The United States challenges, as violative of § 3466 of the
Revised Statutes, a reorganization plan under Chapter X of the
Bankruptcy Act under which claims of junior creditors were to be
partially or fully paid before full payment was made of the
Government's tax claims. Section 3466 provides that, "[w]henever
any person indebted to the United States is insolvent . . . , the
debts due to the United States shall be first satisfied." The
District Court approved the plan. The Court of Appeals affirmed on
the ground that § 3466 was impliedly inapplicable by virtue of the
statutory plan of Chapter X proceedings, § 199 of the Act providing
that the United States shall have "payment," of its tax claims in
such proceedings unless the Secretary of the Treasury accepts "a
lesser amount," and §§ 216 and 221 establishing an equitable
standard to govern the method of payment.
Held: The United States is entitled to absolute
priority of payment under § 3466 of the Revised Statutes over the
other claimants in the reorganization here involved, there being no
inconsistency between the terms of that section and the provisions
of Chapter X. Pp.
397 U. S.
324-333.
407 F.2d 635, reversed and remanded.
MR. JUSTICE MARSHALL delivered the opinion of the Court.
In this case, the United States challenges the treatment given
to its claim for unpaid taxes against an insolvent
Page 397 U. S. 323
corporation in reorganization under Chapter X of the Bankruptcy
Act, 11 U.S.C. §§ 501-676. Under the reorganization plan approved
by the District Court, the debtor, Hancock Trucking, Inc., will
sell its chief asset, its Interstate Commerce Commission operating
rights, to Hennis Freight Lines, Inc., for $935,000. The sale
contract provides for a $300,000 downpayment, with the balance to
be paid in 78 monthly installments. Under the reorganization plan,
the downpayment will be used to satisfy certain wage and state and
local tax claims in full, to satisfy 20% of the claims of the
unsecured creditors, and to satisfy about 10% of the United States'
tax claim of $375,386.55. The remainder of the United States' claim
will he paid out of the monthly installments. The plan, an atypical
one for a corporate reorganization, does not contemplate the
continued existence of the debtor as a going concern, but amounts
in substance to a liquidation.
The United States objects to that aspect of the plan that
provides for partial or complete payment of the claims of unsecured
creditors and state and local government units before full payment
of the federal tax claims. This, the Government urges, violates the
command of § 3-166 of the Revised Statutes, 31 U.S.C. § 191, that
"[w]henever any person indebted to the United States is insolvent .
. . the debts due to the United States shall be first satisfied."
Respondent urges that § 3466 does not apply to Chapter X
proceedings, but that the United States is entitled only to
"payment" of its tax claim, as provided by § 199 of the Bankruptcy
Act, 11 U.S.C. § 599.
The Court of Appeals accepted respondent's theory, and affirmed
the order of the District Court approving the plan. 407 F.2d 635
(C.A. 7th Cir.1969). We granted certiorari, 396 U.S. 874 (1969),
and we reverse.
Page 397 U. S. 324
Since the earliest days of the Republic, § 3466 and its
predecessors have given the Government priority over all other
claimants in collecting debts due it from insolvent debtors.
[
Footnote 1] The present
statute has existed almost unchanged since 1797, [
Footnote 2] and its historical roots reach
back to the similar priority of the Crown in England, an aspect of
the royal prerogative, founded upon a policy of protecting the
public revenues. [
Footnote 3]
The same policy underlies the federal statute,
United
States v. State Bank of North Carolina, 6 Pet. 29,
31 U. S. 35
(1832), and it is established that the terms of § 3466 are to be
liberally construed to achieve this broad purpose.
Beaston v.
Farmers' Bank, 12 Pet. 102,
37 U. S. 134
(1838);
Bramwell v. United States Fidelity Co.,
269 U. S. 483,
269 U. S. 487
(1926).
Section 3466 applies literally to the situation here. The debtor
is concededly insolvent, and it is established that a tax debt is a
"debt due to the United States" within the meaning of the statute.
Price v. United States, 269 U. S. 492,
269 U. S. 499
(1926). No provision of Chapter X explicitly excepts corporate
debtors in reorganization from the application of § 3466, and so
the only remaining question is whether the legislative scheme
established in Chapter X, either by logical inconsistency or other
manifestation of congressional intent, implies such an
exception.
In approaching a claim of an implied exception to § 3466, we
start with the principle, noted above, that the statute must be
given a liberal construction consonant with the public policy
underlying it. Applying that principle to an earlier claim that a
statutory scheme implicitly excluded § 3466, this Court held
that
"[o]nly
Page 397 U. S. 325
the plainest inconsistency would warrant our finding an implied
exception to the operation of so clear a command as that of §
3466."
