Petition for Writ of Certiorari — Industrial Commissioner v. Sword Line, Inc.

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JUL15 1954

Ocroser Term, 1953

No. 214

INDUSTRIAL COMMISSIONER OF THE

STATE OF NEW YORK,

Petitioner,

vs.

SWORD LINE, INC.,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECGND CIRCUIT

NATHANIEL L. GOLDSTEIN,

Attorney General of the State

of New York;

WENDELL P. BROWN,

Solicitor General of the State

of New York,

Counsel for Petitioner,

Office and Post Office Address,

The Capitol,

. Albany, New York.

Francis R. Curran,

Samus. Stern,

Assistant Attorneys General,

Of Cownsel.

—— LT

BATAVIA TIMES, LAW PRINTERS,

BATAVIA, B. Y. =>

INDEX.

Surzgect Inpex.

PAGE

Petition for writ of certiorari ......--++-++ssrererrs 1

Opinions below ....-----++eererrerresttes ttt 2

Jurisdiction .......ceccscceeccecsecccecceeeses 2

Questions presented ......--+++++erereerrertee 2

Statutes involved .......---eeeeeeeeereeererens 2

Statement .......-ceceeereesceeeereeeeceserers 3

Reasons relied upon for allowance of the writ....c6 4

Conclusion .......ecsccccvccceccesccerceansces 17

Appendix ......-seeeserecesececersececceseess 18

TasLe or Cases COILED.

Abelove, Matter of, 138 Mise. 241 (1930) ........---- 13

Abramson, In re (C. A. Qnd, 1914, 210 Fed. 878 ..... 13

American Iron Co. v. Seaboard Airline, 233 U. 8S. 261

(IDEA): os nin sn audnccscewasssanehopeneyses ene ces?

Baker v. Atchison T. & S. F. Ry. Co. (C. A. 10th, 1939),

106 F. 2d 525, cert. den. 308 U. S. GRD: csidiivicccece 13, 14

City of New York v. Saper, 336 U. S. 328 (1949) .5, 6, 7, 8,9

Coder v. Arts, 213 U. S. 223 (1909) ......eeeeeeeees 8

Cover v. Schwartz (C. A. 2nd, 1942), 133 F.2d 541.... 16

Francisco, In re (D. C., N. D. N. Y., 1917), 245 Fed. 216 13

Johnson v. Norris (C. A. 5th, 1911), 190 Fed. 459, ap-

peal dism’d 232 U. S§. 715, cert. den. 232 U. S. 723 .7, 8,9

Littleton v. Kincaid (C. A. 4th, 1950), 179 F. 2d 848,

cert. den. 340 U. S. 809 ......-eeeeeceserecrercess 8, 9

Local Loan Co. Hunt, 292 U. S. 234 (1934) ......-- 13, 14

Macomb Trailer Coach, In re (C. A. 6th, 1953), 200 F.

Qd 611, cert. den. 345 U. S. 958 ....-+--seeeseeeeees

Meinhard, Greeff & Co. Inc. v. Brown (C. A. 4th, 1952),

Oe Be eo, cic d.encncsc0 enced tats Ceeee mee enee

II.

PAGE

Paley, Matter of, (Ritholtz), 260 App. Div. 632 (1940),

aff’d 285 N. Y. 641 (1941) .......-- secre eee eeeee

Pavone Textile Corp., Matter of, (Bloom), 302 N. Y.

DOG (1951) ...... cece cece cece crete ert ceseceteees

People of the State of New York v. J. G. Menihan

Corp., 201 Mise. 1037 (1952), aff’d 281 App. Div.

805 (1953), aff’d 306 N. Y. 792 (1954) .....------- 13

Saper v. City of New York (C. A. 2nd, 1948), 168 F.

OE MR packdcacdscdsddevedies cl irevieries y

Sexton v. Dreyfus, 219 U. 8. 339 (1911) ......------ 8

United States v. Alaska S. S. Co., 253 U. S. 113 (1920) 16

United States v. Bloom, 342 U. 8. 912 (1952) aff’g Mat-

ter of Pavone Textile Corp. (Bloom), 302 ee

BOG (IGGL)... 2c e cee cee teen cece teense cece: 7

United States v. General Engineering & Manufactur-

turing Oo. (C. A. 8th, 1951), 188 F. 2d 80, aff’d 342

U. S. 912 (1952) ... 0... ee ee eee eee e neces 3, 7, 8, 9, 16

Vanston Committee v. Green, 329 U. S. 156 (1946) .... 8

Walling v. Shenandoah-Dives Mining Co. (C. A. 10th,

1943), 134 F. 2d 395 .......-- cece eee eee ee ee eens 16

Weber, Matter of, 212 N. Y. 290 (1994) 2. cies scceeee 13

York Silk Mfg. Co., In re (D. C., M. D. Pa., 1911), 188

Fed. 735, aff’d 192 Fed. 81 (C. A. 3rd, 1911), appeal

dism’d 232 U. S. 718 (1913), cert. den. 232 U. S. 724

(1913) 2... neva cence ences rsencceeeseesereecece 13

TasBLe or Statutes CIrep.

Unrrep States

Bankruptcy Act

Section 2(a) (15) (11 U.S. C. 11(a) (15)) ...--. 5, 18

Section lla (11 U. S. C. 29a) ....-.-----+++---- 5, 18

Section 17 (1) (11 U.S. C. 35 (1)) ..--.------- 7, 9,18

Section 226 (11 U. S. C. 626) .......---- +e ee ees 11

Section 228 (11 U.S. C. 628) .......---- ee eee ees 11

Sections 301 et seg. (11 U.S. C. 701 et seg.) ....-- 3

United States Code, Title 28 (Judiciary Code and

Judiciary)

Section 1254, subd. (1) .........-- +e eee ee ee eee 2

Section 1341 ...... iccweirea sewers’ gale deen aoe 14, 19

TIL.

PAGE

New York State

Debtor and Creditor Law (Chapter 12 of the Con-

solidated Laws of New York)

Section 150 ..........cceeececceeeeeeenerceees 7,15

Labor Law (Chapter 31 of the Consolidated Laws of

New York)

Section 570, subd. 3 .....-.seeeeeeeeeeeeeeeees 9,19

Section 570, subd. 5 ........seeeeeeeeeeeeeeees 15, 20

Section 573, subd. 2 .......eeeeeeeeeeeeeees 3, 15, 16

Section 620 ......-cceeeeecceccceeeseceneceees 15, 20

Section G21 ......0-.eceeecceerceccesercreces 15, 21

Section 624 .....cccecececcccerceescereeseees 15, 22

MisceLLANgous Marrer Crrep.

Collier on Bankruptcy, 14th ed.

9 ee TIE si icie cc nsrne ns cenestnccesseshsenetes 14

v. 3, pgs. 296, 1819, 1820 ......--seeeeeeeeeeres 13

United States Constitution

Art. III, Section 2 .......-.eseeeeeeeeeseeeees 16

Supreme Court of the United States

Ocroser Term, 1953

No.

In the Matter

Sworp Lixg, Inc.,

Debtor,

InpusTRIAL CoMMISSIONER OF THE State or New York,

Petitioner,

vs.

Sworp Liyzg, Inc.,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

The Attorney General of the State of New York, on

behalf of the Industrial Commissioner of the State of New

York, prays that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the

Second Circuit, entered in this case on April 27, 1954. The

judgment reversed the order of the District Court and

remanded the cause to that tribunal (R. 37-38).

Opinions Below

The referee in bankruptcy did not render a written opin-

ion. He did, however, sign findings of fact and conclusions

of law (R. 3-8, 10, 19). The opinion of the District Court

(R. 9-14) and the majority and dissenting opinions of the

Court of Appeals (R. 17-37) were not reported officially at

the time of the preparation of this petition.

Jurisdiction

The jurisdiction of this Court to review the judgment of

the Court of Appeals, which was entered on April 27, 1954

(R. 37-38), is invoked under the provisions of 28 U. S. C.

§ 1254, subd. (1).

Questions Presented

1) Whether, under the facts and circumstances of this

case, the Court of Appeals was correct in its ruling that

it had jurisdiction to determine the liability of the debtor

for post-arrangement interest after the confirmation of the

arrangement and close of the proceeding.

2) Whether the Court of Appeals erred on the law in

concluding that such interest did not arise during the course

of the arrangement proceeding and that the debtor will not

be liable therefor after the confirmation of the arrange-

ment and close of the proceeding.

Statutes Involved

The pertinent statutory provisions are printed in the

Appendix, infra., pp. 18-22.

Statement

A petition for an arrangement under Chapter XI of the

Bankruptcy Act, Sections 301 et seg. (11 U. S. C. Section

701 et seq.), was filed by the debtor and approved on July

30, 1948 (R. 3, 9, 18). On the same day, the District Court

entered an order enjoining and staying until final decree

all persons from the commencement of any suit against the

debtor (R. 4, 9, 18).

