Under § 64 of the Bankruptcy Act, federal and state taxes are to
be paid in full before paying claims for preferred wages, unless it
clearly appear that the particular tax in question has been
subordinated to such claim by some relevant federal or local law.
City of Richmond v. Bird, 249 U.
S. 174.
290 F. 160 affirmed.
Certiorari to a judgment of the circuit court of appeals which
reversed a judgment of the district court giving wages priority
over taxes in a bankruptcy case.
See 283 F. 351.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
The bankrupt's estate consisted of personal property only, and
there is no suggestion of a lien thereon to secure
Page 268 U. S. 2
any of the claims now under consideration. The fund derived from
conversion of all the property is insufficient fully to satisfy
taxes due the United States, and the City and County of San
Francisco, and the allowed claims for preferred wages. Which of
these must be paid first is the question for decision. The referee
ruled in favor of the wages, and the district court approved, but
the circuit court of appeals held to the contrary, and directed
that priority should be given the taxes.
The Bankruptcy Act of 1898, 30 Stat. 544, 563, c. 541,
provides:
"Sec. 64.
Debts Which Have Priority. -- a. The court
shall order the trustee to pay all taxes legally due and owing by
the bankrupt to the United States, state, county, district, or
municipality in advance of the payment of dividends to creditors,
and upon filing the receipts of the proper public officers for such
payment he shall be credited with the amount thereof, and in case
any question arises as to the amount or legality of any such tax
the same shall be heard and determined by the court."
"
b. The debts to have priority, except as herein
provided, and to be paid in full out of bankrupt estates, and the
order of payment shall be (1) the actual and necessary cost of
preserving the estate subsequent to filing the petition; (2) the
filing fees paid by creditors in involuntary cases; (3) the cost of
administration, including the fees and mileage payable to witnesses
as now or hereafter provided by the laws of the United States, and
one reasonable attorney's fee, for the professional services
actually rendered, irrespective of the number of attorneys
employed, to the petitioning creditors in involuntary cases, to the
bankrupt in involuntary cases while performing the duties herein
prescribed, and to the bankrupt in voluntary cases, as the court
may allow; (4) wages due to workmen, clerks, or servants which have
been earned within three months before the date of the
commencement
Page 268 U. S. 3
of proceedings, not to exceed three hundred dollars to each
claimant, and (5) debts owing to any person who by the laws of the
states or the United States is entitled to priority."
Guarantee Co. v. Title Guaranty Co., 224 U.
S. 152,
224 U. S.
159-160, held that, under § 64, wages were entitled to
priority over the claim of the United States for damages occasioned
by the bankrupt's failure to comply with a construction contract.
It was there said:
"By the statute of 1797 [now § 3466] and § 5101 of the Revised
Statutes, all debts due to the United States were expressly given
priority to the wages due any operative, clerk, or house servant. A
different order is prescribed by the act of 1898, and something
more. Labor claims are given priority, and it is provided that
debts having priority shall be paid in
full. The only
exception is 'taxes legally due and owing by the bankrupt to the
United States, state, county, district or municipality.' These were
civil obligations, not personal conventions, and preference was
given to them, but as to debts, we must assume a change of purpose
in the change of order. And we cannot say that it was inadvertent.
The Act takes into consideration, we think, the whole range of
indebtedness of the bankrupt, national, state and individual, and
assigns the order of payment. The policy which dictated it was
beneficent, and well might induce a postponement of the claims,
even of the sovereign in favor of those who necessarily depended
upon their daily labor. And to give such claims priority could in
no case seriously affect the sovereign. To deny them priority would
in all cases seriously affect the claimants."
In
City of Richmond v. Bird, 249 U.
S. 174,
249 U. S. 177,
past-due taxes were denied priority of payment over a debt secured
by a lien which the state law recognized as superior to the city's
claim for such taxes. We said:
"Respondents therefore must prevail unless priority over their
lien is given by § 64a to claim for taxes
Page 268 U. S. 4
which, under state law, occupied no better position than one
held by a general creditor. Section 67d, Bankruptcy Act, quoted
supra, declares that liens given or accepted in good faith
and not in contemplation of or in fraud upon this Act shall not be
affected by it. Other provisions must, of course, be construed in
view of this positive one. Section 64a directs that taxes be paid
in advance of dividends to creditors, and 'dividend,' as commonly
used throughout the Act, means partial payment to general
creditors. In § 65b, for example, the word occurs in contrast to
payment of debts which have priority. And as the local laws gave no
superior right to the city's unsecured claim for taxes, we are
unable to conclude that Congress intended by § 64a to place it
ahead of valid lienholders."
Of course, this opinion must be read in the light of the
question under consideration: Does § 64 require that taxes shall be
paid in advance of debts secured by liens which under the local law
are superior to claims for such taxes? We pointed out that § 67d
preserves valid liens, and is not qualified by the direction of §
64a to discharge taxes "in advance of the payment of dividends to
creditors," since "
dividend,' as commonly used throughout the
Act, means partial payment to general creditors." We did not
undertake to decide in what order, as among themselves, taxes and
the debts specified by § 64 should be satisfied; that point was not
presented.
The language of § 64 has caused much uncertainty, and widely
different views of its true meaning may be found in the opinions of
district courts and circuit courts of appeals.
Paragraph "a" directs that "the court shall order the trustee to
pay all taxes legally due and owing . . . in advance of [not next
preceding] the payment of dividends to creditors" -- that is,
partial payments to general creditors.
City of Richmond v.
Bird, supra. It does not undertake
Page 268 U. S. 5
otherwise to fix the precise position which shall be accorded to
them. This, we think, must be determined upon consideration of the
circumstances of each case and the provisions of relevant federal
and local laws --
e.g., those which prescribe liens to
secure or special priority for tax claims. It also appears, plainly
enough, that all debts mentioned in paragraph "b" must be satisfied
before any payment to general creditors.
Guarantee Co. v. Title Guaranty Co., supra, declares
that the taxes of paragraph "a" are "civil obligations, not
personal conventions, and preference was given to them" over the
wages specified by clause (4), paragraph "b." We adhere to this as
a correct statement of the general rule to be followed whenever it
does not clearly appear that the particular tax has been
subordinated to claims for wages by some relevant law.
We find no error in the action of the court below. The cause
will be remanded to the district court for further proceedings
consistent with this opinion.
Affirmed.