decided that the vested right of
a bankrupt to receive disability benefits in the future
under a paid-up insurance contract passed to the trustee
in bankruptcy. Mr. Justice Brandeis, speaking for a
unanimous court, observed (pp. 495-496):
“{T]he obligation of the company to pay
disability benefits in the future is not after-
acquired property. It is property which was
acquired by Legg long before the adjudication, and
fully paid for by premiums paid before the
adjudication. Nor are the benefits payable after the
adjudication in any sense future earnings. They are
not the fruit of anything to be done by Legg after
the adjudication. The right to secure disability
benefits in the future does not differ from any
other right acquired before adjudication to receive
money thereafter. It is in essence an annuity
purchased and paid for prior to the adjudication.
Like’ other property, it passed to the Trustee,
unless exempted by the law of the bankrupt’s
domicile. The principle declared in Local Loan Co.
v. Hunt, 292 U.S. 234, is not applicable here.”
a Rr gee o> caget .
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OE LR ETE EOE I EB i aT
23
The Court noted (at 496-497) that Tennessee, the
debtor’s domicile, did not exempt disability benefits.
The reference to the Local Loan Co. decision deserves
some comment. Presumably the debtor argued that he
was being denied a fresh start and that the disability
benefits consituted after-acquired property. It is impor-
tant to understand the distinction which Justice
Brandeis made. Like an income tax refund, the
disability benefits “tare not the fruit of anything to be
done” after bankruptcy and such benefits do not
“differ from any other right acquired before bank-
muptcy to receive money thereafter.” No doubt, this
was a difficult decision to render because the effect was
to deprive a disabled person of benefits which he
obviously needed to purchase food, clothing and
shelter. However, it was the correct decision because
the Bankruptcy Act, then and now, requires that result.
In sum, it is clear that the “fresh start” doctrine,
discussed in cases interpreting certain provisions of the
Bankruptcy Act, including Section 70a is simply a
characterization of the benefits flowing to the debtor
after bankruptcy-relief from the obligation of pre-bank-
tuptcy debts, retention of exempt property provided in
Section 6 of the Act, and freedom to accumulate future
wealth.
It is likewise clear that none of these cases, in any
way, supports Petitioner’s claim to an income tax
refund derived from pre-bankruptcy wages. The various
discharge benefits discussed in the cases are of no help
to Petitioner. In fact, the holding of Legg not
considered in Petitioner’s brief, interprets the ‘“‘fresh
start” doctrine as inapplicable to a stituation in
principle the same as the one presented herein.
a a I Pave ba’
24
B. Segal v. Rochelle and Lines v. Frederick.
As a general rule, an income tax refund due th
bankrupt at the time of filing the petition has bee
considered as property within the meaning of Section
70a(5), except for two .recent decisions.*® Theg
exceptions are a result of two lower courts’ application
and interpretation of two recent cases decided by this
Court.
In Segal v. Rochelle, 382 U. S. 375 (1965) this Cour §
determined that a refund arising out of a business lo §
incurred prior to bankruptcy was property owned by
the bankrupt and “transferable” at the time that th
bankruptcy petition was filed and, therefore, passed
the trustee, in accordance with §70a(5S) of th
Bankruptcy Act. In late 1961, voluntary bankruptc
petitions were filed by Gerald Segal, Sam Segal ani
their business partnership. After the close of 1961 (th
taxable year of the loss), the trustee applied for incom
tax refunds for both of the individual bankrupts.*’ Tk
operating losses underlying the refunds had be
incurred by the partnership during that part of 1%)
which was prior to the filing of the petitions z
bankruptcy.** The losses were carried back to the yex
%Calverly, Income Tax Refunds Due Wage Earners, J. of Nz
Assn. of Ref. in Bankruptcy 8, 10 (Jan. 1965). Rev. Rul. 72:3%
1972-2 CB 632; In re Kingswood, 343 F. Supp. 498, 504 (CD
Calif. 1972). In re Perry, 225 F. Supp. 481 (N.D. Ohio 1963).
37Presumably, Applications for Tentative Carryback Adu
ments (IRS Form 1139) were filed by the trustee. See Income Ia
Regulations § 1.641 1-1(a) and (b).
38382 US. at 376.
25
1959 and 1960 to offset net income on. which the
Segals had both paid taxes.*?
379) that “‘[i]t is impossible to give any categorical
definition to the word ‘property’ nor can we attach to
it in certain relations the limitations which would be
attached to it in others.’’ According to the Court, the
_ purposes of the Bankruptcy Act must govern whether
an item is classed as “‘property.”
The Court then reasoned (at 379):
“(T]he main thrust of §70a(S) is to secure for
creditors everything of value the bankrupt may
possess in alienable or leviable form when he files
his petition. To this end, the term ‘property’ has
been construed most generously and an interest is
not outside its reach because it is novel or
contingent or because enjoyment must be post-
poned.””
Further, the Court suggested (at 379):
“However, limitations on the term do grow out of
the purposes of the Act; one purpose which is
highly prominent and is relevant in this case is to
leave the bankrupt free after the date of his
petition to accumulate new wealth in the future.”
Re Ss & 8S BS
SAemek re So ke Sse est aA A
om:
This purpose is illustrated by three examples: (1)
future wages of the bankrupt; (2) inchoate right to a
bequest or promised gift; and (3) an attorney’s right to
a contingent fee with respect to litigation pending at
*The refunds to Gerald Segal were in the amounts of $283.07
ad $1,608.21 for the years 1960 and 1959, respectively; and the
refunds to Sam Segal for 1960 and 1959 were $505.63 and
$1,839.41, respectively.