On July 24, 1950, petitioner filed a claim for New York

State unemployment insurance taxes and by reason of the

inclusion therein of interest beyond the date of the filing

of the petition, the debtor interposed an objection thereto

(R. 5, 9, 18). A hearing on the objection was thereafter

adjourned from time to time pending a decision by this

Court in United States v. General Engineering & Manufac-

turing Co. (1952), 342 U. S. 912 (R. 5, 6, 18), and upon

the rendition of that decision and in conformity therewith,

petitioner filed an amended claim, which included interest

only up to the date of the filing of the petition (R. 6, 10,

18). This claim was allowed by the referee in bankruptcy

on July 2, 1952 (R. 6, 10, 18), the same day on which he

determined the debtor would not be liable in any other

forum, after the close of the proceeding, for interest

“aceruing’’ (R. 8) after the date of the petition (R. 7, 8,

19).

On June 4, 1952, before the allowance and payment of

the amended claim and without leave of the bankruptcy

court, petitioner filed in the Office of the Clerk of the Coun-

ty of New York, pursuant to Section 573, subdivision 2, of

the New York State Labor Law, a warrant which included

post-arrangement interest (R. 6, 10, 18). The debtor there-

upon moved before the referee for (1) an order expunging

the warrant from the judgment docket, (2) a permanent

injunction against any proceeding by petitioner to collect

post-arrangement interest outside the bankruptcy court,

and (3) a determination of the question whether or not

interest arose on the claim of petitioner after the date of

the filing of the petition (R. 19). Following rulings that

petitioner voluntarily submitted himself to the jurisdic-

tion of the bankruptcy court; that he had knowledge of the

proceedings with respect to the determination of the debt-

or’s liability; and that he had knowledge of and was bound

by the Court’s stay against the institution of any other

proceeding, the referee held that petitioner was not em-

powered to issue, file or levy execution under the warrant

or resort to any other summary process to collect such in-

terest in any proceeding other than before the bankruptcy

court (R. 7, 10).

In the interim, between the date of this determination

by the referee and the petition for review of the order

based thereon, the plan of arrangement was confirmed and

the amended claim, which excluded post-interest, was paid

in full (R. 2, 10, 18).

On review of the referee’s order, petitioner offered no

objection to that part of the order which temporarily re-

strained him from levying execution under the warrant

until the entry of a final decree. The issues before the Dis-

trict Court were limited to the jurisdiction of the referee

to permanently enjoin the collection of post-arrangement

interest or to determine the debtor’s liability therefor, the

survivability of .post-arrangement interest, the alleged vio-

lation of the stay order by the filing of the warrant, and

the jurisdiction of the referee to direct the vacation of 4

warrant docketed in another court (R. 10, 11).

On March 13, 1953, the District Court rendered an opin-

ion vacating the permanent injunction, but continuing it

temporarily until the entry of a final decree (R. 14, 19).

The District Court reasoned that since 411 (a) of the

Bankruptcy Act (11 U. S. C. 29a) was limited to suits pend-

ing against a bankrupt at the time of the filing of a peti-

tion on dischargeable claims, and then only until discharge,

the permanent injunction could not be sustained thereunder.

Although ruling that the threatened interference with the

bankruptcy court’s possession, custody or orderly admin-

istration of the bankruptcy estate, warranted the issuance

of a temporary injunction under 4 2a (15) of the Act (11

U.S. C. 11a (15)), the court stated that even after a final

decree or order of discharge has been entered (which was

not the case here), a bankruptcy court should not act to

determine whether a specific claim has been discharged;

that such decision should be reserved to the court where

the claim is sought to be enforced; that the filing of ihe

claim was a submission only of the question whether inter-

est therein included should be allowed, and not a submission

of whether interest should be discharged; and that since

there was no statutory authority for the referee’s deter-

mination of the bankrupt’s liability subsequent to the clos-

ing of the estate, he was not empowered to permanently

enjoin the collection thereof. The District Court also

directed that the order of the referee was not to be con-

strued as an adjudication that the claim was invalid or

that it had been paid; it upheld the authority of the referee

to direct a vacation of the warrant; and it determined, on

the reasoning that City of New York v. Saper (1949), 336

U. S. 328, was inapplicable, that the interest would never-

theless survive the proceeding (R. 11-14).

On March 26, 1953, the District Court entered an order

on the opinion (R. 15) and the debtor thereupon appealed

from those portions of the order which vacated the per-

manent injunction and directed that the order of the referee

was not to be construed as an adjudication that the claim

for post-arrangement interest was either invalid or that it

had been paid (R. 3). Petitioner thereafter complied with

that portion of the order which directed that the warrant

be expunged from the judgment docket (R. 19).

On April 27, 1953, the United States Court of Appeals

for the Second Circuit, by Charles E. Clark, Circuit Judge,

rendered an opinion reversing the order of the lower court

and remanding the case to that tribunal for further pro-

ceedings (R. 18-27). The court upheld the permanent in-

junction mainly upon the authority of the Saper case and

in so ruling, held that the interest in issue was not merely

suspended during the pendency of the proceeding and that

it could not be collected from the debtor after confirmation

(R. 23-25). Cireuit Judge Jerome N. Frank filed an opin-

ion in which he dissented from the majority view of the

court (R. 27-37).

The Court of Appeals ruled that injunctive relief was

not premature despite the fact that the District Court had

refrained from making a final adjudication and petitioner

had not appealed from the order expunging the warrant

from the judgment docket (R. 20). The Court determined

it was empowered to grant the relief because the direct

holding of the referee, which would have settled the ques-

tion, was expunged; there was an absence of adequate pro-

tection for the plan of arrangement; there was a direct

threat of steps to collect; and the plan of arrangement,

recognizing the insolvency of the bankrupt, had since been

confirmed and payments had been made to carry it out

(R. 20).

Circuit Judge Jerome N. Frank, in the dissenting opin-

ion, stated that no court had theretofore considered the

question of whether confirmation of a Chapter XI pro-

ceeding discharged post-interest (R. 28). He analyzed the

authorities, particularly the Saper case, and concluded that

interest was merely suspended; that by reason of insol-

vency, it was not allowable; and since it was not allowable,

it came within the exception to the discharge provisions

of Section 17 of the Bankruptcy Act (11 U.S. C. 35) (R. 31,

34, 35).

Penalties are not in issue, objection to the same having

been withdrawn by respondent before the Court of Appeals.

Reasons Relied Upon for Allowance of the Writ

The following are respectfully submitted by your peti-

tioner and relied upon as reasons for the granting of the

writ:

a) The United States Court of Appeals for the Second

Cireuit has held that post-arrangement interest did not

arise during the course of the proceeding and that the

debtor will not be liable therefor upon the termination

thereof. This ruling is in conflict with applicable decisions

of this Court, particularly City of New York v. Saper

(1949), 336 U. S. 328, which merely held that bankrupt

estates cannot be directly used to pay post-bankruptcy

interest on claims for unpaid taxes; United States v. Gen-

eral Engineering & Manufacturing Co. (1952), 342 U. S.

912, which extended the rule to Chapter XI proceedings ;

United States v. Bloom (1952), 342 U. S. 912, which ex-

tended the rule to general assignment proceedings under

the New York State Debtor and Creditor Law; Johnson ~.

Norris (C. A. 5th, 1911), 190 Fed. 459, appeal dism’d.

Norris v. Johnson, 232 U. 8. 715, cert. den. 232 U. S. 723,

Am. Iron Co. v. Seaboard Airline (1914), 233 U. S. 261, and

Littleton v. Kincaid (C. A. 4th, 1950), 179 F. 2d 848, cert.

den. 340 U. S. 809, which held that claims do not lose their

interest bearing qualities when funds are in custodia legis:

Seaton v. Dreyfus (1911), 219 U. S. 339, which held that

if securities held by a creditor produce interest or divi-

dends during bankruptcy, such amounts should be applied

to post-bankruptcy interest; Macomb Trailer Coach, In re

(C. A. 6th, 1953), 200 F. 2d 611, cert. den. 345 U. S. 958,

Vanston Committee v. Green (1946), 329 U. S. 156, and

Coder v. Arts (1909), 213 U. S. 223, which held that if a

secured claim is worth more than the sum of principal and

interest due, the ereditor, under those circumstances, is

also entitled to payment of post-bankruptcy interest.

Taxing authorities throughout the country are affected

by the ruling and substantial sums of money are at stake.

The issue is not free from doubt and public interest re-

quires that this important and fundamental question of

law be reexamined. As a matter of fact, Cireuit Judge

Jerome N. Frank, in his dissenting opinion, stated (R. 27-

28):

‘‘J1, The cases cited by my colleagues (which I shall

discuss later) have decided only that post-petition in-

terest on a tax claim is not allowable unless a debtor

becomes solvent during the bankruptcy proceeding. A

different question is before us here, viz. whether con-

firmation of a Chapter XI arrangement discharges such

interest, if it has not been allowed (i. e. when the debt-

or has not thus become solvent). No court has hereto-

fore considered this question.”’ (Italics for empha-

sis. )

No language in the Saper or General Engineering cases

outlaws post-petition interest for all time. Mere disallow-

ance in the particular proceeding is all that was intended.

While the possibility of making interest on tax claims

dischargeable by judicial construction is not referred to

in the opinion of this Court in the Saper case, the same

Court of Appeals in considering the argument that interest

on tax claims survives against a bankrupt even after pay-

ment of the tax claims themselves, stated the following

(Saper v. City of New York (C. A. 2nd, 1948), 168 F. 2d

268, 271-272) :

«* © © But assuming arguendo that interest is not

discharged upon payment of the tax claim, we do not

see how that fact can be decisive on the present issue.

