# Amicus Curiae Brief — Kokoszka v. Belford > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0315%3A4 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1974 - **Citation:** 417 U.S. 642 ## Text > te, i al ny pr FRECW SRY ee ‘ rere Po a up ome © | 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 — Pee a a Seite te tte Ee ee ee eee eg PN ORIN OF TRE (i) 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 eee ee eee ms 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. : iy < yhg cee Beets ee a8 See A EIDE EEG LOBEL OEE a ESN LIAB Dg TOE : : 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). — ae . _ ee RA Sp EL SUS Og oC ce iin ke ahi B's 4 entthis ice | matey See tak ivtawn PNT Oe el ee eee 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 Pe ee aT eee ae ae 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 PO ee ee eee Pee 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 ” dala oid! RR oar tae VET ee eR onsit i Fae RET Sheep PATTER, IANS a a TIA . NORTE OES th emaem ix SPR gg ILE 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. a Pe a ag COTES EAT, oA TINE SATEEN EI 2 on ee ee ee ee Pe ae Ee eT N ET eT.’ tt ad prawry ais peer oP T — 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 . + SR QTY MR ARS, Fe res, ee Sint inte 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 - Core Cyt: -pae > = (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. SAS - TEESE ROE AS IPE SRE es Deg EO BPO Wino Sen wi TO Therma (iii sas ectbinaibte terns 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 © --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0315%3A4. Public record. Not legal advice.