LOCATION: U.S. District Court for the District of Columbia
DOCKET NO.: 83
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Ninth Circuit
CITATION: 369 US 38 (1962)
ARGUED: Jan 18, 1962
DECIDED: Mar 05, 1962
Facts of the case
Media for Simonson v. Granquist
Audio Transcription for Oral Argument - January 18, 1962 in Simonson v. Granquist
Number 83, Hattiebelle Simonson, Trustee in Bankruptcy, et al, versus R. C. Granquist, District Director of Internal Revenue, et al.
Donald A. Schmechel:
Mr. Chief Justice and may it please the Court.
We are concerned here in these two cases which are consolidated in a single petition before the Court with two aspects of the bankruptcy law which relate also to the laws of taxation.
In the two cases, both the Harris case which is a Chapter 10 pre-organization under the bankruptcy statute, and the Simonson case which is an ordinary bankruptcy proceeding, in both of these cases, there is presently issue as to whether or not a tax penalty which is a subject of a lien, whether the lien be recorded, whether the notice of lien be recorded prior to bankruptcy or not recorded, is a valid tax lien with respect to the penalty so that it can be recovered despite the language in 57j of the Bankruptcy Act.
This part -- this issue which involves and could determine both the Simonson and the Harris case, will be argued by me.
There is a second issue which is present only in the Simonson case, an ordinary bankruptcy case, primarily arising under Section 70c of the Bankruptcy Act and Section 6323 (a) of the Internal Revenue Code and basically it is the question as to whether or not a trustee in bankruptcy is a judgment creditor or entitled to exercise some of the rights of a judgment creditor as against an unrecorded tax lien.
In the Simonson case the notice of a tax lien had not been recorded prior to the inception of the bankruptcy.
This second issue which is present only in the Simonson case, would be argued by my colleague and who is the counsel in that case.
Now briefly the facts of these two cases should be observed because they do have some light upon both the general policy of the bankruptcy statute and the effect which should be given to them.
The Simonson case as indicated is an ordinary bankruptcy wherein upon liquidation of the assets, the trustee realized some $8000 which was sufficient to pay all tax claims and expenses of the administration and prior to the filing of the bankruptcy proceeding as indicated, the Government had a tax lien represented by its assessment procedures but no notice of the tax lien was on file.
The United States filed its claim in the Simonson case as a secured creditor, relying on the lien, both as to the principle, post petition interest and as to penalties.
The trustee paid both the entire principle of the taxes involved and all pre-petition interest.
The trustee and the court below disallowed post petition interest and some $1442 in penalties and it is this amount which is involved in the Simonson case.
The Harris case somewhat by contrast is a proceeding under Chapter 10 of the Bankruptcy Act, a corporate reorganization of a small operating telephone company.
Prior to the filing of the -- initially a Chapter 11 proceeding which was soon converted into the Chapter 10 proceeding, various tax liens against the bankrupt -- or insolvent telephone company had been filed, notices of the tax lien were on file unlike in the Simonson case.
Also prior to the inception of the proceeding as appears in the record, the taxpayer had made an offer in compromise to the Government as against to all these taxes in the sum of some $57,000 of which $40,000 was actually being held pursuant to that offer in compromise at the time that the Chapter 10 proceeding was instituted.
Charles E. Whittaker:
Would you excuse me please, I did not understand -- did you say that the tax lien had been filed in the Harris case in advance of the bankruptcy?
Donald A. Schmechel:
That is correct Your Honor in the Harris case some year or two before the inception of the reorganization, the notices of the tax lien were recorded and filed.
Donald A. Schmechel:
Now in the Harris case, the Government came in, as shown in the record, and again filed a claim as the secured creditor, claiming not only the principle of their taxes slightly less than $57,000 but claiming also pre-petition interest, post petition interest, and penalties with no mention being made with the $40,000 then being held by the Government.
During the course of the proceedings as the record shows, the Court finally ordered the Government to return the $40,000 to the trustee, and subsequently in the course of the Chapter 10 proceedings a plan of reorganization was submitted in the manner contemplated by the statute.
The plan of reorganization provided as part of its very equitable and just provisions that a payment of $57,000 representing all of the principle of the taxes to United States should be paid in cash to the United States.
The United State acting to the Secretary of the Treasury under Section 199 of Chapter 10 declined that to acquiesce in the acceptance of that amount which would have been payment in full of the principle of the taxes, the Court then proceeded as permitted on Chapter 10 to confirm and approve the plan and make separate provision in effect with respect to any claims of about which there was a dispute including this particular one with reference to the penalties and post petition interest.
As a result of this, the trustee filed objections to the claim of the United States for penalties and to the claim of the Unites States for post petition interest and the referee in the District Court both granted the contention of the trustee, disallowing any penalties and disallowing any post petition interest.
The United States appealed to the Ninth Circuit only with respect to the issue of penalties, not seeking any review of the issue on post petition interest.
Now as a result of the action taken in the proceedings, of course and the order of the court below, the District Court directing payment of the full principle the taxes of $57,000, they have been paid so that in both the Simonson and then the Harris case, all principle of the taxes have been paid and any pre petition interest that was involved has been paid or would be paid as provided.
The only issue before the court is then with respect to the -- whether or not the penalties can be recovered in both of those instances.
Now as to both of these issues the issue on penalties present in both cases and the issue with respect to the status of the trustee as a judgment creditor, neither of these issues have been directly before this Court before as far as counsel can discover.
Now turning first to the argument on the question of penalties which applies as indicated to both cases, in our -- it is our contention that a straight, simple statutory interpretation of Section 57j and 67b of the Bankruptcy Act is possible, and that it gives a reasonable effect to both of those sections and prohibits the recovery of a tax penalty as part of a lien in both the Simonson case and in the Harris case.