In examining Section 70a(5), the Court noted (at
ee PE e rt > 2 STR RSID LS RST ON PO
REN ARB bd
jah inl Mi ee”
‘annual period when his employer shut down the plant
POR eter a anes
a
the date of bankruptcy.*° In each of these examples, on
the date of bankruptcy, the debtor had no right to th
asset in issue, and it has been recognized x
fundamental to the Bankruptcy Act that the debtors
assets acquired after bankruptcy are not subject tof
debts and obligations dischargeable in bankruptcy. See
Local Loan Co. v. Hunt, supra. The holding of Segal is
entirely consistent with the earlier fresh start case f
discussed herein.
The Court then concluded that the loss-carryback §
refund claim was “‘sufficiently rooted in the pre-bank —
ruptcy past and so little entangled with the bankrupts F
ability to make an unencumbered fresh start that ith
should be regarded as_ property under Section
70a(5)”.*! Subsequently, this phrase has been cited and —
applied by this Court in deciding whether layoff of
vacation pay, accrued but unpaid at the time off
bankruptcy, passed to the trustee as “property” undef
Section 70a(5).
In Lines v. Frederick, 400 U.S. 18 (1970), af
employee of a large manufacturing company hif
accrued lay-off pay of $137.28 at the time he filed his
petition. He could collect this sum either during tk
26
in which he worked, or on final termination of hs
employment. Also involved in this case was another
employee, who had accrued vacation pay of $144.1
which he could draw either on termination or under:
conventional voluntary vacation plan of his employer
In deciding that the lay-off and vacation pay was noi
property within the meaning of Section 70a(5), th
#382 US. at 379-380.
411d. at 380.
27
Court inferred that the nature and relationship of the
asset resembled future wages. The Court noted (at p.
20) that the debtors were. wage earners whose sole
source of income prior to and subsequent to bank-
ruptcy was weekly earnings and that “the function of
their accrued vacation pay is to support the basic
requirements of life for them and their families during
- brief facation periods or in the event of layoff.” Lastly,
the Court suggested that “[T]he wage-earning bankrupt
who must take a vacation without pay or forego a
_yacation altogether cannot be said to have achieved the
‘new opportunity in life and [the] clear field for future
effort, unhampered by the pressure and discouragement
of pre-existing debt’, ... Local Loan Co. v. Hunt,
_ supra, which it was the purpose of the statute to
_ provide.”
This Court in Lines recognized vacation pay as having
: a unique function in that-it-was related to a short and
determinable period of non-labor which would occur
- after bankruptcy. The Court focused on the vacation as
a necessary event associated entirely with the post-bank-
_mptcy future. One of the debtors in Lines was in fact
forced to take a vacation, occasioned by an annual two
week shutdown of his employer’s plant. In_ his
dissenting opinion, Justice Harlan noted that if the
employee lost the lay-off pay which had accrued to the
date of bankruptcy, he would have had only three days’
pay coming when his employer shut down the plant.
Thus, the Court treated vacation pay as analogous to
the future wages at issue in Hunt, noting that if the
bankrupts were forced to live through a post-bank-
tuptcy vacation or lay-off period without pay, they
would lack a “clear field for future effort’’.
ile Sindh Wat he ads alebancaaaaadatD
er ee ee
EI eRe Bae: a.
eS .
C. The conflicting holdings of Cedor, Kokoszka
and Gehrig. :
28
The Segal and Lines decisions formed the centr
basis for several recent conflicting decisions dealing with
income tax refunds,*? which this Court is to resolve bg
its decision herein. As previously noted, it has been the
general practice to include in the bankrupt’s estate
income refunds due at the time of bankruptcy”).
Since the Segal and Lines decisions, this practice hs
been under attack. The conflicting approaches taken by
the Second, Eighth and Ninth Circuits can kh ©
summarized as follows: :
1. In re Cedor,™ the Ninth Circuit held that: 3
(a) The portion of a refund attributable to mini:
mum**> withholding does not pass to the trustee and
can be retained by the Bankrupt.
Bae Ls ae
*2For general analysis and review of issues presented to thi
Court see Note, The Income Tax Refund as a Possible Asset of:
Wage Earner’s Bankruptcy Estate, 87 Harv. L. Rev. 395 (1973)
Comment, Title to Property - Employee Bankrupt’s Income Ta} -
Refunds, 4; . Bankr. LJ. 239 (1973); Note, Treatment o'|
Income Tax in Bankruptcy After Lines v. Frederick, 7:|_
Mich L. Rev. 331 (1973); Note, The Withholding Tax in th\
Bankruptcy Context, Brooklyn L. Rev. (1974 - tok
published).
Note 36, supra.
“470 F.2d 996 (9th Cir. 1972).
“SMinimum withholding means that the employee claimed th]
correct number of withholding exemptions on his IRS Form W+}
which he must execute upon beginning his employment. Incom|
Tax Regulations, Section 31.3402(f(2)}-1. If his allowable exemp
tions increase during the course of his employment, he m
execute another Form W-4; e.g., he marries, has a child, bs
itemized deductions increase, etc. See Section 3401(f(1) of &F
Internal Revenue Code of 1954. The determination of the amout >
bade remand cont Nd IK Sah alice cin
Waeky
I Sc) US I ma lie a a
A a ? i ol a. we oo
we
Fe FR aR ge pe DE yeh toe Mia te -
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=
(b) The portion of a refund attributable to
optional*® withholding is “property” which passes to
the trustee pursuant to Section 70a(5), but only to the
extent of 25% in accordance with the Consumer Credit
Protection Act, Sections 1671-1677.