* * * The fact that the bankrupt may not have re-

ceived an immunity he might desire is not ground for

upsetting the statutory scheme of distribution of the

estate in the hands of the trustee * * *”’

The bankruptcy rule merely suspends or postpones the

accrual of interest during bankruptcy, but claims do not

lose their interest bearing qualities. It s merely a rule of

convenience and equity in distribution during a particular

insolvency proceeding.

In the absence of a controlling provision in the Bank-

ruptey Act, the general law should control (Johmson v.

Norris, supra) and where interest on New York State unem-

ployment insurance taxes is concerned, there is more than

the general law to indicate payment should be made. Such

interest is as much a part of the tax as the tax itself (Labor

Law, Section 570, subd. 3; Matter of Pavone Textile Corp.

(Bloom), 302 N. Y. 206) and since it is disallowable under

the Saper and General Engineering cases, it is non-dis-

chargeable under § 17, subdivision 1, of the Bankruptcy Act

(11 U. S. C. 35 (1)).

In Littleton v. Kincaid, supra, after citing the Saper case

for the proposition that ordinarily interest on claims

against a bankrupt estate runs to the filing of the petition

in bankruptcy, the court made it clear that the interest was

merely suspended (pp. 852-853) :

‘«* * * Three reasons are usually given for its exist-

ance: (a) The delay in payment is not the act of the

debtor but is an act of law for the mutual benefit of the

creditors. (b) In the case of claims bearing different

rates of interest, it would be inequitable to permit the

running of interest to increase the proportion of the

assets to which some of the creditors are entitled at the

expense of the other creditors while the estate is in the

process of administration. (c) If all claims bear the

same rate of interest, the addition of interest would

not change the proportion of assets to which each would

be entitled, and the computation may therefore be omit-

ted as a useless act * * *.’’

««* * * But the reason for the stoppage of interest

on funds in custodia legis is not because the claims lose

their interest bearing quality, but because of the in-

equality which would otherwise result in the forced

distribution in receivership to debts carrying different

rates of interest. * * *”’

The Court of Appeals in the instant case has inferentially

held that post-petition interest did not even arise during

the pendency of the proceeding. This is in conflict with the

opinion of the Court of Appeals for the Fourth Circuit in

Mewnhard, Greeff é Co. Inc. v. Brown (1952), 199 F. 2d 70,

which involved the issue of whether a claimant, whose proof

of claim had been allowed in a stated amount, without post

reorganization interest, could thereafter and in the same

proceeding assert against a pledged bond, in accordance

with contract, a claim for post-petition interest. The Court

stated (p. 74):

‘«* * * We do not think, however, that claimant is

precluded from asserting against the pledged bond any

claim for interest accruing subsequent to the filing of

the bankruptcy proceedings or the expense incurred

subsequent to the filing of the claim in protecting the

collateral securing the claim. The allowance of a claim

in bankruptcy operates ordinarily to estop the claimant

as to all matters which were or should have been in-

cluded in the claim, but not as to matters which could

not have been included. Collier on Bankrutcy (14 ed.)

vol. 3, p. 193; Remington on Bankruptcy (4 ed.) vol. 5

pp. 462, 463; United States v. American Surety Co.,

2 Cir. 56 F. 2d 734, 736; Lesser v. Gray, 236 U. 8. 70,

35 8S. Ct. 227, 59 L. Ed. 471. So far as the interest here

involved is concerned, interest subsequent to the filing

of the petition was not provable as a part of the claim

in the bankruptey proceeding. Collier on Bankruptcy

(14 ed.) vol. 3, p. 1835; City of New York v. Saper, 336

U. S. 328, 331, 69 S. Ct. 554, 93 L. Ed. 710; United

States v. Edens, 4 Cir.; 189 F. 2d 876. Expenses in-

curred subsequent to filing of the claim were manifest-

ly not includable within the claim and adjudication of

the claim should not estop claimant from asserting

them. * #@ #9)

The State submits that Judge Jerome N. Frank was

correct, in his dissenting opinion, when he stated that State

of New York v. Femberg (C. A. 2nd, 1953), 204 F. 2d 502,

did not involve the question confronting us here. Petition-

er, who was the appellant in that proceeding and is fully

familiar with what transpired in that case, reiterates that

interest accruing during the pendency of that reorganiza-

tion proceeding was disavowed because of the provisions of

Sections 226 and 228 of the Bankruptcy Act (11 U. S. C.

626 and 628). This is borne out by the opinion of the court

which said no more than ‘‘that the rate of interest on new

securities under a Chapter X plan need not vary accord-

ing to the varying interest rates to which the several credi-

tors had been entitled before bankruptey’’ (R. 37).

b) The decision of the Court of Appeals is also in direct

conflict with New York State court decisions on the same

issue of liability of the debtor for interest.

In Matter of Paley (Ritholtz), 285 N. Y. 641, aff’g. 260

App. Div. 632, the New York Court of Appeals held that a

discharge in bankruptcy does not affect a debt or part of a

debt that is not provable, such as after-accruimg interest.

The debtor in that case argued that the discharge in

bankruptcy extinguished the debt owing by the bankrupt

and consequently the interest thereon, and rendered in-

operative against the bankrupt the post-petition interest

included in the judgment. The creditor contended that

since interest had accrued subsequent to the petition, those

items were not provable debts and consequently not affected

by the discharge which, by the very terms of the statute and

the order of discharge, was limited to provable debts.

Since the New York Court of Appeals affirmed the case

without opinion, we quote from the Appellate Division

opinion (p. 635):

‘Among debts provable under the Bankruptcy Act,

Section 63, subdivision a, clause (1) (11 U. S. Code

§ 103, subd. a, cl. (1) is any fixed liability evidenced by

a note or any instrument in writing ‘absolutely owing

at the time of the filing of the petition * * * whether

then payable or not, with any interest thereon which

would have been recoverable at that date.’ The item

of interest here involved was not due, payable or

recoverable at that date; it accrued after that date,

i, e., between the date of the petition and the judgment

which antedated the discharge. When it accrued, the

principal debt had not at that time been discharged;

and although the discharge related back to the date of

filing the petition, it affected only provable debts. The

item of interest in question being ‘interest accrued

after the filing of the petition’ is expressly excluded

from provable debts under the provisions of Section

63, subdivision a, clause (5). Accordingly it was not

discharged.’’

c) The decision of the Court of Appeals is also in con-

flict with federal and state court decisions on a similar

issue, the survivability of penalties after bankruptcy.

The law is settled in both jurisdictions that penalties

survive bankruptcies, including arrangements.

Federal decisions to the foregoing effect are Abramson,

In re (C. A. 2nd, 1914), 210 Fed. 878; York Silk Mfg. Co.,

In re (D. C., M. D., Pa., 1911), 188 Fed. 735; aff’d 192 Fed.

81 (C. A. 3rd, 1911), appeal dism’d 232 U. S. 718 (1913),

cert. den. 232 U. S. 724 (1913); Francisco, In re (D. C.,

N. D. N. Y., 1917), 245 Fed. 216.

State court decisions are also indicative of the same

result (People of the State of New York v. J. G. Menihan

Corp., 201 Misc. 1037, aff’d. 281 App. Div. 805, aff’d. 306

N. Y. 792; Matter of Weber, 212 N. Y. 290; Matter of Abe-

love, 138 Mise. 241).

See also Collier on Bankruptcy, 14th ed., Vol. 3, pp. 296

1819 and 1820.

d) The ruling of the Court of Appeals that injunctive

relief against the State of New York was not at that stage

premature, based as it was upon clearly erroneous findings

of fact and conclusions of law, is in conflict with applicable

decisions of this Court, particularly Local Loan Co. v. Hunt

(1934), 292 U. S. 234 and Baker v. Atchison T. & 8. F. Ry.

Co. (C. A. 10th, 1939), cert. den. 308 U. S. 620.

The Hunt case, supra, held there is a lack of general pow-

er in a bankruptcy court to determine the dischargeability

of claims, that ancillary jurisdiction in that respect can be

taken only after discharge, and that it must be attended by

unusual and compelling circumstances or an inadequacy

of protection of a debtor in a non-bankruptcy tribunal.

It is clear that the ancillary jurisdiction envisioned in

the Hunt case is strictly limited to instances of insufficient

remedy invoking a right to equitable relief; it does not ex-

tend to or contemplate a general jurisdiction in the bank-

ruptey court to determine upon application the discharge-

ability of claims or to enjoin the enforcement of claims

in other courts regardless of the pankrupt’s remedy (Collier

on Bankruptcy, 14th ed.; Vol. 1, p. 291).

Aside from the fact the referee exercised ancillary juris-

diction before confirmation and discharge of certain debts,

so that the advantages of discharge could not have been

lost, the record is bare of any evidence entitling the debtor

to come within the doctrine established in the Hunt case, or

any of the other cases which adhere to the same limitation.

The Atchison case, supra, emphasized the established

principle that federal courts should exercise an appropriate

reluctance to interfere with the fiscal affairs of a state.

