United States v. Key

PETITIONER:United States
RESPONDENT:Key
LOCATION:17th Judicial Circuit Green County Alabama Jury Commission

DOCKET NO.: 402
DECIDED BY: Burger Court (1969-1970)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 397 US 322 (1970)
ARGUED: Jan 21, 1970
DECIDED: Mar 30, 1970

Facts of the case

Question

Audio Transcription for Oral Argument – January 21, 1970 in United States v. Key

Warren E. Burger:

Number 402, United States against Key.

Mr. Wallace, you may proceed whenever you’re ready.

Lawrence G. Wallace:

Mr. Chief Justice and may it please the Court.

This case is concerned with the single aspect of the proceedings under a voluntary petition for corporate reorganization originally filed in 1954 pursuant to Chapter X of the Bankruptcy law by the debtor, Hancock Trucking Incorporated.

In the petition, Hancock alleged that it was unable to meet its debts as they became due and requested the appointment of a trustee to operate its business and manage its property.

The respondent here is that trustee.

The claims of the United States against the debtor are for unpaid income withholding, employment and excise taxes in the total amount of more than $375,000.00.

Because of the narrow focus of the questions presented by the Government’s petition for a certiorari, little of the lengthy history of these reorganization proceedings need be recounted here.

The issues in this Court concerned an amended plan of reorganization filed by the trustee in June 1967 and approved by the courts below over the Government’s objection.

The amended plan reflected in agreement approved by the District Court and by the Interstate Commerce Commission for the sale of the debtors principle asset, its Interstate Commerce Commission operating rights for truck freight services to Hennis Freight Lines Incorporated.

The purchase price of $935,000.00 was to be paid in accordance with the schedule requiring $300,000.00 to be paid within 90 days of the Commission’s approval of the sale and the balance in 78 monthly installments.

The amended reorganization plan reflecting this sale agreement did not contemplate that the debtor Hancock Trucking would continue to exist.

The amended plan is in effect a liquidation plan.

The Government made no objection to the terms of the sale agreement, its objections relates solely to the provisions for payment to creditors in the amended reorganization plan.

Byron R. White:

You say this was basically a liquidation plan and not a continuing?

Lawrence G. Wallace:

That is correct.

Byron R. White:

Where were the installment payments going to be generated?

Lawrence G. Wallace:

The payments being made by Hennis Trucking Company which has purchased the Interstate Commerce Commission rights to operate the freight line.

Byron R. White:

Based on the capital equipment?

Lawrence G. Wallace:

Now, the capital equipment had previously been disposed off.

Byron R. White:

I see.

Lawrence G. Wallace:

The major remaining asset was simply the —

Byron R. White:

Was the license?

Lawrence G. Wallace:

The license.

That is correct.

Warren E. Burger:

While youre pausing for a moment could you answer this for me.

If the plan had provided for equal participation across the board, would you still be objecting to it on a priority basis for the tax claims?

Lawrence G. Wallace:

We would be entitled to object to it but the secretary also would have had discretion to accept for the plan if he wishes.

Warren E. Burger:

He can and sometimes does accept, does he not?

Lawrence G. Wallace:

Yes, he does sir specially when it will contribute to rehabilitation of the debtor and enable the debtor to continue in business.

Warren E. Burger:

But you regard this is simply a voluntary waiver by the Government of the priority claim.

Lawrence G. Wallace:

That is our view, yes Mr. Chief Justice.

The Government contends that the provisions for payment of creditors in the amended plan do not satisfy its statutory priority of payment rights and the respondent trustee admits in its brief that the Government is entitled to priority but contends that its rights are fully satisfied under the plan and that is the issue is this Court.

The contested plan provides for an initial payment of 100% of certain wage claims and certain state and local tax claims.

20% of the claims of the general unsecured creditors which is all they will receive and 10% of the Government’s tax claims and of the remaining state and local tax claims.

The remainder of the amount due to the Government and to state and local tax authorities was to be paid in 78 monthly installments secured by an assignment of the note and chattel mortgage Hennis had executed on its purchase of the debtor’s operating rights.

This amounts to an initial payment on the Government’s total claim of some $375,400.00 of approximately $37,500.00 and 78 equal monthly installments thereafter of approximately $4,330.00 each.

No interest was to be paid on the monthly installments which together with the initial payment would simply total the $375,400.00 owing to the Government.

As we point out in our brief, at the time of the initial payment when lower ranking creditors were to be paid in cash the discounted present value of the right to these future payments to the Government plus the initial payment to the Government would amount to approximately $317,000.00, some $58,400.00 less than the $375,400.00 owing to the Government.

The Government’s position is that this does not satisfy its priority rights not because the Government has a right to immediate payment of all cash that is on hand up to the limit of its claim in a Chapter X proceeding which we do not urged and not because the Government has a right to the payment of interest for any part of the post petition period preceding cash payment to lower ranking creditors.

We recognize that there isn’t a right to such interest on the Government’s claims.

Our contention is simply that the Government as a priority creditor cannot be required at the time when non-priority creditors are being paid in cash to accept IOU’s payable only in the future the part of its claim.

Potter Stewart:

I thought, I guess I misunderstood.

I thought your claim simply was that you’re entitled the full payment?

Lawrence G. Wallace:

(Voice Overlap) It’s admitted that we’re entitled to full payment.

The issue is when?

Potter Stewart:

Oh!

No, you’re not getting it.

Out of $374,000.00 tax claim to get $317,000.00 is not a full payment.

You don’t admit that you’re getting full payment at all, you’re not getting it.