2. In re Kokoszka,*’ the Second Circuit ruled:
(a) An income tax refund, attributable to either
minimum or optional withholding, is “‘property” within
the meaning of Section 70a(5) and passes to the
- trustee.
29
_ of withholding was changed by the Revenue Act of 1971. Public
| Law 92-178, 92nd Cong., Ist Sess., §208 (1971). These changes
have been codified as Section 3401(f), supra. The reason for the
amendments was to enable wage earners to have the correct
amount of income tax withheld and avoid both the over and under
withholding. See H. Rept. No. 92-533, 92nd Cong., Ist Sess.,
1972-1 Cum. Bull. 518-520. However, a wage earner may still claim
fewer than the maximum withholding exemptions permitted-him
under the statute. Also, he may unconsciously cause his employer
to over-withhold if his allowable deductions increase measurably
during the tax year and he does not increase his withholding
exemptions. For example, a married wage earner with an income
- under $8,000 should claim one additional withholding allowance
_ for each $750 of deductions which exceed $1,700, the base figure
_ in the withholding tables. Therefore if his allowable deductions
during the year are between $1,701 and $2,450, he should claim
one additional allowance; if the amount of such deductions are
between $2,451 and $3,200, he should claim two additional
exemptions. If the correct number of withholding exemptions are
claimed, neither over nor under withholding will occur assuming
_ the wage earner works the entire year.
a rma en RR Sel Shen Gd I Paha deaads om ba 0
Ue Lear
“Optional withholding occurs when a taxpayer claims fewer
than his permitted withholding exemptions. See Section
3401(f{1), supra. This action results in more income tax being
withheld than is necessary. —_
“7479 F.2d 990 (2d. Cir. 1973).
a FE IP LPO YEE DEE RELA ELD SIE OEE OE IE OEE
Ce
(b) Since such tax refund is not “‘earnings”’ for the
purposes of the Consumer Credit Protection Act. the
entire refund, rather than only 25%, belongs to the
trustee.
i 3. In re Gehrig,*® the Eighth Circuit concluded that:
(a) The portion of a refund attributable to minimum
withholding does not pass to the trustee and can le
retained by the bankrupt. .
(b) To the extent that a tax refund may bey
attributable to the optional withholding by the debtor, —
it is “property” within the meaning of Section 70a(5) ;
and the provisions of the Consumer Credit Protection ©
Act do not apply to any portion of such refund.
30
C8 A ea ES cee |
It is difficult, if not impossible, to perceive any basis —
for the distinction drawn by the Eighth and Ninth
Circuits between optional and minimum withholding
Certainly, the language of Section 70a(5) makes no
such distinction. It would seem to follow logically that}
if a refund is due at the time of bankruptcy with]
respect to taxes withheld from wages paid prior to}
bankruptcy, whether such refund is the result of 4
optional or minimum withholding should not answer}
the question whether it is “property” under Section}
70a(5). If the refund is “property” because the debtor
had his employer over withhold, it follows that it i>
also “property” if the employee claims the correct
number of withholding exemptions because the test
depends upon whether the refund claim is transferabk f
by the debtor at the date of bankruptcy, and nop
whether voluntarily withheld as “forced savings” of
involuntarily withheld as required by law. :
ne AT ete
;
4
i
|
;
:
|
j
|
481974 CCH Bankruptcy Reports 965,116 (8th Cir. 1974).
——
al
Ss se wee anunsRe Ss ke aA Ss S&S
31
D. Application of Segal and Lines.
As previously noted, there is nothing in the history -
or language of Section 70a to exclude a tax refund as
“property”. In fact, “it was the intent of Congress to
secure to creditors all property of a bankrupt’’.*? The
laws of Connecticut do not exempt a tax refund. as an
exempt asset.°® The tax refund is also assignable under
Connecticut law.*' Petitioner even admits that Connect-
icut law does not exempt wages.*? Impliedly, Petitioner —
admits that the tax refund is not an exempt asset under
the laws of the State of Connecticut; otherwise, there
would be no reason to argue that this Court should
decide thatyit is not “property” under Section 70a(S).
_ In effect, this Court is being asked to create a Federal
_ exemption that would exempt the tax refund, which
tax refund would otherwise not be exempt under the
laws of Connecticut.
In order for this Court to decide in Petitioner’s favor,
_ it must ignore the holding in Legg v. St. John, supra, as
_ well as the meaning and application of Sections 70a(5)
_ and 6 of the Bankruptcy Act. Moreover, the position
urged by Petitioner would be extremely detrimental to
the provisions of the practice under the Bankruptcy
Act, because Sections 70a(5) and 6 would have a
meaning wholly inconsistent with long standing inter-
i pretations by this Court and lower courts which must
supervise bankruptcy proceedings daily.
“Segal v. Rochelle, at 379.
See §52-352 of the laws of Connecticut.
*'479 F.2d at 993; this fact is not in dispute.
Brief for Petitioner at 19-20.
Se ee eee Se ere eer tee fe ree es
siteedient ta
32
Basically, Petitioner is requesting this Court to res
such a decision on the holding of Lines v. Frederick.
supra. Petitioner’s interpretation of the Lines decision
disregards the meaning and application of the fresh stan
doctrine, and ignores the point that lay-off and vacation
pay were considered by this Court equivalent to
post-bankruptcy wages. Once Petitioner’s analysis of
Lines is rejected, he is left without any legal argumen;
that the refund is not property under Section 70a(5).