This is also evident by the provisions of 28 U. S. C. § 1341,

which provides as follows:

‘The district courts shall not enjoin suspend or re-

strain the assessment, levy or collection of any tax

under State law where a plain, speedy or efficient

remedy may be had in the courts of such State.’’

The Court of Appeals ruled that even though the District

Court refrained from a final adjudication and petitioner

did not appeal from the order expunging the warrant from

the state judgment docket, it still had jurisdiction to decide

the issue of the liablity of the debtor for the interest (R. 20).

None of the reasons ascribed by the court justified a deter-

mination of that issue. The State of New York was al-

ready restrained by a temporary injunction and there was

no direct threat of steps to collect; the expunging of

the direct holding by the referee, which would have settled

the question, did not foreclose the debtor from its remedy

in the state courts after the close of the proceeding; the

plan of arrangement was still adequately protected by the

temporary injunction; and although the plan of arrange-

ment recognizing the insolvency of the bankrupt had then

been confirmed and payments made to carry it out, such

was not the situation when the issue arose before the ref-

eree in bankruptcy.

The debtor is not peculiarly handicapped in asserting in

a non-bankruptcy forum its defense of discharge of the post-

arrangement interest. The debtor may pay those items

under protest and request a refund (Labor Law, Section

570, subd. 5). If that is denied, the debtor may request

a hearing before an unemployment insurance referee, with

appeals thereafter to the Appeal Board of the New York

State Department of Labor, the Appellate Division of the

Supreme Court, Third Department, and in a proper case, to

the New York Court of Appeals (Labor Law, Sections 620,

621 and 624). These statutes meet the test of due process.

If a warrant be docketed as a judgment (Labor Law, Sec-

tion 573, subd. 2), the debtor would have an adequate

remedy by an application for discharge under the provi-

sions of Section 150 of the New York State Debtor and

Creditor Law.

e) The Court of Appeals in exercising ancillary juris-

diction has decided an important question of federal bank-

ruptey law, which has not, but should be, settled by this

Court. In upholding the permanent injunction, the Court

of Appeals has in effect ruled that the filing of the amended

claim, without post-interest, and the filing of the warrant,

including such interest, but outside the bankruptcy court,

constituted a submission of the question whether the debtor

would be liable for post-interest after the close of the pro-

ceeding.

The amended claim, which excluded post-arrangement in-

terest and superseded a previous claim, was filed on April

18, 1952. Commencing on that date, and on July 2, 1952,

the date of the referee’s adverse ruling, the issue of its al-

lowance was no longer before the referee. Respondent’s

objection was only directed to the previously filed claim,

which included the interest pending a determination by the

United States Supreme Court in United States v. General

Engineering & Manufacturing Co. (1952), 342 U. S. 912.

Upon the filing of the amended claim, the issue of the al-

lowance of the interest, as well as its dischargeability, be-

came academic. Under federal law, the referee was not em-

powered to act thereon (U. S. Constitution, Art. IIT, § 2;

United States v. Alaska S. 8. Co. (1920), 253 U. S. 113;

Walling v. Shenandoah-Dives Mining Co. (C. A. 10th,

1943), 134 F. 2d 395; Cover v. Schwartz (C. A. 2nd, 1942),

133 F. 2d 541). There was no real controversy before the

Court.

The previously filed claims which for all intents and pur-

poses was no longer in existence on July 2, 1952, may not

be deemed to have been a submission to the bankruptcy

court of the liability of the debtor for post-interest after

the close of the proceeding. The District Court was

correct in its ruling that the filing only brought forth the

issue of whether the interest was allowable in the proceed-

ing (R. 14).

Neither did the filing of the warrant constitute a submis-

sion of the question to the court. The warrant, which was

docketed against the debtor before confirmation, pursuant

to statute, namely, Section 573, subd. 2, of the New York

a ae a re ae, ee

State Unemployment Insurance Law (Article 18 of the

Labor Law), did not constitute a claim in the proceeding

and the only issue created by such filing was whether it

violated the stay order or interfered with the orderly ad-

ministration of the estate in bankruptcy. The limitation

of the debtor’s remedy was an application for a temporary

injunction. ;

Conclusion

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

NATHANIEL L. GOLDSTEIN,

Attorney General of the State

of New York,

Wenvett P. Brown,

Solicitor General of the State

of New York,

Attorney for Petitioner.

June 17, 1954.

Francis R. Cunray,

Samus. STERN,

Assistant Attorneys General,

Of Counsel.

APPENDIX

Bankruptcy Act (United States Code, Title 11):

‘2. Creation of Courts of Bankruptcy and Their

Jurisdiction. a. The courts of the United States

hereinbefore defined as courts of bankruptcy are here-

by created courts of bankruptcy and are hereby in-

vested, within their respective territorial limits as now

established or as they may be hereafter changed, with

such jurisdiction at law and in equity as will enable

them to exercise original jurisdiction in proceedings

under this Act, in vacation, in chambers, and during

their respective terms, as they are now or may be here-

after held, to—

‘*(15) Make such orders, issue such process, and en-

ter such judgments, in addition to those specifically

provided for, as may be necessary for the enforcement

of the provisions of this Act: * * *

2 * @>>

‘$11. Suits By and Against Bankrupts. a. A suit

which is founded upon a claim from which a discharge

would be a release, and which is pending against a

person at the time of the filing of a petition by or

against him, shall be stayed until an adjudication or

the dismissal of the petition; if such person is ad-

judged a bankrupt, such action may be further stayed

until the question of his discharge is determined by

the court after a hearing, or by the bankrupt’s filing

a waiver of, or having lost, his right to a dischar,

or, in the case of a corporation, by its failure to file

an application for a discharge within the time pre-

scribed under this Act: * * *’’

“$17. Debts Not Affected by a Discharge. a. A

discharge in bankruptcy shall release a bankrupt from

all of his provable debts, whether allowable in full

or in part, except such as (1) are due as a tax levied

by * ¢ @ any State* * *,”

“*§ 314. The court may, in addition to the relief

provided by section 11 of this Act and elsewhere under

this chapter, enjoin or stay until final decree the com-

mencement or continuation of suits other than suits

to enforce liens upon the property of a debtor, and

may, upon notice and for cause shown, enjoin or stay

until final decree any act or the commencement or con-

tinuation of any proceeding to enforce any lien upon

the property of a debtor.’’ (italics for emphasis)

‘*§ 371. The confirmation of an arrangement shall

discharge a debtor from all his unsecured debts and

liabilities provided for by the arrangement, except as

provided in the arrangement or the order confirming

the arrangement, but excluding such debts as, under

section 17 of this Act, are not dischargeable.”’ (italics

for emphasis)

‘*§ 372. Upon the consummation of a proceeding

under this chapter after confirmation of an arrange-

ment, the court shall enter a final decree dischargin

the receiver or trustee, if any; closing the estate; an |

making such provisions, by way of injunction or other-

wise, as may be equitable.’’

United States Code :

Title 28

**§ 1341. Taxes by States.

The district courts shall not enjoin, suspend or re-

strain the assessment, levy or collection of any tax

under State law where a plain, speedy and efficient

remedy may be had in the courts of such State.’’

**§ 2283. Stay of State Court proceedings.

A court of the United States may not grant an in-

junction to stay proceedings in a State court except

as expressly authorized by Act of Congress, or where

necessary in aid of its jurisdiction, or to protect or

effectuate its judgments.’’

New York State Labor Law

‘*§570. Payment of contributions.

3. Default. An employer who fails to pay contribu-

tions required to be made by him to the fund shall pay

interest :.t the rate of three-fourths of one percentum contribu

of the amount of such contributions for each month he missions

is in default. Such interest shall be assessed, collected apply te

and paid as part of the payment required to be made days af

by the employer to the fumd.’’ (Italics for emphasis.) such de’

* * * 3. D

“«5, Refunds and credits. If any employer shall for sha

make application for a refund of any contribution, decision

interest, or penalty paid by him or for a credit thereof Written

and the commissioner shall determine that such con- reasons

tribution, interest or penalty, or any portion thereof ant or e

was erroneously collected, the commissioner shall re- affected

fund said amount or allow a eredit therefor, without «6 62

interest, as specified in this subdivision, unless the

employer shall have already deducted said amount by

way of credit:against moneys payable by him into the

fund. No refund or credit shall be allowed unless an in twen

application therefor shall be made on or before which- of notic

ever of the following dates shall be the later: (a) one determi

year from the date on which such payment was made; the emy

or (b) three years from the last day of the first month provide

following the end of that calendar quarter during of appe

which the remuneration was paid which formed the may lik

basis for contributions, interest or penalty claimed to board b

have been erroneously collected. For a like cause and regardl

within the same period a refund may be so made or peared

a credit allowed on the initiative of the commissioner. referee.

Any credit or refund of interest and penalties erron- 3° C

eously collected, allowed by the commissioner under car

the foregoing conditions, shall be a charge against the a ne

special fund. Any credit or refund of deposits for this art

hearings and appeals, and of contributions erroneously baibbent

collected, allowed by the commissioner under the fore- discret

going conditions, shall be a charge against the un- or rém

employment insurance fund. rm vd

* @ 99 and sl

: ‘whethe

‘$620. Referee’s hearings. at the |

ee affectec

2. Contested determinations, rules or orders. Any hearing

employer who claims to be aggrieved by the industrial reverse

commissioner’s determination of the amount of his sg

and s

ributions or by any other rule or order of the com-

ioner under any provision of this article may

y to the commissioner for a hearing within twenty

; after mailing or personal delivery of notice of

determination, rule, or order.

