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6331 Bankruptcy page 4 | |
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[56-2 USTC ¶9704]In the Matter of Timberline Lodge, Inc., an
Oregon Corporation, Alleged Bankrupt U. S. District Court, Goldstein, Galton & Galton, Memorandum Opinion MCCOLLOCH, Judge: On The motion for permission to amend the original petition to include
allegations of two additional acts of bankruptcy (paragraph 6(b)
and (c)) should be denied for these reasons: 1. In paragraph 6(b) there is an attempt to allege a preferential
transfer which upon its face occurred more than four months prior
to the proffer of the amended petition. 1 2. Paragraph 6(c) fails to state specific facts relied upon to
constitute a preferential transfer. Allegations in the language of
the statute alone are insufficient. 2
The allegations should have included the date of the alleged
transfer, a description of the property transferred, and a
statement that it was made in satisfaction of an antecedent debt. A more difficult question is presented by the motion to dismiss the
original petition upon the ground that it does not allege an act
of bankruptcy. Allegations of the one act of bankruptcy are: "(6) That within four months next preceding
the filing of this petition, the said Timberline Lodge, Inc., an
Oregon corporation, committed an act of bankruptcy in that it did
heretofore, to-wit: on or about the 23rd day of March, 1955, while
insolvent, suffered or permitted the United States to obtain a
lien upon its property through legal proceedings and has not
vacated or discharged such lien within thirty (30) days from the
date thereof and that the United States did file in the office of
the County Clerk of Multnomah County, Oregon, two liens being No.
3396 in the amount of $5,380.03 and lien No. 3397 in the amount of
$14,245.62; that said liens are still in full force and effect and
have not been vacated or discharged as of the time of the filing
of this paper. That the sale of the equipment and inventory of
Timberline Lodge, Inc., under and by virtue of said liens is
scheduled to be sold at public auction on The first part of this paragraph does not state an act of
bankruptcy because the filing of a tax lien is not obtaining a
lien "through legal proceedings". 3
The last sentence seems to contain the essence of an act of
bankruptcy although defectively stated. The sentence might have
stated that the District Director of Internal Revenue on a
specified day levied upon and seized all inventory and equipment
of Timberline Lodge, Inc., by distraint and advertised it to be
sold at public auction on If the petition were permitted to be so amended the court would be
faced with a question, yet undecided, whether such facts
constitute an act of bankruptcy within the meaning of U. S. Code
Title 11, Section 21a(3): "* * * suffered or permitted, while insolvent, any creditor to
obtain a lien upon any of his property through legal proceedings or
distraint and not having vacated or discharged such lien
within thirty days from the date thereof or at least five days
before the date set for any sale or other disposition of such
property" [Bankrupt Taxpayer's Contention] Counsel for the alleged bankrupt contends that, inasmuch as a lien
for delinquent taxes is not one obtained through legal
proceedings, a distraint of specific personal property to enforce
collection of such a lien is not the kind of distraint intended by
Congress in adding the words "or distraint" by amendment
in 1952. Counsel is incorrect in stating that prior to 1952 the
above subdivision read as follows: "Suffered or permitted, while insolvent, any creditor to
obtain a preference through legal proceedings, and not having at
least five days before a sale or final disposition of any property
affected by such preference vacated or discharged such
preference;" This wording was abandoned by the Chandler Act in 1938 so that for
the past seventeen years the subdivision read exactly as first
quoted above until 1952 when the underscored words "or
distraint" were inserted. Thus in 1938 the troublesome word
"preference" was eliminated. Counsel's argument in
connection with the former use of the word preference in its
technical sense is no longer tenable. Although House Report No. 2320 states in explanation of the 1952
amendment that "a distraint under a landlord's warrant is not
a legal proceeding", the 1954 Collier Pamphlet Edition of the
Bankruptcy Act very carefully avoids any confusion as to the scope
of the amendment. Its comment edited by Professors Moore and Laube
(both members of the National Bankruptcy Conference) follows: "In addition, Section 3a(3) was amended to include within the
third act of bankruptcy the suffering or permitting of a lien upon
property by distraint, even though such a lien is not obtained by
'legal proceedings'. As stated in the House Report: 'Since it is
the unvacated or undischarged lien which should, in such
circumstances, give rise to the act of bankruptcy, a distraint
should be included.' See also 1 Collier on Bankruptcy (14th ed. by
Moore and Oglebay), Paragraphs 3.206 and 3.308." [Distraint to Enforce Tax Lien] Distraint is a word of wide use. It comprehends any seizure of
personal property to enforce a common law or statutory right or
lien. Tax liens are created by statute. Like landlord liens they
fall within the category of floating liens. Goods are sold and
moneys are checked out of bank accounts every moment of the day
against which there are floating liens. However such liens attach
to specific personal property only when it is levied upon or
seized to enforce the lien. In adding liens obtained through distraint Congress could not have
overlooked its own Internal Revenue Code Title 26 U. S. C. A., and
particularly Subchapter C entitled "Distraint". Section
3690--Authority to Distrain--reads: "If any person liable to pay any taxes
neglects or refuses to pay the same within ten days after notice
and demand, it shall be lawful for the collector or his deputy to
collect the said taxes, with such interest and other additional
amounts as are required by law, by distraint and sale, in the
manner provided in this subchapter, of the goods, chattels, or
effects, including stocks, securities, bank accounts, and
evidences of debt, of the person delinquent as aforesaid. 53 Stat.