United States v. Emory, 314 U.
S. 423,
314 U. S. 433
(1941).
Here, the Court of Appeals discerned an intent not to apply §
3466 to Chapter X proceedings from § 199 of the Bankruptcy Act,
which forbids the approval of any reorganization plan which does
not provide for the "payment" of taxes or customs due to the United
States, unless the Secretary of the Treasury accepts "a lesser
amount." [
Footnote 4] The Court
of Appeals further supported its inference of exclusionary intent
from §§ 216(7) and 221 of the Act, 11 U.S.C. §§ 616(7) and 621.
Section 216(7) provides that, where a class of creditors dissents
from a reorganization plan, the District Court shall provide
"adequate protection for the realization by them of the value of
their claims against the property" in any of four ways, the last
and most general of which is by
"such method as will, under and consistent with
Page 397 U. S. 326
the circumstances of the particular case, equitably and fairly
provide such protection."
Section 221 merely sums up the applicable tests for a valid
reorganization plan by providing that "[t]he judge shall confirm a
plan if satisfied that" § 199 has been complied with, and that "the
plan is fair and equitable, and feasible."
The Court of Appeals reasoned from these provisions to the
implied exclusion of the operation of § 3466 as follows:
"Within Chapter X, §§ 199, 216 and 221 are interrelated statutes
and part of a studied statutory plan. Section 199 outlines the
nature of the government's tax claim 'priority,' and the two other
sections establish an equitable standard to govern the method of
payment. If, as the government would have us hold, § 3466 creates
an absolute right to first payment in addition to full payment,
there would be little need for §§ 199, 216(7) and 221. These
sections apply specifically to Chapter X proceedings, and should
control over the more general and conflicting direction of §
3466."
407 F.2d at 638.
In our view, these provisions are not logically inconsistent
with the terms of § 3466, nor would they be rendered redundant if
the older statute applied, nor does their language or legislative
history reveal a purpose incongruous with its application.
In the first place, § 216(7) has nothing to do with the
priorities of different classes of claimants under Chapter X. That
section merely provides that, where an affected class of creditors
(and here the United States itself constitutes the whole of such a
class) dissents from a plan, their claims are to be dealt with in
one of the four ways specified, one of which is that those claims
must be disposed of "equitably and fairly."
Page 397 U. S. 327
This Court has long held that these words, along with the words
"fair and equitable" in § 221, in no way authorize a District Court
to ignore or erode priorities otherwise granted by law, and it
follows that this language cannot be taken to exclude by
implication an explicit statutory priority, such as that granted
the United States by § 3466. In short, the words "fair and
equitable" in Chapter X are terms of art, and no plan can be "fair
and equitable" which compromises the rights of senior creditors in
order to protect junior creditors.
Case v. Los Angeles Lumber
Co., 308 U. S. 106,
308 U. S.
115-116 (1939);
Consolidated Rock Co. v. Du
Bois, 312 U. S. 510,
312 U. S.
527-529 (1941).
We turn then to the argument upon which respondent chiefly
relies for his claim that § 3466 does not reach to Chapter X
proceedings -- the alleged inconsistency between application of the
"first satisfied" requirement and the terms and purposes of § 199.
As already noted, § 199 provides that the United States shall have
"payment" of its tax claims in Chapter X proceedings unless the
Secretary of the Treasury accepts "a lesser amount." respondent
argues and the Court of Appeals held that this establishes by
negative implication that Congress did not mean the United States
to be able to insist upon the more onerous remedy of payment first
in time. [
Footnote 5]
Page 397 U. S. 328
As a matter of logic, we see no inconsistency between a
requirement of payment and a requirement of first satisfaction.
Congress surely could have provided that the United States receive
payment out of a limited fund at the expense of other claimants,
and quite consistently provided that, when the wherewithal to make
such payment became available in installments over time, the United
States should also have the right to claim the first of those
installments and each succeeding one until its debt was satisfied.
[
Footnote 6] Separate
provisions to this effect in the same statute could certainly be
read in harmony with each other, and there is no reason why § 3466
should not be read to supplement the requirement of payment
contained in § 199 in the same fashion.