Decisions. Every hearing as herein provided

shall be held by a referee who shall render his

sion within five days after the hearing is concluded.

tten notice of the referee’s decision, containing the

ons therefor, shall be promptly given to the claim-

or employer, to the commissioner, and to any party

sted thereby who appeared at the hearing.”’

§ 621. Appeals to appeal board.

Contested determinations, rules or orders. With-

wenty days after the mailing or personal delivery

otice of the decision after a hearing on contested

rminations, rules, or orders by the commissioner,

employer may take an appeal to the appeal board,

vided he appeared at the hearing, by filing a notice

ppeal with the commissioner, and the commissioner

- likewise within such period take an appeal to the

rd by giving written notice thereof to the employer,

ardless of whether or not the commissioner ap-

red or was represented at the hearing before the

ree,

Conduct of appeals. The appeal board may de-

any case appealed to it under any provision of

article on the basis of the record and of evidence

viously submitted in such case, or it may in its

retion hear argument or hold a further hearing,

rémand such case to a referee for such purposes

it may direct. If a further hearing is to be held

argument had, the board shall fix a time therefor

shall notify the commissioner, regardless of

ther or not he had appeared or been represented

he hearing before the referee, ard any other party

.cted, provided such other party appeared at the

ring before the referee. The board may affirm or

erse, wholly or in part, or may modify the decision

vealed from and shall render its decision promptly

| shall thereupon send written notice thereof to-

sees

ther with the reasons therefor to the commissioner

and any other party affected thereby who appeared at

the hearing before the referee.’’

‘«¢§ 624. Appeals to courts

Within thirty days after the mailing or personal

delivery of notice of a decision by the appea board,

the commissioner or any other party affected thereby

who appeared at the appeal before the board may a

peal questions of law involved in such decision to the

appellate division of the supreme court, third depart-

ment. The board may also, in its discretion, certify

to such court questions of law involved in its decisions.

Such appeals and the questions so certified shall be

heard in a summary manner and shall have precedence

over all other civil cases in such court except cases

arising under the workmen’s compensation law. The

commissioner shall be represented in court by the at-

torney general without additional compensation. An

appeal may be taken from the decision of such court

to the court of appeals in the same manner and sub-

ject to the same limitations, not inconsistent herewith,

as is provided for in civil action. Tt shall not be neces-

sary to file exception to the rulings of the appeal board.

No bond shall be required to be filed upon an appeal to

the appellate division or to the court of appeals except

as hereinafter provided. Upon final determination of

an appeal, the appeal board shall enter an order in

accordance with such determination.”’

Pa 2

wPreeortiwne ti wwlfTllerelererlTrlhU ve ,er

APPENDIX

Unrrep States Court or Appeals For rae Second Circurt—

October Term, 1953

No, 132

Argued February 2, 1954 Decided April 27, 1954

Docket No. 22860

Sworp Linz, Inc., Appellant,

Vv.

InpusTRIAL CoMMISSIONER OF THE StTaTE or NEw York,

Appellee

Before Clark, Frank and Hincks, Circuit Judges

Appeal from the United States District Court for the

Southern District of New York, Sylvester J. Ryan, Judge.

Reversed and remanded. |

R. H. Guthrie, New York City (Mudge, Stern, Williams

& Tucker and Ara P. Blanc, New York City, on the brief),

for appellant.

Samuel Stern, Asst, Atty. Gen. of the State of New York

(Nathaniel L. Goldstein, Atty. Gen. of the State of New

York, Wendell P. Brown, Sol.-Gen., and Francis R. Curran,

Asst. Atty. Gen., on the brief), for appellee.

The debtor filed a petition for an arrangement under

Chapter XI of the Bankruptcy Act, 11 U. S. C. §§ 701 et seq.,

on July 30, 1948. On that same day the petition was ap-

proved and the court made an order enjoining and staying

until final decree all persons from the commencement of any

suit against the debtor. On July 24, 1950, respondent-

appellee, the Industrial Commissioner of the State of New

York, filed a proof of claim in the amount of $98,209.97,

representing unpaid pay roll contributions from October

1, 1946, to July 30, 1948, of $88,199.82, plus interest of $9,-

961.14 computed to July 30, 1950, and interest on the late

payment of $49.01. The debtor filed objections to this

claim on the ground that interest could be allowed only to

July 30, 1948—the date of the filing of the petition for ar-

rangement. Before the hearing on these objections and

following the decision of the Supreme Court in United

States v. General Engineering & Mfg. Co., 342 U. 8S. 912,

which had been awaited, respondent, on April 18, 1952, filed

an amended proof of claim in the amount of $88,592.31,

which included interest only to July 30, 1984. The State did

not apply to the court for leave to amend the claim; the

debtor did not agree to the amendment. The claim was

allowed on July 2, 1952, and has been paid in full according

to a plan of arrangement confirmed July 31, 1952, under

which claims entitled to priority were paid in full and

claims not so entitled were paid in part, but in each case

without interest beyond July 30, 1948.

On June 4, 1952, respondent, without leave of the bank-

ruptcy court, filed in the office of the County Clerk of New

York, pursuant to § 573(2) of N. Y. Labor Law, a warrant

in the amount of $119,068.54, representing the claim as

allowed, plus penalties and interest computed to May 31,

1952, in the amount of $30,476.23.

On July 2, 1952, the debtor moved before the Referee

for (1) an order expunging the warrant from the state

judgment docket, (2) a permanent injunction against any

proceeding by the respondent against the debtor outside

the bankruptcy court, and (3) a determination of the ques-

tion whether or not interest arose on the claim of respond-

ent after July 30, 1948. The Referee found, as a ‘‘conclu-

sion of law,’’ that respondent was not entitled to interest

on his claim beyond the date of the filing of the debtor’s

petition for an arrangement; accordingly he granted debt-

or’s motion. Respondent petitioned for review of this

order to the United States District Court, which vacated

the injunction and held, inter alia, that the order of the

Referee ‘‘is not to be construed as an adjudication that

the claim of the Industrial Commissioner for interest and

penalties accrued since July 30, 1948 is either invalid or

has been paid.’’ It did continue a temporary injunction

until entry of the final decree and did order the warrant

expunged from the judgment docket—an order which has

been complied with. At the time of the hearing below a

eer 8 —= ES. OS Ea. SS ~

~ | ‘

or: SF

oer P Fhe er Oe Ot

final decree had not been entered in the arrangement pro-

ceedings.

Ciark, Circuit Judge:

It is conceded, as it must be in the light of relevant Su-

preme Court decisions, that bankrupt estates cannot be

directly used to pay post-bankruptcy interest on claims

against the bankrupt for unpaid taxes. This was settled for

ordinary bankruptcy by the leading case of City of New

York v. Saper, 336 U. S. 328; for proceedings in reorganiza-

tion by United States v. Edens, 342 U.S. 912 affirming 4

Cir., 189 F. 2d 876; for proceedings by way of arrangement

by United States v. General Engineering & Mfg. Co., supra,

342 U. S. 912, affirming.8 Cir., 188 F. 2d 80, and see Com-

monwealth of Massachusetts v. Thompson, 1 Cir., 190

F, 2d 10, certiorari denied 342 U. S. 918; and even for a

general assignment under N. Y. Debtor & Creditor Law

by United States v. Bloom, 342 U. 8. 912, affirming Pavone

Textile Corp. v. Bloom, 302 N. Y. 206, 97 N. E. 2d 755.

This appeal raises the question whether, notwithstanding

this current of authority, such interest may nevertheless

be collected by direct action against a debtor after con-

firmation of its arrangement in Chapter XI proceedings.

It is the position of the State of New York, vigorously

asserted here and elsewhere, that such collection may be

made by using the ordinary remedies available against sol-

vent debtors. And this view appears to have been sub-

stantially the view of the district court in reversing the

decision of the referee in bankruptcy for the debtor, al-

though it did refrain from a final adjudication.’ But since

1 This is made most clear not only by respondent’s specifie contentions

herein, but also by his citation to us, as correct and authoritative, of a

decision by a referee in the Unemployment Insurance Referee Section of

the State Department of Labor—Case No. E2340-53R, Starrett Television

Corp.—holding an employer liable for interest on unpaid taxes during the

pendency of arrangement proceedings in reliance on Judge Ryan’s deci-

sion in this case.

2 In view of this and of the fact that respondent has not appealed from

the order expunging the warrant from the state judgment docket, it may

be suggested that injunctive relief now is premature. But the expunging

a plan of arrangement recognizing the insolvency of this

bankrupt has been confirmed and payments made to carry

it out, the issue is before us and must be decided. Par-

ticularly in the case of a reorganized or ‘‘arranged’’ cor-

poration such as this is it clear that the State’s position

ealls for payment of interest before the debtor can go

ahead with its activities. That is, the Supreme Court rul-

ings cannot then accomplish what they seem intended to

do; on the contrary, they will lead in actuality to simpler

and harsher collection of the tax interest than if ordered

through the medium of reorganization or arrangement.