451." Section 3692 provides that the collector may "by warrant
authorize a deputy collector to levy upon all property and rights
of property * * * belonging to such person, or on which the lien
in Section 3670 exists for the payment of the sum due * * *."
Section 3693 entitled "Proceedings on Distraint" states
"When distraint is made, as provided in Section 3690,
"the collector shall make an account of the goods or effects
distrained, a copy of which shall be left with the owner or
possessor thereof, and shall then proceed with the sale upon due
notice published and posted as prescribed. Section 3710 requires
"any person in possession of property, or rights of property,
subject to distraint, upon which levy has been made, shall, upon
demand * * * surrender such property or rights to such collector
or deputy * * *." Obviously if Congress had intended to limit liens obtained through
distraint to landlord liens it would have phrased the amendment
accordingly. In most states where landlord liens are recognized,
the liens are created by statute and exist against crops or
possessions of the tenant. The non crop liens exist against all
personal property of tenants so long as the property remains upon
the rented premises and from ten to thirty days after removal.
Like tax liens they attach to specific property only upon seizure
under a warrant of distress. Such warrants are usually issued by a
justice or other magistrate upon the affidavit of the landlord. It
cannot be argued that only landlord liens are obtained through
distraint. Like tax liens they are created and exist by virtue of
statutes. Like tax liens they attach to specific personal property
only by seizure under distraint. As Collier states: "It is not the lien itself, nor the
execution thereunder, which constitutes the act of bankruptcy. It
is rather the failure on the part of the debtor to have the same
vacated or discharged (1) at least five days before the date set
for the sale or other disposition of the property, or (2) within
thirty days after the creation of the lien." 4 Rule 15(a) provides that after a responsive pleading a party may
amend only by leave of court or by written consent; "and
leave shall be freely given when justice so requires."
Amendments to conform to evidence also must be permitted with
great freedom. If the facts are such as to sustain the suggested
additional allegations to remedy the defective pleading of the act
of bankruptcy, the petitioning creditors may have five days within
which to amend, otherwise the petition will be dismissed. 1
In re Brown Commercial Car Co., 227 Fed. 387. In re Haff
(CCA 2d Cir.) 136 Fed. 78. Collier Bankruptcy Manual, 2d Ed. p.
230. 2
In re Gaynor Homes Inc. (CCA 2d Cir.) 65 Fed. (2d) 378, 23
A. B. R. (N. S.) 654. Collier Bankruptcy Manual, 2d Ed. p. 81. 3
Matter of Rialto Properties Co. (D. C. Cal.) 8 Fed. (Supp.)
57. 4
Collier on Bankruptcy, 14th Ed., Vol. 1, p. 461. [80-1 USTC ¶9129]In the Matter of Monarch Industries, Inc.,
Bankrupt. (CA-5), U. S. Court of Appeals, 5th Circuit, No.