Nor is § 199 redundant if § 3466 applies in Chapter X
proceedings on the ground that a requirement of first satisfaction
necessarily implies a requirement of payment. Section 3466 applies
only to insolvent debtors. [
Footnote 7]
Page 397 U. S. 329
Yet Chapter X proceedings are not open merely to corporations
that are insolvent in that their liabilities exceed their assets,
but also to those that are solvent in the bankruptcy or
asset-liability sense, and yet are unable to meet their obligations
as they mature. Bankruptcy Act § 130(1), 11 U.S.C. § 530(1). Thus,
§ 199 does not merely give the Government rights already granted by
implication in § 3466, but extends the Government's priority, for
tax claims at least, to solvent corporations in Chapter X
reorganization.
Thus, on the face of the statute, no inconsistency arises from
applying both § 3466 and § 199 to Chapter X proceedings, much less
the "plain inconsistency" required if respondent is to prevail
under the test of
United States v. Emory, supra. That, in
itself, strongly suggests that § 3466 should apply here, and our
examination of the background and legislative history of § 199 and
of Chapter X generally does not reveal a contrary intent on the
part of Congress.
Before the reorganization legislation of the 1930's, the
principal method of reorganizing corporations that were unable to
meet their debts was the equity receivership. This judge-made
device was designed to preserve the debtor business as a going
concern by cancelling claims against it, in return for which
cancellation the claimants received debt or equity interests in a
new corporation, which then acquired the assets of the old
corporation in a judicial sale.
See T. Finletter, The Law
of Bankruptcy Reorganization 1-17 (1939). By 1926, it was
established that § 3466 applied to give the United States an
absolute priority for payment of debts due it from insolvent
corporations in equity receivership.
Price v. United
States, 269 U.S. at
269 U. S.
502-503,
and see Blair, The Priority of the
United States in Equity Receiverships, 39 Harv.L.Rev. 1 (1925).
In 1933, Congress enacted § 77 of the Bankruptcy Act, 47 Stat.
1474, providing a statutory procedure for the
Page 397 U. S. 330
reorganization of railroads. Section 77, as well as later
corporate reorganization statutes discussed below, was designed to
follow the general format of the equity receivership. As one of the
early commentators on the federal statutes has noted, "[t]he
principles of the equity receivership underlie nearly every
substantive provision of the [reorganization acts]." Finletter,
supra, at 3. These statutes were not, of course, mere
codifications of the law governing equity receiverships. They were
designed in part to correct abuses and inefficiencies that had
existed under the prior regime.
Duparquet Co. v. Evans,
297 U. S. 216,
297 U. S.
218-219 (1936). However, the problems of the equity
receivership that led to the legislative intervention did not
include the Government's priority under § 3466, a relatively
uncontroversial aspect of the receivership procedure.
Nothing in § 77 casts any doubt on the continued priority of the
United States under § 3466. Indeed, the only provision in the new
statute affecting the claims of the United States was § 77(e),
which provided in pertinent part:
"If the United States of America is directly a creditor or
stockholder, the Secretary of the Treasury is hereby authorized to
accept or reject a plan in respect of the interests or claims of
the United States."
47 Stat. 1478. The purpose of this provision was to overcome the
effect of two prior rulings of the Attorney General that the
Secretary of the Treasury lacked authority to compromise claims of
indebtedness owed to the Government by the railroads, 33
Op.Atty.Gen. 423 (1923), 34 Op.Atty.Gen. 108 (1924). [
Footnote 8]
Page 397 U. S. 331
In 1934, Congress enacted § 77B of the Bankruptcy Act, 48 Stat.
911, which provided a reorganization scheme for corporations
generally, closely modeled on the railroad reorganization scheme of
§ 77; § 77B(e)(1) granted the Secretary of the Treasury power to
compromise federal claims, in language almost identical with that
of 77(e). 48 Stat. 918. There is no language in the statute, and
nothing in its history, to suggest any intention to alter the
established priority of the United States under § 3466.
In 1935, the Secretary of the Treasury called the attention of
Congress to the fact that the courts were construing § 77B(e)(1) to
include the United States among the general creditors in
reorganization proceedings, so that plans disapproved by the
Secretary for failure to satisfy a federal claim could nevertheless
be confirmed if the necessary majority of general creditors
approved. S.Rep. No. 953, 74th Cong., 1st Sess. (1935). The
Secretary proposed an amendment, which, after some weakening in the
House,
see S.Rep. No. 1386, 74th Cong., 1st Sess. (1935),
was adopted. [
Footnote 9] 49
Stat. 966
Page 397 U. S. 332
(1935). In its relevant provisions, the amendment was identical
with present § 199, and the 1938 revisions which culminated in the
replacement of § 77B by present Chapter X did not affect it.