The following quote from the. opinion of the}
Bankruptcy Judge ably explains the nature of a
income tax refund and demonstrates why it is property ©
within the meaning of Section 70a(5):
. First, wages are withheld under federal law |
for application on an eventual tax liability and are |
paid to and become the property of the —
government. Second, the wages are not withheld |
for taxes under any designed program that they or |
any portion of them shall be returned to the
bankrupt to insure his_ future support when he is
without daily earnings. Third, a claim to a refund
arising out of taxes voluntarily or involuntarily
paid out of wages is quite the equivalent of savings
accumulated by a bankrupt out of his yearly
earnings and any such savings held by a bankrupt
at bankruptcy.— whether in the form of cash ina |
=
—
—}~ a ee —
safe deposit box or in a bank account — became.
the property of the bankruptcy estate. Fourth, a
claim to a refund is not distinguishably different
from any other property. of property right which a
bankrupt might have acquired by using a portion
of his annual wages to make a loan to another, to
buy securities or to acquire an automobile, all of |
which pass to a trustee in the event of bankruptcy.
Accordingly, it is the view. of this court that a
claim to a tax refund for excess taxes paid from
ek gw ee ae
33
esi wages is quite something different from a right to
ck receive accumulated wages in the future which
were specifically designed to substitute for future
| lack of earnings. The concept of Lines is not
“a applicable to a tax refund. Such a refund is a
property which passes to a trustee in bankruptcy
" _ under section 70a(5). (App, at 7-8).
vat Apart from ignoring the differences between an
5), | mcome tax refund and the accrued vacation pay at
the f _ issue in Lines, Petitioner overemphasizes the importance
that an income tax return has an origin in the
bankrupt’s wages and deserves special protection.
In support of this position, Petitioner cites Sniadach
_». Family Finance Corp., 395 U.S. 337 (1969); James v.
| Strange, 407 U.S. 128 (1972); Fuentes v. Shevin, 407
US. 67 (1972); Lynch v. Household Finance Corp. 405
U.S. 538 (1972), None of these causes concerned the
issue presented before this Court. These respective
decisions address other problems unassociated with the
) Bankruptcy Act and the interplay between Section
4 70a(5) and Section 6. Petitioner advanced the same
argument before the Court of Appeals that wages are a
specialized type of property. The appellate tribunal
‘properly answered this contention as follows (p. 995):
“ .. Just because some property interest had its
source in wages, however, dos not give it special
protection, for to do so would exempt from the
bankrupt estate most of the property owned by
many bankrupts, such as savings accounts and
automobiles which had their origin in wages.”
The Sixth Circuit was faced directly with the issue of
Whether wages earned prior to bankruptcy should be
-_-—=- ee —™ = * TO | Ge CO Cele
[— © Vw — SF - SF TS Te
ae.
given special protection under the Bankruptcy Act. };
that factual situation, the bankrupt had earned wag,
prior to bankruptcy which were unpaid at the date ¢
his bankruptcy filing. The Sixth Circuit determined thy}
wages not exempt under the laws of Ohio constitu
property which should go to the trustee, relying upor
the test set forth by this Court in Segal v. Rochelk
34
<
3
eae ae, PP “
+
a
supra, and noted that the concept of. a “fresh start }
should not be judicially expanded to include “prop
erty” which would otherwise vest in the trustee.
I
I
(
t
(
|
|
f
Once Lines is limited to its own special facts, th. i
criteria for including the income tax refund within th = |
bankruptcy estate is whether the refund is “sufficienth | |
rooted in pre-bankruptcy past”, the tax refund in ismelh |
represented taxes withheld from wages earned by |
Petitioner prior to his filing for bankruptcy. The ta_ i
refund is not the equivalent of future wages and dos |
not relate in any way to future wages.®* At the end '
each year, most wage earners must file a United State) |
Income Tax Return.’* Generally, the person either (If
Pt
a af
In re Aveni, 458 F. 2d 972 (6th Cir.), cert. dtnied, 409 US}
877 (1972).
“379 U.S. at 375: “Accordingly, future wages of the banknr}
do not constitute property at the time of bankruptcy... ..” 4
SSAn unmarried taxpayer with gross income in excess ¢
$2,050.00 and married taxpayers, filing a joint retum, with >
combined gross income in excess of $2,800.00 must file incom h
tax returns. See Section 6012(a) of the Internal Revenue Cod cif
1954. However, those persons earning less may still file a retumap |
order to claim a refund. This is what Petitioner did. He and hiswkf *
filed a joint return showing income of $2,322 and claimed a refuni
of the entire amount withheld from his wages ($250.90). Appr e
dix, page 19. fi
: :
3 i,f pays no additional tax because the amount. withheld
ag} equals the income tax due; (2) receives a tax refund
, gf because the amount withheld exceeds the income tax
that} due; Or (3) he must pay more tax because the income
v4 tax due exceeds the amount withheld. In the instant
por case, the bankrupt filed his petition on January 5,
elle} 1972, and at that time had a right to a refund for 1971
| because he did not earn enough to pay any tax.**
op During 1971, Petitioner earned $2,322.00, and his
"employer withheld $250.90 based upon two withhold-
th ing allowances claimed by the bankrupt.5? On January
te 5, 1972, the date the bankruptcy petition was filed,
nth | Petitioner had a right to claim a refund from the
sui United States Government for taxes paid during 1971.**
by It is apparent, therefore, that the refund of 1971 taxes
ta is “sufficiently rooted in the pre-bankruptcy past” of
jos Petitioner and certainly not “future wages” which
1g would not be an asset of the bankrupt of the date of
its} | bankruptcy.