79-1841, Summary Calendar, *,
609 F2d 117, Morton Kosto, Friedman & Britton, 310 Southeast National Bank
Bldg., Orlando, Fla. 32801, for bankrupt. Gary L. Betz, United
States Attorney, Kendell W. Wherry, Assistant United States
Attorney, Jacksonville, Fla. 32201, M. Carr Ferguson, Assistant
Attorney General, Gilbert E. Andrews, Crombie J. D. Garrett, Karl
Schmeidler, Department of Justice, Washington, D. C. 20530, for
plaintiff-appellant. Before COLEMAN, Chief Judge, HILL and GARZA, Circuit Judges. The Internal Revenue Service ( The judgment of the district court is reversed with directions to
enter judgment treating the claim of the REVERSED. *
Fed. R. App. Proc. 34(a), 5th Cir. Local R. 18. 1
Before both the bankruptcy and district courts, the 68-1 USTC ¶9226]In the Matter of Major Manufacturing
Company, a Michigan Corporation, Debtor U. S. District Court, West. Dist. Walter K. Schmidt, 540 Old Kent Bldg., Grand Rapids, Mich., for
Major Mfg. Co. Murray De Groot, 640 Trust Bldg., Grand Rapids,
Mich., for bankrupt. Opinion NIMS, JR., Referee: Since It is the claim of the receiver that Ivankovich and Shaw are
essential to this operation and that they will terminate their
employment if the I. R. S. is allowed to continue its levies.
Because of their experience with debtor, it is claimed that these
employees are valuable and essential to the receiver. It is the claim of the I. R. S. that Ivankovich and Shaw owe for
assessments arising out of non payment of withholding and FICA
taxes by a corporation in which they were previously officers for
1960 and 1961. The I. R. S. also points out that the debtor itself
owes withholding and employment taxes and the I. R. S. has filed a
proof of claim in the sum of $16,602.52 in this estate. Since the controversy was submitted, the debtor has filed its Plan
which proposes inter alia to pay the I. R. S. claim in
full. Hearing on the Plan has been set for These are a few issues of fact. The Court determines these as
follows: 1. Ivankovich is indispensable to the receiver's operation in that
it would be impossible to replace him by one having the same
experience, knowledge, contacts, knowhow, and abilities and who
would be willing to put in the exceptionally long hours and
effort, which Ivankovich has, on a temporary operation at $150.00
a week, and the receiver cannot afford to pay more than this. 2. Shaw is especially valuable to the receiver because of her
experience, knowledge and contacts, not only as a bookkeeper and
secretary, but also in customer contact work. She could not be
replaced at $20.00 a week, and the receiver cannot pay more. 3. Ivankovich and Shaw would probably resign if the levies are
allowed to continue. 4. That the payroll of twenty five (25) persons in the small town
of Belding, Michigan (1960 census-4887) could not be easily
absorbed in the event of the closing of debtor, though I am of the
opinion that this fact is not material to the issues. It is the claim of the receiver that the funds from which payments
are made to employees of the receiver are custodia legis
and therefore cannot be reached by Notice of Levy. Though counsel cite many cases in their briefs bearing on this
general problem, I find none on the exact issue involved here,
that is, whether the United States by Notice of Levy can attach
the wages of an employee of an operating receiver in a Chapter XI
Proceedings, where to do so may cause the failure of the
Arrangement. In an Arrangement Proceedings, a receiver has the power, subject to
the control of the Bankruptcy Court, to operate the business of
the debtor during such period as the Court may fix. Bankruptcy
Act Sec. 343, 11 The purpose of the Arrangement Proceedings is stated by 9
Remington on Bankruptcy 202, Sec. 3565 as follows: "Chapter 11 of the Act, which governs
arrangements and compositions since the 1938 amendments, follows
the outline and concept of former Section 74, and it is obvious
that its purpose, like that of its predecessors, is to keep the
affairs of a debtor who can offer a fair arrangement acceptable to
most of his creditors out of bankruptcy, or to remove them from
further bankruptcy administration if bankruptcy proceedings are
already pending, substituting the arrangement with certain
safeguards, for the usual bankruptcy administration and
discharge." Thus, from the provisions of the Bankruptcy Act it seems clear that
all of the property of the debtor is under the exclusive
jurisdiction of this Court and thus would be in custodia legis.