Thus, § 199 is derived from an enactment designed to grant the
Government the power to compromise its claims against debtors, and
an amendment designed to ensure priority for federal claims over
the claims of general creditors. Nothing in this background lends
any support to respondent's claim that the draftsmen of Chapter X
meant to provide an exception to the operation of § 3466 for
reorganization proceedings under the new statute. Indeed, the
established practice of applying § 3466 to equity receiverships,
the acknowledged predecessor of the Chapter X proceeding, combined
with the failure to indicate in any way an intent to alter that
practice in the new statutes, supports the conclusion that Congress
affirmatively meant 3466 to apply to statutory reorganization.
[
Footnote 10]
As we noted at the outset, § 3466 must apply according to its
terms except where expressly superseded, or where excluded by a
later enactment "plainly inconsistent" with it. Here, the statute
literally applies, and no plain inconsistency with the scheme of
Chapter X appears. The terms of § 3466 are clearly not satisfied by
the reorganization plan here in question, which provides payment in
part to general creditors and other nonpreferred claimants
[
Footnote 11] before
satisfaction of the federal tax
Page 397 U. S. 333
claim. Therefore the judgment upholding the plan must be
reversed, and the case remanded to the Court of Appeals for further
proceedings consistent with this opinion.
Reversed.
[
Footnote 1]
See, e.g., Act of July 31, 1789, § 21, 1 Stat. 42; Act
of August 4, 1790, § 45, 1 Stat. 169.
[
Footnote 2]
See Act of March 3, 1797, § 5, 1 Stat. 515, as amended
by Act of March 2, 1799, § 65, 1 Stat. 676.
[
Footnote 3]
See 33 Hen. 8, c. 39, § 74 (1541); 13 Eliz. 1, c. 4
(1570).
[
Footnote 4]
Section 199 provides:
"If the United States is a secured or unsecured creditor or
stockholder of a debtor, the claims or stock thereof shall be
deemed to be affected by a plan under this chapter, and the
Secretary of the Treasury is authorized to accept or reject a plan
in respect of the claims or stock of the United States. If, in any
proceeding under this chapter, the United States is a secured or
unsecured creditor on claims for taxes or customs duties (whether
or not the United States has any other interest in, or claim
against the debtor, as secured or unsecured creditor or
stockholder), no plan which does not provide for the payment
thereof shall be confirmed by the judge except upon the acceptance
of a lesser amount by the Secretary of the Treasury certified to
the court:
Provided, That if the Secretary of the Treasury
shall fail to accept or reject a plan for more than ninety days
after receipt of written notice so to do from the court to which
the plan has been proposed, accompanied by a certified copy of the
plan, his consent shall be conclusively presumed."
11 U.S.C. § 599.
[
Footnote 5]
The Government argues in the alternative that, even if § 3466
does not apply to claims against debtors in Chapter X, the plan
here is defective even under the § 199 requirement of "payment"
alone, since the deferment of payment of the Government's tax claim
while the cash flow from the installment contract is used to
satisfy the claims of lower ranking creditors means that the
Government is receiving a "lesser amount," which § 199, in its
terms, contrasts with "payment," than what it would receive if it
had first claim on all cash as it came in. The argument is premised
on the fact that the Government cannot collect post-petition
interest on its claim.
City of New York v. Saper,
336 U. S. 328
(1949);
United States v. Edens, 189 F.2d 876 (C.A.4th
Cir.1951),
aff'd per curiam, 342 U.S. 912 (1952). Because
of our determination that § 3466 applies here and requires payment
first in time, we need not reach this contention.
[
Footnote 6]
In the normal Chapter X reorganization, no provision need be
made for priority in time of different claims. Claimants receive
debt or equity interests in a going concern in the usual situation,
and the priority of one claimant over another means only that, if
there is insufficient going concern value to satisfy both claims,
the claimant with priority must receive value equivalent to his
full claim if the other claimant is to receive anything. Here, a
second sense of priority is involved: when cash becomes available
to pay off outstanding claims only over a period of time, the
claimant with "priority" in this second sense receives his cash
first in time; the nonpriority claimant may receive full payment,
but receives it later. In its literal language -- "first satisfied"
-- § 3466 provides this kind of priority, and respondent has not
argued that it should not be so construed if it applies here.
[
Footnote 7]
It seems to have long been assumed that the term insolvent in §
3466 meant insolvent in the bankruptcy sense, and this Court
clearly so held in
United States v. Oklahoma, 261 U.