We do not believe that all this history and decision can

really have been intended to produce so pyrrhic a result.

The basis of the State’s claim rests upon the provisions

in the Bankruptcy Act for priority and nondischargeability

of tax claims and the complete assimilation of post-bank-

ruptey interest to the taxes themselves. Thus §371 of the

Act, 11 U. S. C. §771, provides that the confirmation of an

arrangement shall not discharge debts not dischargeable

under §17, 11 U. S. C. §35, while §17 excepts from discharge

debts as ‘‘are due as a tax levied by the United States, or

any State, county, district, or municipality.’’* In §354 as

now amended, 11 U. S. C. §755, it is provided that, when an

order in an arangement proceeding is entered directing

that bankruptcy be proceeded with, only claims for taxes

legally due and owing to the United States or any State or

any subdivision thereof at the time of the filing of the

original petition under this title,’ together with the or-

of the direct holding by the referee in bankruptey which would have

settled the question, the absence now of any adequate protection for the

plan of arrangement, and the direct threat of steps to collect, see note 1

supra, convince us that action is now necessary.

8 The provisions of § 226, 11 U. 8. C. § 626, applying to reorganization

proceedings, are somewhat differently framed, being to the effect that the

property dealt with by the plan is free and clear of creditors’ claims, and

there is no specific exception for claims allowable under § 17, 11 U. 8. ¢.

arrangemen

a ease of ordinary benkruptey. Of course a differentiation between these

proceedings would be most unfair and inequitable, and the rationale de-

veloped later in this opinion avoids necessity for any attempt to make it.

) oe

dinary provable claims, §63, 11 U. S. C. $103, ‘‘shall be

allowed.’’* Since there is nothing in the Act which spe-

cifically covers either the allowance or the nondischarge-

ability of interest on taxes, such a claim if based affirma-

tively on the statute must be brought within the terms here

cited to gain the special immunity claimed. But the lan-

guage is not apt for the purpose—thus such interest is

hardly a tax ‘‘legally due and owing’’ at the time of the

filing of the petition; and the history of the status of such

claims and their treatment judicially is persuasive to the

contrary. Nor can the State rest on the statute’s silence

and the assumption that claims survive unless expressly

eut off. For we think the contrary true under the scheme

of the Act.

Before the matter was settled by the ruling in the Saper

ease there had been sharp differences of view among federal

judges and commentators on the issue—a situation not

unnatural in view of the absence of statutory mandate.

Without pausing here for a full citation of opposing au-

thorities, we may refer to the able decision in favor of

allowance of interest in Davie v. Green, 1 Cir., 133 F. 2d 451,

which persuaded two of our colleagues, Carter v. United

States, 2 Cir., 168 F. 2d 272, and was relied on by the dis-

senting justice in the Saper case, 336 U. S. 328, at page 341.

Our opposing decision in Saper v. City of New York, 2 Cir.,

168 F. 2d 268, produced a conflict in and among circuits

which led to the Supreme Court review settling the issue,

City of New York v. Saper, supra, 336 U. S. 328.

The approach to the issue of Justice Jackson, speaking

for the Court in this decisive case, is instructive. First is

his initial statement of the problem: ‘“‘The ultimate issue

in these three cases is whether tax claims against a bank-

rupt bear interest until date of bankruptcy, as held by

the court below, or until payment, as previously held by

another Court of Appeals.’’ (Italics here and later sup-

plied.) He continues: ‘‘More than forty years ago Mr.

Justice Holmes wrote for this Court that the rule stopping

interest at bankruptcy had then been followed for more

4 The corresponding section of Chapter X, § 238(3), 11 U. 8. C. § 638 (3)

as amended, is identical in the language quoted.

than a century and a half. He said the rule was not a

matter of legislative command or statutory construction

but, rather, a fundamental principle of the English bank-

ruptey system which we copied.’’ Then after finding

logical implications to the same effect in §63(a)(1) and (5),

11 U. S. C. §103(a)(1) and (5), and §57(j), 11 U.S. C.

§93(j)—the latter dealing specifically with debts owed the

United States or any state or subdivision thereof—he con-

tinues: ‘‘Moreover, there is no interest except that which

acerues according to law—it is exactly such interest that

the ‘fundamental principle’ cuts off as of bankruptcy.

Section 57(n), 11 U. S .C. §93(n), requires governmental

claims to be proved in the same manner and within the

same time as other debts and only for cause shown may

a reasonable extension be granted. Tax claims are treated

the same as other debts except for the fourth priority of

payment, §64(a), 11 U. 8. C. §104(a), and the provision

making taxes nondischargeable, $17, 11 U.S. C. §35. But

each of these sections is silent as to interest.’”’ Then he

makes an extended analysis of the case authority and later

amendments of the Bankruptcy Act to state: ‘‘The Court

of Appeals concluded that by the 1926 amendment and the

Chandler Act, Congress assimilated taxes to other debts

for all purposes, including denial of post-bankruptcy mter-

est. We think this is a sound and logical interpretation

of the Act after those amendments to §§64(a) and 57(n).”’

336 U. S. 328, at pages 329, 330, 331, 332, 337, 338.

So conclusive did-this reasoning and decision seem to us

that recently when the State of New York again made a

like contention to us, we rejected it, citing particularly the

last quotation made above. In State of New York v. Fewm-

berg, 2 Cir., 204 F. 2d 502, 503, Judge Kaufman approved

a plan of reorganization of Huyler’s, Inc., which granted

the State on bonds issued for unpaid unemployment taxes

only such interest as other bondholders of like class were

to receive, not the 9 per cent per annum provided for this

tax by New York law. It is obvious that we could not

properly have affirmed the approval of the plan, which

made no provision for the contingency, if the law would

permit the State to make later collection of the additional

amount. But in fact we referred to the principle that even

governmental priorities were ‘‘fully discharged upon con-

summation of the final plan of reorganization’’; said that

“<i¢ would seem anomalous that sometime later there might

be a revivification of priorities once terminated’’; and held

the matter settled in favor of the power exercised by the

trial judge under the Saper ruling that Congress had as-

similated taxes to other debts ‘‘for all purposes, including

denial of post-bankruptcy interest.” And see also Pavone

Textile Corp. v. Bloom, supra, 302 N. Y. 206, at page 211,

97 N. E. 2d 755, making a like analysis of both federal and

New York statutes.

The argument to the contrary appears, SO far as we

understand it, to be based upon the assumed premise that

interest is merely ‘‘suspended’’ during the period of bank-

ruptey and, not being specifically denominated as dis-

charged, therefore revives after termination of proceed-

ings. This is a large premise, with a generous and uncom-

pelled, if not surprising, conclusion. Thus stated the diffi-

culty appears to be only semantic and, if the reasons of

policy and history are as strong as the Supreme Court has

indicated, should yield to semantic remedies. And it is little

compliment to the Supreme Court, whose skillful and per-

suasive rationale in the Saper case met and surmounted

the major issue, to hold that it would be balked by this

limited and already indicated subordinate step, so much

so, indeed, as to nullify for all practical effect its prior

carefully considered holding.

The holding that interest is only suspended is a deduction

from two stated ‘‘exceptions’’ to the English rule cited

approvingly in the Saper case, 336 U. S. 328, at page 330,

n. 7, viz., (1) that if the alleged bankrupt proved solvent,

creditors received post-bankruptcy interest before any sur-

plus reverted to the debtor ; and (2) that if securities held

by a creditor as collateral produced interest or dividends

during bankruptcy, these amounts were applied to post-

bankruptcy interest. These exceptions, be it noted, were

general, without peculiar application to tax claims. The

first exception was applied (without resort to the rationale

of interest as ‘‘suspended’’) in Johnson v. Norris, 5 Cir.,

190 F. 459, appeal dismissed Norris v. Johnson, 232 U.S.

715, and in American Iron € Steel Mfg. Co. v. Seaboard

Air Line Ry., 233 U. 8. 261, 267, a receivership case, where

the Court said: ‘‘For, manifestly, the law does not contem-

plate that either the debtor or the trustees can, by securing

the appointment of receiver, stop the running of interest

on claims of the highest dignity.’’ See for a late acute

discussion In re Macomb Trailer Coach, 6 Cir., 200 F. 2d

611, certiorari denied McInnis, Trustee v. Weeks, 345 U.S.

958, noted in 27 J. N. A. Ref. Bankr. 122, supporting a

third exception, namely where the value of the security

is more than sufficient to pay both the principal and inter-

est thereon to date of payment of the claim secured thereby.

Since the Supreme Court has not yet settled the extent

and nature of these suggested exceptions, it may be pre-

mature to base an extended argument upon their existence;

in pursuance of an overriding policy the Court may ulti-

mately think it not desirable to allow any at all. Never-

theless we do not perceive real difficulty in accepting them

if the Court so desires. But in that case these further sug-

gestions seem in point.