(if In Segal, this Court determined that transferring the
' tax claim to the trustee did not hinder the bankrupt
| from starting out on a “clean slate”.*°
Mr. Kokoszka was employed for approximately three months
_ during 1971. See Brief for Petitioner at 2.
| é On or before the date an individual commences a.
me after December 31, 1971, Petitioner's 1971 taxable year
kt® ended, and he was then entitled to any refund for 1971. Petitioner
filed a joint income tax return in mid-February 1972, and the
refund check was received a short time later.
9382 U.S. at 380.
Pp ees bly
‘ciently rooted in pre-bankruptcy past”;
‘the petition;
——o
The ' Petitioner perceives “‘similarities”®™ between th
accrued vacation issue in Lines and the tax refuy
question before this Court. The fact of the matter sf
that the income tax refund: .
1. Relates solely to pre-bankruptcy earnings “sufi
2. It is not created out of “future wages”® by
rather was withheld from pre-bankruptcy earnings;
3. Is a vested right in existence at the time of filin’ |
dy ee wy
Pe a ae Ce ae ee ee ee a)
4. Is not an exempt asset under the laws of the Sta
of Connecticut ;“
5. Has traditionally been made available to creditor
in accordance with long-standing practice throughor
the bankruptcy courts of the United States;
6. Does not deprive the Petitioner of a “fresh star’
or “new opportunity in life” consistent with previog |
decisions. .
If in 1971 Petitioner had loaned $250.59 to a thing
party and had gone into bankruptcy on January :
1972, (as he did), clearly that loan would have beeng
receivable due him and listed on Schedule B-2 (Person
Property) of his Bankruptcy Petition. It cannot q
seriously questioned that this receivable would not hap
Brief for Petitioner at 8-10.
®! Segal v. Rochelle, supra.
27 ocal Loan Co. v. Hunt, supra.
Note 12, supra.
“Note 50, supra.
Note 36, supra.
_— ae
i: been an asset of the bankruptcy estate, i.e., “property”
within the meaning of Section 70a(5). However, the
is effect of Petitioner’s argument to this Court is that the
| joan receivable should not be deemed “property”
| because the debtor needs those funds for a “fresh
| start”. Under this argument, the determination of what
- is “property” would be based on how much money the
Ny debtor needed in the future. It is suggested that the
income tax refund in other cases could be as much as
_ $1,000.%
; The Bankruptcy Act objectives, ‘“‘clean_ slate’’,
a
m
“unencumbered fresh start”, “new opportunity in life”
*and “clear field for future effort” enunciated in pre
Hunt cases, Hunt, Legg, Segal and Lines, are not
® circumscribed by the tax refund going to the trustee.
M The discharge of Petitioner’s $6,105.22 pre-bankruptcy
unsecured debts, satisfies those objectives. |
tf’ Certainly, Petitioner’s income tax refund in the
+ amount of $250.59 would help the debtor to pay for
| post bankruptcy medical or other expenses. However,
mj | the present Bankruptcy Act does not exempt “prop-
y) erty” because the bankrupt could use money to pay
) personal expenses. The proposed Bankruptcy Act,
discussed infra would permit Kokoszka, and other
y, debtors, to retain up to $500 of an income tax refund.
_ “Brief for Petitioner at 17. On March 26, 1974, Donald C.
Alexander, Commissioner of Internal Revenue, announced that the
werage refund was $345 for all tax returns processed to date. See
Reyes Expects to Step Up Tax Audits”. New York Times (March
“1, 1974).
Sie eg Eee Rem z PSOE EGIL LE ION REL POLLED LOL TT
Ye 38
¥
SI RS, mite ap oe
4
THE EXEMPTION OF THE INCOME TAX REFUND
FROM THE BANKRUPT’S ESTATE IS BEING
CONSIDERED BY THE CONGRESS.
mien he
A. Bankruptcy Commission.
There is pending before the Congress the mos
sweeping bankruptcy legislation since the Chandler Ac
was enacted in 1938.°7 On July 30, 1973, th
Commission on the Bankruptcy Laws of the Unite
States, pursuant to its legislative charter, transmitted t
the President, the Chief Justice, and the Congress is
Report, consisting of two principal parts, an analys
SREBESEBBBE BEF
Cio.) ee aT) WAS Kite ete
and evaluation of the present system of bankruptc | I
administration in the United States and recommend: ; ,
tions for changes, including a new Bankruptcy Act.* — :
=
3 e
B. Legislative Recommendations. iq 4
a Ss
The legislation, introduced in both Houses of ty |,
Congress and entitled the “Bankruptcy Act of 1973) Spe
was assigned to the Committees on the Judiciary in tk ant
House and Senate. As yet, neither Committee has unt
§7H.R. 10792, 93rd Cong., Ist Sess., introduced October!
1973; S. 2565, 93rd Cong., Ist Sess., introduced October 11, 19°F
The Bankruptcy Commission was created by Senate Josh
1970), and its members were appointed by the President, the Ch
Justice, President of the Senate and Speaker of the House.
AE a EEA Te
—
legislation will be reintroduced next year and con-
sidered by the Ninety-Fourth Congress.