S. 253, 260-261 (1923).
[
Footnote 8]
See Senate Committee on the Judiciary, Criticisms and
Suggestions Relating to H.R. 14359 and S. 5551, Amending the
Bankruptcy Act 19-20, 72d Cong., 2d Sess. (Comm.Print. 133).
[
Footnote 9]
The Secretary had proposed that he be given a veto over plans
that failed to provide for "payment" of any federal claim.
See S.Rep. No. 953,
supra. The House imposed the
"payment" requirement only upon tax and customs claims, possibly
intending to leave the Government in the position of a general
creditor with respect to other claims,
see S.Rep. No.
1386,
supra, and this was the form in which the amendment
was adopted. Section 199 preserves this apparent distinction
between tax and other claims,
see text at
n 4,
supra. However the courts,
relying on the strong presumption against implied exceptions to §
3466, have not treated the Government as a general creditor in its
nontax claims, but rather have held that it has priority under §
3466.
United States v. Anderson, 334 F.2d 111 (C.A. 5th
Cir.1964);
In re Cherry Valley Homes, Inc., 255 F.2d 706
(C.A.3d Cir.1958);
Reconstruction Finance Corp. v. Flynn,
175 F.2d 761 (C.A.2d Cir.1949).
If, as appears from the present case, § 3466, if applicable,
may, in some instances, give the Government greater protection than
§ 199, it would be anomalous to deny that protection to Government
tax claims while granting it to nontax claims, since Congress
clearly intended that tax claims should have greater
protection.
[
Footnote 10]
The leading authorities agree that § 3466 applies to Chapter X
proceedings. Finletter,
supra, at. 3-393; 6A Collier on
Bankruptcy 269 n. 11 (14th ed.1969).
[
Footnote 11]
This case does not raise the question, never decided by this
Court, whether § 3466 grants the Government priority over the prior
specific liens of secured creditors.
See United States v.
Gilbert Associates, 345 U. S. 361,
345 U. S.
365-366 (1953).
MR. JUSTICE DOUGLAS, concurring.
I join the opinion of the Court. As it holds, the Chandler Act
provides the standard for treatment of claims of the United States
as "a secured or unsecured creditor" of the debtor. Those are the
words of § 199, 52 Stat. 893, 11 U.S.C. § 599. Section 199 goes on
to provide that "no plan which does not provide for the payment" of
the claims of the United States for taxes or customs duties shall
be "confirmed" by the judge, "except upon the acceptance of a
lesser amount by the Secretary of the Treasury."
The question, therefore, is what kind of "payment," as used in §
199, the claim of the United States must receive in a Chapter X
proceeding.
There is no doubt but that the claim of the United States has
priority by reason of § 3466 of the Revised Statutes, 31 U.S.C. §
11.
Section 216 of the Chandler Act provides the standards for
dealing with the priorities among creditors. Section 216(7) says
that, where "any class of creditors" affected by the plan does not
accept the plan, those claims can be dealt with in several ways,
including a method which "equitably and fairly" protects them. And
§ 221(2) of the Act provides that the judge shall confirm the plan
if satisfied that it is "fair and equitable, and feasible."
The words "fair and equitable" are words of art; we have made
unmistakably clear that compromising the rights of senior creditors
to protect junior creditors is not "fair and equitable" treatment.
Case v. Los Angeles Lumber Co., 308 U.
S. 106,
308 U. S.
115-116;
Consolidated
Rock
Page 397 U. S. 334
Co. v. Du Bois, 312 U. S. 510,
312 U. S.
527-529. We said in the
Du Bois case:
"[I]t is plain that, while creditors nay be given inferior
grades of securities, their 'superior rights' must be recognized.
Clearly, those prior rights are not recognized, in cases where
stockholders are participating in the plan, if creditors are given
only a face amount of inferior securities equal to the face amount
of their claims. They must receive, in addition, compensation for
the senior rights which they are to surrender. If they receive less
than that full compensatory treatment, some of their property
rights will be appropriated for the benefit of stockholders without
compensation. That is not permissible."
Id. at
312 U. S.
528-529.
The present plan is likewise infirm because it provides junior
creditors with immediate, partial payment, while making the United
States with a prior claim accept delayed, and therefore discounted,
payment of its claim, with all the attendant risks. If the United
States is to forgo the right to be paid out of the first available
funds, it must receive equivalent compensation in return. The Court
of Appeals thought that it contradicted § 216 and § 221 to apply §
3466 to a Chapter X plan. Today, we take the contrary view. Section
3466 is relevant in defining the priority; § 216 and § 221 are
relevant in providing how that priority shall be honored.