1. At common law the Crown of Great Britain, by virtue of a
prerogative right, had priority over all subjects for the payment
out of a debtor's property of all debts due to it, whether the
property was in possession of the debtor or of a third person or
in custodia legis, and the priority could be defeated or
postponed only through passing the title to such property,
absolutely or by way of lien, before the sovereign sought to
enforce his right. P.
254 U. S.
382.
2. A like right of priority, based on sovereign prerogative,
belongs to the State of New York, as her highest court has decided,
through her adoption, by her constitutions, of the common law, and
attaches to a debt due the state by a sister-state corporation as a
license fee or tax for the privilege of doing business in New York,
although no statute of the state makes the tax a lien or declares
its priority. P.
254 U. S.
383.
3. The question whether this priority is a prerogative right or
a rule of administration is a question of local law, the
determination of which by the highest court of the state concludes
the federal courts. P.
254 U. S.
384.
4. The priority extends to all property of the debtor within the
borders
Page 254 U. S. 381
of the state, whether the debtor be a resident or a nonresident,
and is enforceable against such property in the hands of a receiver
appointed by a federal court within the state, since such a
receiver takes property subject to all liens, priorities, or
privileges existing or accruing under the state laws. P.
254 U. S. 385.
City of Richmond v. Bird, 249 U.
S. 174, distinguished.
262 F. 727 affirmed.
The case is stated in the opinion.
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
On December 4, 1917, the District Court of the United States for
the Southern District of New York appointed H. Snowden Marshall
general receiver of the property of the All Package Grocery Stores
Company, a corporation organized under the laws of Delaware but
having a place of business and property in the State of New York.
The latter state asked to have certain debts due to it declared
payable as preferred claims out of the assets in the hands of the
receiver. These debts consisted of (a) amounts due for annual
franchise taxes assessed under § 182 of the New York Tax Law, and
(b) amounts due for license fees or taxes for the privilege of
doing business within the state, assessed under § 181 of that law,
and payable but once. The state asserted in its claim:
"that said taxes accrued and became a lien on all the property
of defendant corporation, pursuant to the provisions of the Tax Law
of the State of New York, prior to the appointment of a receiver
herein."
The district court held that both
Page 254 U. S. 382
classes of claims were taxes, but that the lien created by § 197
of the Tax Law applied only to annual franchise taxes, and that no
provision of the law gave a lien for license taxes until a levy was
made therefor. It accordingly allowed the preference as to the
amounts due for annual franchise taxes, and denied it as to the
amounts due for license taxes. Upon appeal by the state, the
circuit court of appeals held that, independently of specific
statutory provisions, the law of New York as declared by its courts
gave to the state as sovereign a lien or priority for payment of
taxes over unsecured creditors, that this priority was a
prerogative right, not a mere rule of administration, and that it
applied therefore in the federal courts.
Sweet v. All Package
Grocery Stores Co., 262 F. 727. The case came here on writ of
certiorari. 252 U.S. 577. The propriety of allowing to the state a
preference as to amounts due for the annual franchise taxes is
admitted by the receiver. No question of the relative priority of
the state and the United States is involved. Nor does any question
arise as to priority of the state over incumbrances. The single
question is presented whether the State of New York has priority in
payment out of the general assets of the debtor over other
creditors whose claims are not secured by act of the parties nor
accorded a preference, by reason of their nature, by the state
legislature or otherwise.
At common, law the Crown of Great Britain, by virtue of a
prerogative right, had priority over all subjects for the payment
out of a debtor's property of all debts due it. The priority was
effective alike whether the property remained in the hands of the
debtor or had been placed in the possession of a third person, or
was
in custodia legis. The priority could be defeated or
postponed only through the passing of title to the debtor's
property, absolutely or by way of lien, before the sovereign sought
to enforce his right.
Giles v. Grover, 9 Bing. 128, 139,
157, 183.
In re Henley & Co., 9 Ch.D. 469.
Compare
United States v.
Page 254 U. S. 383
National Surety Co., ante, 254 U. S. 73. The
first Constitution of the State of New York (adopted in 1777)
provided that the common law of England, which together with the
statutes constituted the law of the colony on April 19, 1775,
should be and continue the law of the state, subject to such
alterations as its legislature might thereafter make. This
provision was embodied in substance in the later constitutions. The
courts of New York decided that, by virtue of this constitutional
provision, the state, as sovereign, succeeded to the crown's
prerogative right of priority, and that the priority was not
limited to amounts due for taxes, but extended alike to all debts
due to the state --
e.g., to amounts due on a general
deposit of state funds in a bank.
Matter of Carnegie Trust
Co., 151 App.Div. 606, 206 N.Y. 390. This priority has been
enforced by the courts of New York under a great variety of
circumstances in an unbroken series of cases extending over more
than half a century. [
Footnote
1] It has been enforced as a right, and not as a rule of
administration.
This priority arose and exists independently of any statute. The
legislature has never, in terms, limited its scope, and the courts
have rejected as unsound every contention made that some statute
before them for construction had, by implication, effected a repeal
or abridgement of the priority. [
Footnote 2] The only changes of the right made by statute
have been by way of enlarging its scope in
Page 254 U. S. 384
certain cases. Thus, while by the common law of England,
The
King (in aid of Braddock) v. Watson, 3 Price 6, and by that of
New York,
Wise v. L. & C. Wise Co., 153 N.Y. 507, 511,
the priority does not obtain over a specific lien created by the
debtor before the sovereign undertakes to enforce its right, the
Legislature of New York extended the prerogative right, so as to
give certain taxes priority over prior incumbrances. An extension
of this nature is found in § 197 of the Tax Law, which declares in
respect to the annual franchise tax, that
"[s]uch tax shall be a lien upon and bind all the real and
personal property of the corporation, join-stock company, or
association liable to pay the same from the time when it is payable
until the same is paid in full."