In Chapter 7 of its Report, the Commission addresses
the subject of exemptions and suggests that they are of
particular importance to the consumer debtor.®? The
major complaint voiced by the Commission is that the
| present Act defers to state laws for what is exempt and
Ae + this has resulted in a lack of uniformity of treatment of
th ‘creditors and debtors.” It proposes to solve this
", problem by legislating the exemptions as a part of the
new Bankruptcy Act. The following quote sums up the
39
te ;
. Commission’s approach to exemptions:
ys “The Commission recommends that kinds of
exempt by state governments form the nucleus of
the federal exemptions with appropriate federal
maximums. This approach avoids the unfairness of
» existing state exemptions laws, most of which are
| archaic, some of which are unduly generous and
some of which are exceedingly niggardly, particu-
larly as to urban residents. .. .’’”!
tc property that traditionally have been treated as
4Specifically, the exemptions include, among other items
} snot relevant, “‘Cash, securities, and receivables, including
“|junpaid personal earnings, accrued vacation pay, and
income tax refund, to the aggregate value of not more
sthan $500.77 In discussing the proposed statutory
th language, the Commission suggests that these assets,
“Report of the Commission on Bankruptcy Laws of the United
»States (hereinafter cited as Bankruptcy Report), Part I, at 169.
"Id.
"id, Part I, at 171.
™This provision is found in Section 4-S03(c\(3) of H.R. 10792,
“pra note 67, at 120, and the same Section in S. 2565, supra note
©67, at 114-115. Of course, it depends on the particular law of the
psiate where the debtor resides whether an income tax refund is
pt. See Vukowich, Debtor’s Exemption Rights, 62 Geo. LJ.
#19, 829-830 (1974).
i
including an income tax refund, are often exempt uni}
state laws.”*> Implicit in this analysis of the cum}
Bankruptcy Act is that such asset is property with
the meaning of Section 70a(5); otherwise, it wou}
make no difference to propose to exempt it. Also, 4:
must be stressed that the interpretation given td
exemption provision of Section 6 is that state |;
governs whether an income tax refund is exempt. Bot
of these conclusions by the Commission are support?
by the cases and legislative history cited earlier in tk
; Brief.
The Report also recommends that “property of tr.
estate” be defined in the proposed Bankmptcy Act a
that “the tests of transferability and leviability undé
state law be abandoned.” Primarily, the Commissic
focuses on the requirement of the present Act th
local law govern not only what is “property of tk
estate” but also the question whether Property :
voluntarily or involuntarily transferable.”* The refe
to state law to determine whether property
transferable, in the opinion of the Commission, §
unnecessarily productive of litigation and produces}
lack of uniformity.” The Commission interpry
Section 70a(5) to cover property “which prior to tk
filing of the petition [the debtor] could by any meay
have transferred or which might have been levied upop
and sold under judicial process against him,
otherwise seized, impounded, or sequestered”’.”’
40
ee a « oo r,s ee eo
ne
tie cq © fe ff res
ANUS ROARS AID Bil Sissi OA alas ili sisi ecabancSc PNM we
foaasoninftPm eG "3
Bankruptcy Report, Part Il, at 128.
™Id., Part I, at 17.
%SId., Part I, at 193.
761g.
"1d.
ee —
: PPLE ILO AL Pp ena ys a> wept warren: -
an Nl Se
4
41
The proposed statutory language would streamline
the definition of “property of the estate” as all
{property of the debtor as of the date of the petition,
with exceptions not material herein, together with
certain other property which can be recovered from
Ji third parties.* In any event, reference to state law,
‘+ even under the proposed Bankruptcy Act, will still be
4 necessary to determine what is the “property” of the
—s | Lass mu - Le ao Le f
debtor, and the Report suggests that “this reference has
4 not proved too troublesome, and what difficulty it may
‘create is far over-shadowed by the difficulty of
Jbankruptcy act, with respect to either what is _ -
codifying rules of property solely for the purpose of
bankruptcy administration’’.”°
After an exhaustive two year study of the present
Bankruptcy Act, the Bankruptcy Commission, its staff
and consultants, comprising the most knowledgeable
and able bankruptcy scholars in the country, has
concluded that the present Act does not produce
uniformity, an essential ingredient of a national
4 “property of the estate” under Section 70a(5) or what
TCO NE HT GE TSR,
property, which would otherwise be part of the
bankruptcy estate, is exempt.®° As discussed above, the
answers to those questions hinge on the state laws of
the jurisdiction where the debtor files his petition. The
changes proposed by the Bankruptcy Commission
would incorporate in the Bankruptcy Act itself the
definition of ‘“‘property of the estate” and the
- exemptions which would be allowed.
*Section 4601(a) of H.R. 10792, supra note 67, at 135-137,
: and S. 2565, supra note 67, at 130-131.
Bankruptcy Report, Part I, at 194.
"Id., Part I, at 169, 193. ;
Tce Se rg ee a
a
Certainly, the findings of the Bankruptcy Commi
sion are entitled to great weight. The interpretatic
given Section 70a(5) of the Bankruptcy Act is that a}
property which could by any means have beef
transferred is property of the estate. This would inch¢
an income tax refund which could have been applig!
for by the debtor on the date of bankruptcy)
Obviously, such an asset would not have been exemptet,
by the €ommission in the new Act unless it We
property’ of the estate.*! E
In this proceeding, Petitioner is asking this Court t+
judicially amend the present Bankruptcy Act to eith
(1) determine that an income tax refund is m#*
“property” within the meaning of Section 70a(5) or (2
decide than an income tax refund is “exempt” withor
reference to Section 6 of the Bankruptcy Act and tt
laws of Connecticut. It would seem that the exhaustir
study and proposed Bankruptcy Act of the Commissa’
on the Bankruptcy Laws of the United States, whichi}
presently pending before the Congress, offers a ma
preferable and traditional way of considering amen}
ments to the present Bankruptcy Act, and ma
particularly, when the changes sought by Petitioy:
would require a new approach to deciding what 4
“property” and what property is exempt, bo
fundamental questions under the Bankruptcy Act.