This would be especially true in this case where by order of the
Court, the receiver may make no disbursement of funds without an
express order of the Court and the counter signature of a Referee
in Bankruptcy on any check which he issues under such order. The
Court may also issue such orders as may be necessary to enforce
the provisions of the Act and specifically to effect the purpose
of Chapter XI Proceedings within the intent of Congress as set
forth in the provisions of the Chapter. The general rule relied on by the receiver is stated in Bankers
Mortgage Co. of Topeka, Kans. v. McComb, 60 F. (2d) 218 (CCA
10th Cir. 1932) at p. 221: "It is a general rule that, where a person's
possession or control of property constitutes custodia legis, he
cannot be subjected to garnishment process in respect to such
property. * * * "The reason for the rule is that to require
such a person to respond in garnishment would result in an
interruption of the orderly progress of judicial proceedings and
an invasion of the jurisdiction of the court which has legal
custody of such property. * * * "Such a person, with the consent of the
court having custody of such property, may be held as garnishee
after the purposes of the law's custody have been accomplished and
such court has by order directed delivery thereof to the
garnishee-debtor. Under such circumstances, garnishment will not
interrupt the progress of judicial proceedings in such court nor
invade its jurisdiction. The officer holds the property not for
the law but for the person entitled thereto; and the reason for
the rule no longer exists." The receiver especially relies on In Re Chakos, 36 F. (2d)
776 (D. C., W. D. Wis.--1930) where the Court stated that the
granting of leave to allow one to garnishee a trustee in
bankruptcy was discretionary with the Referee. But, In Re
Chakos, supra, is not the law in our Circuit. In In Re
Berman and Company, 378 F. 2d 252 (CCA-6th Cir.--1967) the
Referee granted permission to the attachment by a State Court
order of a dividend payable to a creditor of a bankruptcy estate.
This action was affirmed by the District Judge. In reversing this
decision and directing the referee to pay the dividend to the
creditor, the Court said at p. 253: "* * * we are clearly of the opinion that a
referee in bankruptcy is not authorized or empowered to permit a
dividend in the hands of his trustee to be attached by process
from a state court. This has long been the rule established by
federal appellate courts." In discussing In Re Chakos, supra, the Court stated at pp.
254-255: "The appellee's principal reliance is upon a
district court case, In re Chakos, 36 F. (2d) 776, decided
by the District Court for the Western District of Wisconsin in
1930. The Chakos opinion purports to follow the Argonaut
Shoe and American Telephone cases, and cites them in
support of the following statement: 'It is the established rule in the federal court
(sic) that funds in custodia legis are not as matter of right
subject to either attachment or garnishment. * * *' The flaw in the Chakos reasoning lies in the fact that the
statement just quoted is not the rule set forth in the cases
cited. Those cases did not restrict 'the established rule' to the
statement that funds to either attachment or garnishment. They
unequivocally held that funds in the hands of a trustee in
bankruptcy are not subject to attachment by process from a state
court; that such a right could arise only from express statutory
authority, and that the bankruptcy court may not permit such
attachment'. "* * * "As we have seen, the Ninth and Seventh
Circuits have unqualifiedly held that a dividend in the hands of a
trustee in bankruptcy may not be reached by an attachment from a
state court; that the right to garnishee such funds can arise only
from express statutory authority which is not found in the
bankruptcy laws; and that (as heretofore quoted) 'the distribution
of the assets of bankrupt, therefore, cannot be stayed or
prevented by the process of a state court, the object of which is
to withhold a dividend from a creditor entitled thereto for the
security of a plaintiff pending litigation.' We agree with this
long-established rule, and regard as unsound the attempt of Chakos
to alter it by permitting a dividend in the hands of a trustee in
bankruptcy to be reached by a state court attachment if the
referee thinks the bankruptcy proceeding will not be delayed or
interfered with by the attachment. "This case is an example of the delay which
may occur if the Chakos holding is applied. Here, the
referee permitted the attachment because he thought his proceeding
would not be delayed by it. He tried, through the subterfuge of
having Berman's dividend check certified, to avoid delay in
closing the bankruptcy proceeding; but he was not successful. Now,
nearly two years after the attachment, the referee still has
possession of the certified dividend check, the trustee is still
under bond, and the bankruptcy case has not been terminated. It
could have been closed in the fall of 1965, had the referee not
permitted the dividend to be attached. "* * *." Thus, at least as to distributions in a bankruptcy proceedings, the
Court has no choice but to disallow all garnishments or
attachments issued out of other courts. The United States relies principally on In Re Quakertown
Shopping Center, Inc. [66-2 USTC ¶9655], 366 F. 2d 95 (CCA,
3d Cir. 1966). In that estate, the taxpayer was a creditor of a
debtor in an Arrangement Proceedings. The District Director served
a Notice of Levy on the receiver. In holding that the government
was entitled to payment out of the dividend due taxpayer, the
Court stated at p. 98: "In making a levy such as this the United
States becomes in effect the involuntary assignee of the creditor.