To denominate uncollectible interest as merely suspended

seems of itself a solecism. It reminds of Dean Ames’

classic statement: ‘‘ An immortal right to bring an eternally

prohibited action is a metaphysical subtlety that the pres-

ent writer cannot pretend to understand.’’ Lectures on

Legal History 199 (1913). But, however it be denominated,

of course the fact, rather than the label, controls. And the

reiterated fact throughout the cases, and the basis of the

extensive rationale, is—as we have seen by the quotations

above—that interest ceases upon bankruptcy in the general

and usual instances noted and unless the bankruptcy bar

proves eventually nonexistent by reason of the actual sol-

vency of the debtor.® The discretionary control of a court

over interest not based on a contract is traditional. See

Redfield v. Ystalyfera Iron Co., 110 U. S. 174, 176; Red-

5 This is discussed as one interpretation of the Court’s Saper opinion

in a Note, 58 Yale L. J. 982, 992, before the later re-enforcing decisions

—although the writer appears to presume in favor of the alternative

accepted below.

field v. Bartels, 139 U. S. 694, 701. And this is but a re-

sponse to both policy and federal statutory control. Par-

ticularly when it appears that failure thus clearly to carry

the logic of the policy announced by the Court to its natural

conclusion is effectually to deny realistic operation of the

policy itself, do we feel that the outcome here stated is

that intended by the Court.

The decision below denying this effect to the arrangement

proceedings is therefore error. While injunction against

state proceedings is undesirable, it is nevertheless recog-

nized aS necessary where preservation of federal disposi-

tions in bankruptcy and protection and enforcement of

federal decrees in legal rehabilitation of corporations are

necessary. Ciavarella v. Salituri, 2 Cir., 153 F. 2d 343;

Evans v. Dearborn Machinery Movers Co., 6 Cir., 200 F.

9d 125; Local Loan Co. v. Hunt, 292 U. S. 234, 93 A. L. R.

195; and see also Halpert v. Engine Air Service, 2 Cir.,

April 27, 1954. It may be that on remand of this action,

injunctive relief will no longer be necessary; but if it is

shown to be, then the district court has power to act.

Reversed and remanded for proceedings in accordance

with this opinion.

Frank, Circuit Judge, dissenting :

1. The cases cited by my colleagues (which I shall dis-

cuss later) have decided only that post-petition interest

on a tax claim is not allowable unless the debtor become

solvent during the bankruptcy proceeding. A different

question is before us here, viz. whether confirmation of a

Chapter XI arrangement discharges such interest if it has

not been allowed (i. e., when the debtor has not thus become

solvent). No court has heretofore considered this question.

My colleagues say, in effect, that (1) it having been held

such interest is not allowable, it would be absurd (2) to

hold nevertheless that it is not discharged. I think it not

at all absurd. For a discharge in ordinary bankruptcy or

a confirmation of a Chapter XI arrangement leaves undis-

charged many un-allowed claims which may be immense in

magnitude.

In ordinary bankruptcy, the other creditors usually have

no concern with undischarged claims. But not so in a

Chapter XI case. For there the assenting creditors often

look solely to the debtor’s property for payment, yet, after

confirmation that property—thanks to § 17 (11 U.S. C. See.

35)—may be subjected to huge undischarged claims which

often are unknown to, and unknowable by, the assenting

creditors at the time when the court confirmed the arrange-

ment. Such unknown and unknowable claims include,

among others, the following:* (1) liabilities for obtaining

property by false pretenses or false representations, (2)

unprovable liabilities for willful and malicious injuries, (3)

debts not duly scheduled of creditors who had no notice or

no actual knowledge of the bankruptcy proceeding, (4)

debts created by fraud, embezzlement, misappropriations

or defalcations, while the debtor acted in a fiduciary capac-

ity. To the extent that the undischarged claims are known

and definite in amount, the assenting creditors act with

their eyes open. But often the assenting creditors are un-

aware and cannot learn of either the existence or the

amount of many undischarged claims which may add up

to many thousands of dollars and utterly disrupt the ar-

rangement. In this respect, any Chapter XI arrangement

is undeniably vulnerable, as a Chapter X plan is not.

§ 626 and § 628) that a confirmation order wipes out all

claims not expected in the plan, or the order, as against

the debtor’s property dealt with by the plan.* But Chapter

6 Nor usually is the debtor if it is a corporation. Cf. Saper v. City of

New York, 168 F. (2d) 268, 272 (C. A. 2).

7 See §17, 11 U. S. C. § 35.

8 Section 226 reads: “The property dealt with by the plan, when trans-

ferred by the trustee to the debtor or other corporation or corporations

provided for by the plan, or when transferred by the debtor in possession

to such other corporation or corporations, or when retained by the debtor

in possession, as the case may be, shall be free and clear of all claims and

interests of the debtor, ereditors, and stockholders, except such claims

and interests as may otherwise be provided for in the plan or in the order

confirming the plan or in the order directing or authorizing the transfer

or retention of such property.”

Section 228 reads in part as follows: “Upon the consummation of the

plan, the judge shall enter a final decree (1) discharging the debtor from

XI—see § 371 (11 U.S. C. § 771)—incorporates § 17 as Chap-

ter X does not, with the result that claims not discharged

under § 17 are undischarged by confirmation of a Chapter

XI arrangement.®

In 8 Collier, Bankruptcy (14th ed.) p. 1259, it is said

that ‘‘the discharge provisions of Chapter X are radically

different from those of Chapter XI in that debts which are

not discharged under § 17 of the Act are not excluded from

the operation of a discharge under Chapter X.’’? At pp.

1267-1270, Collier says: ‘‘Section 371 specifically excludes

from the operation of the discharge ‘such debts as, under

section 17 of this Act, are not dischargeable.’ Chapter X

does not make the same exception; while some considera-

tion was given to excluding from the discharge under Chap-

ter XI only some of the debts specified in § 17, all of those

debts have been excluded by § 371.” And at pp. 1270-71,

Collier says: ‘‘An arrangement and its provisions, upon

confirmation of the arrangement, are binding upon all credi-

tors, including the holders of debts which are not dis-

charged. That, however, does not affect the liability of the

debtor upon the debts not discharged. If a creditor’s debt

was not discharged because he was not provided for in

the arrangement, it is clear that he may immediately pro-

ceed against the debtor to enforce collection. But where

a creditor is provided for in the arrangement, and his

claim is nevertheless not discharged under § 371, the prob-

lem is suggested as to the exact extent of that creditor’s

rights. Thus, if the arrangement provides that creditors

are to receive 20% in full settlement of their claims one

month after confirmation, the right of the creditor whose

debt is not discharged to enforce collection of the remain-

all its debts and liabilities and terminating all rights and interests of

stockholders of the debtor, except as provided in the plan or in the order

confirming the plan or in the order, directing or authorizing the transfer

or retention of property. * * °”

® Section 371 reads: “The confirmation of an arrangement shall dis-

charge a debtor from all his unsecured debts and liabilities provided for

by the arrangement, except as provided in the arrangement or the order

confirming the arrangement, including the claims specified in section 355

of this title, but excluding such debts as, under section 17 of this title, are

not dischargeable.”

ing 80% is clear. But the problem is whether he can im-

mediately sue the debtor for the full amount of his original

claim, or whether he can immediately sue for only 80%, and

must await payment of the other 20% pursuant to the terms

of the arrangement. It seems clear that he can immedi-

ately sue for the full amount, and such was the apparent

intention of the framers of the Act. The creditor has the

right to share in distribution, but the discharge consequent

upon confirmation does not affect his original claim, which

may therefore be immediately enforced in full. Where the

creditor has actually received some payment under the dis-

tribution upon confirmation, that payment, of course, must

be credited against the claim.”’

The courts can do nothing to overcome this serious de-

fect in Chapter XI. Congress alone, by future legislation,

can remove it. Accordingly, we must answer the question

here, recognizing this great gap in Chapter XI. (I note in

passing that, if post-petition interest on taxes is not dis-

charged, the assenting creditors, as to such interest, take

a known risk, because the amount of such interest is pre-

cisely ascertainable.)

2. Outside bankruptcy, interest on a claim for a fixed

sum is ordinarily an integral part of the principal. The

Bankruptcy Act so treats pre-petition interest. Does it

treat differently post-petition interest? I think not. The

cases, cited by the Supreme Court in New York v. Saper,

336 U. S. 328 at 330 footnote 7, as stating the correct rule,

hold (1) the interest accruing during the bankruptcy has

come into existence but that it is ‘‘suspended,”’ or is ‘‘still

running’’ during that period, and, significantly, that (2)

such interest is a part of the debt for which no new or

separate proof of claim is required to enable the creditor

to collect it in the event of solvency which the bankruptcy

proceedings are pending. See Johnson v. Norris, 190 F. 459

(C. A. 5, cited with approval in American Iron Co. v. Sea

board Air Line Ry. Co., 233 U. 8. 261.°° Johnson v. Norris,

supra, cites many previous decisions to the same effect.”

10 Of. Ryerson & Son v. Peden, 318 Ill. 105, 109-110.

11 Brown v. Leo, 34 F. (2d) 127, 128 (C. A. 2), cites Johnson v. Norris

with approval.