42
®*!The new definition of “property of the estate” combines
part, present Sections 70a(S) and (6) so that “property”
purposes of the new act would not be different with respect
covering an income tax refund. See Bankruptcy Report, Part ll
148-149.
43
—
THE CONSUMER CREDIT PROTECTION ACT
DOES NOT PRECLUDE THE TRUSTEE FROM
OBTAINING THE ENTIRE INCOME TAX REFUND
WITHIN THE BANKRUPTCY ESTATE.
Petitioner contends®? “that the income tax refund,”
“leven if it is ‘property’, is entitled to the 75% exemption
‘enjoyed by all other wage payments under the
provisions of the Consumer Credit Protection Act
4(“CCPA”).®? Petitioner bases his argument on Section 6
of the Bankruptcy Act, which does not affect the
@allowance to bankrupts of exemptions which are
Gprescribed by the laws of the United States. Petitioner
relies upon definitions contained in Section 1672 of the
CCPA.** Petitioner argues that a tax refund is
. @“earnings”’ because the refund consists entirely of
. gcompensation payable for personal services and that
“Fwhen the refund is returned to the Petitioner it is
“Brief for Petitioner at 28.
15 U.S.C. §1671-1677.
#15 U.S.C. § 1672. Definitions, provides:
“For the purposes of this subchapter:
(a) The term ‘earnings’ means compensation paid or payable for
‘personal services; whether denominated as wages, salary, commis-
“sion, bonus, or otherwise, and includes periodic payments pursuant
toa pension or retirement program.
(b) The term ‘disposable earnings’ means that part of the
eamings of any individual remaining after the deduction from
those earnings of any amounts required by law to be withheld.
(c) The term ‘garnishment’ means any legal or equitable
“procedure through which the earnings of any individual are
Srequired to be withheld for payment of any debt.”
SaaS aed
GOSLLE 3 FBI oF Se
44
“disposable”’ earnings because nothing is required h{.
law to be deducted or withheld from these eaming|
Petitioner, therefore, contends that the taking of thy |
tax refund is a “garnishment” because the bankrupio} ||
proceeding is a legal or equitable procedure throu
which the earnings of an individual are withheld fat
payment of a debt. These same contentions werl’
asserted before the Appellate Court which held** that)
tax refund is not “‘earnings” for the purposes of § 167!)
and therefore it is not protected by §1673.% Th |
Appellate Court reasoned that the intent of the CCP @i
85479 F. 2d at 996-997. In re Gehrig, note 48, supra, concur
with the ruling of the 2nd Circuit and disagreed with Jn re Ceds
note 44, supra, which held to the contrary:
86 § 1673. “Restriction on garnishment — Maximum allowd
garnishment
(a) Except as provided in subsection (b) of this Section and:
Section 1675 of this title, the maximum part of the aggreg:”
disposable earnings of an individual for any workweek whichi
subjected to garnishment may not exceed
(1) 25 per centum of his disposable earnings 5 tor that wed
or
(2) the amount by which his disposable earnings for th
week exceed thirty times the Federal minimum hourly wa
prescribed by Section 206(aX{1) of Title 29 in effect at the t
the earnings are payable, whichever is less. In the case of eaming
for any pay period other than a week, the Secretary of Labor &
by regulation prescribe a multiple of the Federal minimum how
wage equivalent in effect to that set forth in paragraph (2).
Exceptions _ ;
(b) The restrictions of subsection (a) of this Section do
apply in the case of
(1) any order of any court for the support of any person.
(2) any order of any court of bankruptcy under chapter \
of the Bankruptcy Act.
(3) any debt due for any State or Federal tax.”
9 RR ps
eGR PI PM PIR ree wang) ce
45
»{ was to make certain that wage earners were able to
x} receive at least 75% of their take home pay in any one |
hf period, so that they would have enough cash to meet
nf .basic needs. The Court concluded that it was clear from
slithe language of Sections 1672 and 1673 and the
‘legislative intent thereof, that “‘earnings’”’ means periodic
\payments of compensation and does not pertain to
Fievery asset that is traceable in some way to such
| compensation.
4 Once again, legislative history is helpful in establish-
Jing the intent of Congress in enacting Title II
“Gamishment” of the CCPA. In House Report No.
1040,’ the Committge on Banking and Currency noted
that restricting garnishment of wages had the following
purposes: f
“Title II restrigts the garnishment of wages, which
the Committee finds to be a frequent element in
the predatory extension of credit, resulting, in
tum, in a disruption of employment, production
and consumption.”
#1 7In further analyzing the restriction of garnishment of
}awages embodied in Title II, the Committee stated at
41963:
“While consumer credit has enjoyed phenomenal
growth over the past twenty years, so have
personal bankruptcies. Title II of your Commit-
tee’s bill, restricting the garnishment of wages, will
relieve many consumers from the greatest single
_ pressure forcing wage earners into bankruptcies.”
Additionally, in the Committee Report under the
heading entitled, ‘What the Bill Would Do”, the
© "H. Rept. No. 1040, 90th Cong., 2nd Sess., 2 U.S. Code,
Cong. & Adm. News, 1963 (1968). .
a Prcren cron i a a
46
Committee stated that “Title II is concerned wir
mitigating the harsh and burdensome effects on bog
employers and employees of the garnishment ob
employees’ wages”.°* This statement further emphasizg,
x
7 eA ete va ele ie PY.
; that the Committee was notably concerned with
disruptive effects on employers and employees wh
employee’s wages were garnished by a creditor.