It does not invade the jurisdiction of the Bankruptcy Court or
interfere with the administration of the estate. It merely serves
notice on the receiver or trustee that whatever funds otherwise
would be paid to the taxpayer shall instead be paid to the
government as the distrainor, to the extent of the amount due it.
We are here on familiar ground. A creditor may voluntarily
transfer his claim against a bankrupt estate without obtaining the
approval of the Bankruptcy Court. 3 Collier on Bankruptcy (14th
ed. 1966) Sec. 57.06. We deem the levy to be similar in effect to
an assignment, albeit involuntary on the part of the creditor of
the bankrupt." I do not believe In Re Quakertown Shopping Center, Inc., supra,
is in anyway comparable to our matter. There the situation was no
different than any bankruptcy proceedings. Administration of the
estate would have been completed before the dividend would be
payable. There, the Notice of Levy could be of only slight
inconvenience to the receiver. In view of In Re Berman and
Company, supra, it is questionable that the 6th Circuit would
have decided In Re Quakertown Shopping Center, Inc., in the
same way as the 3d Circuit since after all the levy proceedings
are similar to a garnishment proceedings and the same possible
delays that were the reason for the 6th Circuit decision could
result in either type of proceedings. See United States v.
Eiland [55-1 USTC ¶9487], 223 F. 2d 118 (CCA 4th Cir. 1955). But, here we are faced with action by the United States that
seriously interferes with the administration of the estate. In
fact, this action may completely thwart Congress's intent that
Chapter XI proceedings keeps a debtor out of bankruptcy for the
benefit of the creditors as well as the economy of the community. I am well aware of the equities of government and that there is a
strong public policy that the It is to be noted that the most that could be collected on any one
levy against Ivankovich would be $150.00 and against Shaw of
$20.00. The I. R. S. must levy each week. United States v. Long
Island Drug Co. [41-1 USTC ¶9140], 115 F. (2d) 983 (CCA 2
Cir. 1940). But, here there is a possibility of a recovery of the
government's claim of $16,602.52 if a Plan is accepted and
confirmed. Because of a large mortgage and security agreement, it
is unlikely the government will receive a dividend in the event
the Plan fails. It seems rather shortsighted to go to the expense
of levy proceedings to gain a few dollars when by so doing the
recovery of a sizeable amount may be jeopardized. In Arrangement Proceedings, all parties involved, receiver, debtor,
creditors committees, employees and the Court face numerous
problems and are usually involved in a frantic effort to keep a
debtor alive in hopes that it can be revived so that the maximum
recovery may be obtained for creditors and the debtor be returned
to society as a contributing factor in our economy. Certainly,
this Court has been given actual and implied power by Congress to
prevent action that will place an impossible burden upon the
receiver, already faced with a surfeit of problems. I therefore hold that, as a minimum, it was incumbent upon the
Internal Revenue Service to obtain permission of this Court to
serve a notice of levy upon the receiver (or referee) and that if
such permission were requested, this Court would have no choice
but in its discretion to deny it under the facts in this case. In
view of my holding, it is not necessary to decide whether under In
Re Berman and Company, supra, the referee has such discretion. The order enjoining the Internal Revenue Service and its officers
from serving notices to levy on the receiver and referee is made
permanent and all outstanding levies are nullified. 77-2 USTC ¶9760]In re Ceafco, Inc., Bankrupt U. S. District Court, So. Dist. Ala., Bankruptcy
No. 28,700, Robert H. Allen, First National Bank Bldg., Mobile, Ala. 36602,
attorney for trustee, Herbert P. Feibelman, Jr., P. O. Box 2082,
Mobile, Ala. 36602, attorney for Construction Equipment Rental.
Edward J. Vulevich, Jr., Assistant United States Attorney, Mobile,
Ala. 36602, for U. S. Order on Show Cause At Mobile in said District on the 21st |