In Johnson v. Norris, a bankruptcy proceeding where it

turned out that the assets in the hands of the bankruptcy

trustees exceeded the amount of the debts plus pre-petition

interest, the court held that post-petition interest must be

paid, ruling as follows (190 F. at 465) : ‘‘It is said that sub-

sequently accruing interest should not be paid because it

has never been proved as a debt. We do not think this

objection is sound. The proof of an interest-bearing claim

is proof of the interest collectible on such claim. Interest

is an incident of, a part of, the debt, and no separate

proof is required.’’ In American Iron Co. v. Seaboard Air

Line, the Court, in an equity insolvency case, after referring

to the usual rule that interest is not allowed after an insol-

vent’s property is in custodia legis, continued (233 U. S.

at 266-267) : ‘‘But that rule did not prevent the running of

interest during the Receivership; and if as a result of

good fortune or good management, the estate proved suffi-

cient to discharge the claims in full, interest as well as

principal should be paid. Even in bankruptcy, and in the

face of the argument that the debtor’s liability on the debt

and its incidents terminated at the date of adjudication and

as a fixed liability was transferred to the fund, it has been

held, in the rare instances where the assets ultimately proved

sufficient for the purpose that creditors were entitled to

interest accruing after adjudication. 2 Blackstone’s Comm.

488; Cf. Johnson v. Norris, 190 Fed. Rep. 459, 460 (5).”’

In 3 Collier (14th ed.) 1838-1839, it is said: ‘The princi-

ple that interest stops running from the date of the filing

of the petition in bankruptcy should be understood as a

rule of liquidation practice rather than as a rule of sub-

stantive law that the creditor of an interest-bearing claim

is not entitled to interest beyond the filing date. The over-

whelming majority of bankruptcy cases end with the dis-

tribution of a dividend that is far from satisfying the credi-

tors even as to the principal. Disputes over interest thereby

become largely academic. But it would not be accurate to

allow this quantitative element to create a confusion as to

what is the rule and what the exception. In liquidating

interest-bearing claims, the computation of interest must

be made as of some fixed date. The law selects as decisive

aaa

the date of the filing of the petition in bankruptcy. It dis-

regards, for the purposes of liquidation, interest accruing

beyond that date. Yet this is primarily a technical device

to cope in the most convenient and equitable manner with

the debtor’s apparent insolvency. True, most cases of bank-

ruptcy liquidation are, as it were, ripe for the surgical

operation saving the patient’s life by amputating his debts.

As to such cases the denial of interest accrued after the fil-

ing date, in its origin more a provisional method of cal-

culation, becomes the final word. But in some cases the

estate is sufficient to take care of the interest accrued after

the filing date, and in this situation the debtor will not be

handed over the residue without previous distribution to

the creditors of such after-accrued interest up to the day of

payment. Though numerically undoubtedly a negligible

minority, these cases of ultimate solvency instance what is

truly the rule rather than the exception, namely that a

debtor should pay interest up to the day of payment, a rule

whose operation is merely suspended where a debtor is so

hopelessly insolvent that he is unable to pay even the

provable part of a claim, namely principal and interest

accrued prior to bankruptcy.’’

Now turn to Section 17 (11 U. S. C. Sec. 35). It pro-

vides that a discharge releases all ‘‘provable’’ debts

‘¢whether allowable in full or in part’’ except (inter alia)

‘¢snch as are due as a tax levied by * * * any State.’’ Apply-

ing this provision, we have this result: All the interest on

a tax—the pre-petition and the post-petition interest—con-

stitutes a ‘‘provable’”’ part of the tax claim. But—absent

solvency during bankruptcy—the total tax claim, including

all that interest, is ‘‘allowable’’ only ‘‘in part.’’ The ‘‘part”’

consisting of post-petition interest is the ‘‘part”’ not ‘‘allow-

able’’ unless solvency occurs during bankruptcy. Conse-

quently, were it not for the exception as to taxes contained

in Section 17, the post-petition interest would be dis-

charged (when the estate remains insolvent during bank-

12 Section 17 reads in part as follows: “A discharge in bankruptcy shall

release a bankrupt from all his provable debts, whether allowable in full

or in part, except such as (1) are due as a tax levied by the United States

or any State. * * *”

ruptcy). But that exception saves it from discharge in the

case of an insolvent estate.”

The very cases cited by my colleagues—Redfield v.

Ystalyfera Iron Co., 110 U. 8. 174, and Redfield v. Bartels,

139 U. S. 694, 701—hold that where ‘‘interest is reserved

expressly in the contract, or is implied by the nature of the

promise, it becomes part of the debt, and is recoverable by

right * * *,’’ its recovery not being ‘‘discretionary.’’ As the

New York statute expressly provides for interest on the

tax here, it is part of the tax claim, and its recovery is not

(as my colleagues suggest) within ‘‘the discretionary con-

trol of the court.”’

3. The cases my colleagues cite decide nothing contrary

to my position. In Saper v. New York, 168 F. (2d) 268

(C. A. 2), where the sole issue was of the allowability of

post-petition interest on a tax claim in an ordinary bank-

ruptey case, we explicitly left the question open, saying

(p. 271) : ‘No cases appear to have held that interest thus

survives beyond the principal claim which gives it birth.

But assuming, arguendo, that interest is not discharged

upon payment of the tax claim, we do not see how that fact

can be decisive on the present issue.’’ Accordingly, the

Supreme Court, in affirming our decision—New York v.

Saper, 336 U. S. 329—did not face the present problem.

An article in 58 Yale L. J. (1949) 982, 992, Interest on Tax

Arrearages After Bankruptcy, discussing the Saper case,

says, ‘‘Presumably * * * the case holds only that interest

accruing after a petition is filed is not provable; it does not

seem to affect the proviso of Section 17 that bars discharge

of tax claims not satisfied out of a debtor’s estate.’’ “

18 Section 755, added by amendment in 1952, provides that, upon the

entry of an order in a Chapter XI proceeding directing “that bankruptcy

be provided with, only claims for taxes legally due and owing at the time

of the filing of the original petition and such claims as are provable under

Section 63 shall be allowed. * * * ”

This provision does not at all affect Section 17 as to the discharge of

any “part” of a provable tax claim which is not “allowable” in an insolvent

estate. Just as before the 1952 amendment, the post-petition interest is

included in the provable tax claim; but is a part not “allowable” unless

solvency occurs during bankruptcy.

4 Footnote 35, p. 989, refers to the legislative history showing that

Congress has refused to amend Section 17 so as to discharge claims.

-Inapposite is United States v. Edens, 189 F. (2d) 876

(C. A. 4), affirmed without opinion in 342 U. S. 912. There

the Court merely decided, on the basis of the Saper case,

that post-petition interest on a tax claim was not allowable

in a Chapter X case. No more in point are similar rulings

in respect of Chapter XI arrangements—United States v,

General Engineering & Mfg. Co., 188 F. (2d) 80 (C. A. 8),

affirmed without opinion in 342 U. S. 912, and Massachu.

setts v. Thompson, 190 F. (2d) 10 (C. A. 1)—or, in respect

of a general assignment—Pavone Textile Corp. v. Bloom,

302 N. Y. 206, affirmed without opinion sub. nom. United

States v. Bloom, 342 U. 8. 912.

New York v. Feinberg, 204 F. (2d) 502 (C. A. 2), is

surely not pertinent. In the first place, it related to a con-

firmed Chapter X plan, and, as already noted, such con-

firmation eliminates all post-confirmation claims not ex-

cepted from the plan as against all the debtor’s property

covered by the plan. In the second place, the State—no

doubt because of that Chapter X provision—expressly dis-

avowed any right to interest accruing during the bank-

ruptey.> Our opinion so stated as follows: ‘‘The State of

New York does not object to the failure to pay interest

during the reorganization proceedings. * * *’’ The State

advanced this sole contention: The Plan allotted to all un-

secured creditors—including the State for its pre-petition

taxes—debentures bearing interest at 6%; but for the

bankruptcy, the State’s tax claim, under a state statute,

would have carried interest at 9%, while the other creditors

would have been entitled to a smaller rate; the plan was

therefore unfair in not giving the State, through the de-

bentures, 9% for the post-confirmation period. In affirm-

ing the order which confirmed the plan, we held the plan

fair. This amounted to saying no more than that the rate

of interest on new securities under a Chapter X plan need

not vary according to the varying interest rates to which

the several creditors had been entitled before bankruptcy.

Patently, then, the Feinberg case did not involve the ques-

tion confronting us here.

18 The debtor retained no property not covered by the plan.

S-

Unirep States Court or APPEALS FOR THE Seconp Crmcuit

At a Stated Term of the United States Court of Appeals,

in and for the Second Circuit, held at the United States

Courthouse in the City of New York, on the 27th day of

April one thousand nine hundred and fifty-four.

Present: Hon. Charles E. Clark, Hon. Jerome N. Frank,

Hon. Carroll C. Hincks, Circuit Judges.

In the Matter of Sworp Lins, Ivnc., Debtor-Appellant,

InpusTRiAL CoMMISSIONER OF THE State oF NEw York,

Appellee

Appeal from the United States District Court for the

Southern District of New York

This cause came on to be heard on the transcript of record

from the United States District Court for the Southern

District of New York, and was argued by counsel.

On consideration whereof, it is now hereby ordered, ad-

judged, and decreed that the order of said District Court

be and it hereby is reversed and action remanded for pro-

ceedings in accordance with the opinion of this Court with

costs to the appellant.

It is further ordered that a Mandate issue to the said

District Court in accordance with this decree.

(S.) A. Dantex Fusaro,

Clerk.

(6100)

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