The Committee further reiterated its concem ¢
employees’ wages being garnished in that the Commi
: tee “finds that the garnishment of wages is frequent)
i .an essential element in the predatory extension ¢
credit resulting in a disruption of employmen
F
{
}
:
{
oe
production, as well as consumption.”*®? A _ furth
indication of the clear cut purpose of the garnishmeri
: restrictions is reflected by the Committee when;
, stated that: “Your Committee has adopted an ameni |
: ment... prohibiting an employer from discharging z |
employee by reason of a single garnishment of tk
‘ employee’s wages.’ Noting that Title II had receive
endorsement from trade unions and industrial group}
7
?
,
:
the Committee stated:
“The limitations on the garnishment of wages
adopted by your committee, while permitting the }|
continued orderly payment of consumer debts, will |
relieve countless honest debtors driven by econo
mic desperation from plunging into bankruptcy in
order to preserve their employment and insure a
continued ' means of support for themselves and
their families.”
881d, at 1966. 1
897d, at 1977.
7g, at 1978-1979.
¢
A ION Aa ane ge —
3 le ae es OE? PAT RI EY! API Sn eT ete PROT ER TE a gh, Pane score mares it
~—
47
It is apparent that the Committee was genuinely
concerned about the undesirable consequences of.
_ unrestricted garnishments being placed with:an em-
inf ployer which in turn could result “in economic
9° 91
‘desperation plunging an employee into bankruptcy”.
\ In addition to the intent of Congress expressed in the
‘Committee Report, this same intent is clearly reflected
purposes in Section 1671(a)(1) and (2) of the CCPA.
tion due for personal services encourages the
' making of predatory extensions of credit. Such
extensions of credit divest money into excessive
credit payments and thereby hinder the production
and flow of goods in interstate commerce.”
“(2) The application of garnishment as a creditors’
remedy frequently results in loss of employment
“(1) The unrestricted garnishment of compensa-
.| by the debtor, and the resulting disruption of
employment, production, and consumption consti-
tutes a substantial burden on interstate com-
merce.”
That “extensions of credit’’, “loss of employment”, and
“disruption of employment” refer to an ongoing
| employer-employee relationship is most apparent. Title
ll of the CCPA was intended to protect the
employment of a debtor when his employer had been
named in a garnishment proceeding and the employee’s
wages were sought to be garnished. The legislative
history of the CCPA and the specific statutory language
clearly manifest an intent to regulate garnishment in its
usual and accepted sense — employer-employee relation-
"Id., at 1979,
a i
,
48
ship. Title II gives no suggestion that a differy
purpose was intended and there is nothing in the Ap
which provides or supports a contrary conclusion, |}
- anything, the main objective of the CCPA was to key}:
wage earners out of bankruptcy and once bankmpt}
‘has occurred, the CCPA was not intended to prote}-
the bankrupt.
The Appellate Court correctly held that the Act wal
‘Glearly intended to protect only compensation made i}
the form of periodic payments to support a wx
earner’s family and was not designed to pertain to even _
asset traceable to wage compensation. This is partic:
: larly true when a bankruptcy occurs since the incom —
_ tax refund has no relationship to the cil
receiving compensation directly from his employer t j
support of his family. An income tax refund does ne |
fall within the definition of ‘‘earnings” or “‘disposabk
earnings’. ;
Despite the fact that the trustee is “vested bh
operation of law with the title of the bankrupt as ¢
the date of the filing of the petition initiating
proceeding”, such a vesting is not within the definitio
of “garnishment”, i.e., a “legal or equitable procedur
Qype
eae nara
TP ee eee ee ig
through which earnings of any individual are requir} |
to be withheld for payment of any debt”. Furthermor}, ‘
q the assertion by Petitioner that the Referee’s tumor
order comes within the CCPA requires little commen
since such order is authorized and required by tk
provisions of the Bankruptcy Act, which provisions ar
directed at marshalling the assets of the bankrupt aw
not placing a garnishment with his employer. Finaly.
but most importantly, the overriding purposes of th
" Aahint
Soe > ee Seen eaten =
49
pankruptcy Act are ignored by Petitioner.°? If this
Court accepts Petitioner’s argument that the CCPA
fapplies to a tax refund and thereby precludes the
‘trustee from obtaining all of the refund, it will ignore
“the Bankruptcy Act.*? There is nothing in the
‘Bankruptcy Act which even remotely reflects such an
‘intention, nor is there anything in the CCPA which
“likewise makes such an assumption.
a Nan St eb seat MMe iI ty WIP RARE ES ol nit
215 U.S:C. §1673(b)(2) provides: “The restrictions of subsec-
tion (a) of this Section do not apply in the case of . . . any order of
any court of bankruptcy under Chapter XIII of the Bankruptcy
7 Act.” Chapter XIII of the Bankruptcy Act is designed to
7 rehabilitate debtors through Wage Earners Plans, so that straight
bankruptcy can be prevented. Since normally debtors would pay
their creditors through their wages, the CCPA was designed not to-
affect this objective. There is nothing, however, to suggest that
Congress intended to make applicable the CCPA to straight
bankruptcy. :
Additionally, the Secretary of Labor's position (Petitioner's
' Brief, p. 36) is not supported by the history of the CCPA.
» Likewise, it is contrary to the basic provisions of the Bankruptcy
Act.
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50
CONCLUSION
For the foregoing reasons, the decision of the Cire,
Court of Appeals should be in all respects affirmed.
‘Respectfully submitted,
BENJAMIN R. CIVILETTI
VENABLE, BAETJER AND
Of Counsel: HOWARD
JAMES L. LEKIN 2 Hopkins Plaza
HARRY D. SHAPIRO Baltimore, Maryland 2120)
Venable, Baetjer and (301) 752-6780
Howard Amicus Curiae ©
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.