By reason of that provision, the annual franchise tax takes
priority over incumbrances on the corporate property.
New York
Terminal Co. v. Gaus, 204 N.Y. 512. Under the earlier law, a
debt for franchise taxes was not "a technical lien on specific
property," and had been ordered paid out of moneys in receivers'
hands.
Central Trust Co. v. New York City & Northern R.
Co., 110 N.Y. 250, 259,. In the case at bar, the district
judge relied upon § 197 as justifying him in giving priority for
the claim for annual franchise taxes, and in denying priority for
the claim for license fees because, in respect to the latter, no
corresponding provision is to be found in the Tax Law. But he had
no occasion to seek statutory support for the priority sought by
the state; since here it does not seek to displace any prior lien.
It asks merely to have its prerogative right enforced against
property on which there is no prior lien and upon which it is
impossible to levy because the property has been taken out of the
hands of the debtor and placed in the custody of the court for
purposes of protection and distribution.
Whether the priority enjoyed by the State of New York is a
prerogative right or merely a rule of administration is a matter of
local law. Being such, the decisions of the
Page 254 U. S. 385
highest court of the state as to the existence of the right and
its incidents will be accepted by this Court as conclusive.
Compare Lewis v. Monson, 151 U. S. 545,
151 U. S. 549;
St. Anthony Falls Water Power Co. v. Water Commissioners,
168 U. S. 349,
168 U. S. 358;
Archer v. Greenville Gravel Co., 233 U. S.
60,
233 U. S. 68-69;
Guffey v. Smith, 237 U. S. 101,
237 U. S. 113.
The priority of the state extends to all property of the debtor
within its borders, whether the debtor be a resident or nonresident
and whether the property be in his possession or
in custodia
legis. The priority is therefore enforceable against the
property in the hands of a receiver appointed by a federal court
within the state.
Duryea v. American Woodworking Machine
Co., 133 F. 329;
Conklin v. United States Shipbuilding
Co., 148 F. 129, 130.
Compare Franklin Trust Co. v. New
Jersey, 181 F. 769;
Washington-Alaska Bank v. Dexter
Horton National Bank, 263 F. 304. For a receiver appointed by
a federal court takes property subject to all liens, priorities, or
privileges existing or accruing under the laws of the state. In the
case at bar, a warrant for the amount of the license tax might have
issued but for the appointment of the receiver, and if the levy had
been made, it would have become, under § 201 of the Tax Law, a lien
on all the property of the company from "the time an actual levy
shall be made by virtue thereof." Since the prerogative right of
the state could not be enforced by levy and seizure, an application
to the court for payment of the debt due was the appropriate
remedy.
In re Tyler, 149 U. S. 164,
149 U. S.
184.
The state's right to be paid out of the assets prior to other
creditors does not, as pointed out in
In re Tyler, supra
(quoting
Greeley v. Provident Savings Bank, 98 Mo. 458),
arise from an express lien on the assets existing at the time they
passed into the receiver's hands.
State v. Rowse, 49 Mo.
586, 592;
George v. St. Louis Cable & Western Railway
Co., 44 F. 117, 118;
Hamilton
Page 254 U. S. 386
v. David C. Beggs Co., 171 F. 157;
Coy v. Title
Guarantee & Trust Co., 212 F. 520, 523; 220 F. 90. The
right of priority has been likened to an equitable lien.
State
v. Rowse, supra. The analogous preference in payment given to
claims for labor by state statutes, and to which the Bankruptcy Act
gives priority, have been described as being "tantamount" to a
lien.
In re Laird, 109 F. 550, 555;
In re
Bennett, 153 F. 673, 677. The priority is a lien in the broad
sense of that term which includes "those preferred or privileged
claims given by statute or by admiralty law." 2 Bouvier, Law Dict.
(15th ed. 1883) 88. The prerogative right of the state resembles
the privilege accorded by the civil law of Louisiana to certain
classes of debts which it was assumed in
Burdon Central Sugar
Refining Co. v. Payne, 167 U. S. 127,
would be enforced against property in the custody of a receiver
appointed by a federal court. The fact that the right rests on the
common law independently of any statute does not, of course, affect
the right of enforcement in the federal courts.
City of Richmond v. Bird, 249 U.
S. 174, relied upon by the petitioner, is not in point.
The city sought there in vain to have taxes declared payable out of
the bankrupt's assets in preference to the claim of the landlord
thereon which was secured by a specific lien arising upon
distraint. This Court held that the city did not have such superior
right, since neither the laws of the United States nor those of
Virginia accorded such priority. Here, it is not sought to gain
priority over a lien existing at the time when the receiver was
appointed, and the priority over unsecured creditors is granted by
the common law of New York.
Affirmed.
[
Footnote 1]
See, in addition to cases cited in the text,
Matter
of Receivership of Columbian Insurance Co., 3 Abb.Dec. 239,
242 (1866);
Central Trust Co. v. New York City & Northern
R. Co., 110 N.Y. 250, 259;
Matter of Atlas Iron
Construction Co., 19 App.Div. 415, 419 (1897);
Matter of
Niederstein, 154 App.Div. 238, 246, 138 N.Y.Supp. 952 (1912);
Matter of Wesley, 156 App.Div. 403, 405 (1913);
People v.
Surety Co., 158 App.Div. 647, 650 (1913);
Mixter v. Mohawk
Clothing Co., Inc., 155 N.Y.S. 647 (1915).
[
Footnote 2]
See Matter of Niederstein, 154 App.Div. 238, 244-246;
Matter of Wesley, 156 App.Div. 403, 405.