Lawrence G. Wallace:

I meant to say it’s admitted by the respondent that they were entitled to full payment.

That is the issue between us.

Of course we contend is that what —

Potter Stewart:

I don’t understand that.

I thought that you would be satisfied if you would get an installment payments which added up would equal your full tax claim as discounted?

Lawrence G. Wallace:

There is an alternative contention that we have a right to take the discounting into account.

Potter Stewart:

The only right is to full payment, isn’t it on circumstances in this case?

Lawrence G. Wallace:

Well, we also contend that we have a right to be first satisfied under Section 3466 of the Revised —

Potter Stewart:

But you just said you don’t claim a right to be paid now in cash simply because cash is available, haven’t you?

Lawrence G. Wallace:

What I just said was in Chapter X proceedings.

Lawrence G. Wallace:

We do not claim a right to the immediate disbursement of cash that is not being paid to creditors.

Potter Stewart:

So what —

Lawrence G. Wallace:

We don’t claim that because cash is on hand and we are creditor we have a right to the immediate payment of our claim.

Potter Stewart:

That’s what I understood you to say so, what are —

Lawrence G. Wallace:

But when cash is being paid to creditors, we claim the right to be satisfied first.

Potter Stewart:

Now on fully in cash?

Lawrence G. Wallace:

To the limit of what’s being paid to creditors, yes Mr. Justice.

We claim a right to be paid to ahead of nonpriority creditors when payments are being made to creditors.

We do not claim a right to insist that the payments be made when other uses are being made of the money that the trustee holds.

Byron R. White:

Now, you should contend or 3466 gives you a priority, is that right?

Lawrence G. Wallace:

And that is what we understand to be the meaning of the priority.

Byron R. White:

Well, you contend that’s applicable in this case but so does the Bankruptcy Act give priorities.

Under Chapter X, there’s certain creditors who have priority just by virtue of the provisions of the Act, aren’t there?

Lawrence G. Wallace:

There is no general priority provision in Chapter X Mr. Justice, the only comprehensive —

Byron R. White:

What about administrative expenses?

Lawrence G. Wallace:

There is a provision for administrative expenses.

It’s the only other provision —

Byron R. White:

What about wages?

Lawrence G. Wallace:

There is no wage priority in Chapter X.

Byron R. White:

Either —

Lawrence G. Wallace:

There is a wage priority in Section 64 of the Act which by Section 102 of the Act is expressly inapplicable to Chapter X.

Byron R. White:

What about your creditors in Chapter X?

Lawrence G. Wallace:

There is nothing granting them priority in Chapter X, but there has been lengthy litigation about whether they have a priority ahead of the 3466 priority.

Byron R. White:

I thought you relied on the cases on strict priority — strict priority doctrine that you have to pay — that you really have satisfy priority creditors like the Case against Los Angeles?

Lawrence G. Wallace:

Well, we do contend that you have to abide by the classes of priority creditors.

Byron R. White:

You really wouldn’t suggest to that — you really wouldn’t suggest to the secured creditor does not have some priority to Chapter X, would you?

Lawrence G. Wallace:

No.

It’s been held in equity reorganization equity receivership proceedings that secured creditors at least the mortgagees have priority ahead of the Government’s priority under 3466.

There has been disagreement about other secured creditors.

Byron R. White:

Alright.

Byron R. White:

Let’s take mortgagees then.

You say they have priority in the Chapter X?

Lawrence G. Wallace:

We believe that the standards of priority that prevail in equity receiverships have been carried over into Chapter X, yes sir.

Byron R. White:

Alright, let’s take a mortgagee priority over unsecured creditors, would you suggest that the mortgagee may not be postponed in payment to unsecured creditors who say have been scaled down to 25% of their claim?

Let’s assume the plan calls for satisfying the secured debt over a period of 10-year.

But unsecured creditors are paid off after when you value the property and you find out what interest the unsecured creditors have, you find out the only assets that are left for them are 25%.

25% of their claims are going to be paid and they have to cash to pay you and they decide just to get rid of it and they pay him off in cash in the plan but secured creditors who are going to be paid in full are postponed for 10 years.

Lawrence G. Wallace:

Our understanding of the fair and equitable rule is that if the secured creditors object to that, they have a right to insist on their payments being made first, but —

Byron R. White:

And that is essential for your case, isn’t it?

Lawrence G. Wallace:

It’s not essential for your case Mr. Justice because we have a statutory right and revised statutes.

Byron R. White:

I know but although you say that give this priority.

Lawrence G. Wallace:

Moreover, we have an explicit right in Section 199 in Chapter X to object to the plan if it doesn’t satisfy our rights.

Byron R. White:

Yes.

You can object to the plan but then the question is what provisional will be made for none dissenting creditors and whether it’s fair and equitable to do that but you don’t claim it.

Do you think 3466 gives you some kind of a priority that’s different from other priority creditors?

Assuming it’s applicable to this case it does give you a priority.

But is there any different priority than a secured creditor has?

Lawrence G. Wallace:

Well, I think it’s more explicit that it’s a right to have our claim first satisfied that’s the language used in Section 3466 where there’s no explicit statutory language giving the secured creditors such a right.

They will have to draw their rights from the judicial interpretations of the fair and equitable rule and equity receivership proceedings and their arguably would be more leeway for the courts to consider making exceptions to some of the rules that have been established in those proceedings.

Byron R. White:

I take it that if you really do then find it essential to rely on 3466 in this case.

Lawrence G. Wallace:

Not essential because we don’t think we received the full payment right granted in Section 199 since the discounting of our claims was never taken into account.

Byron R. White:

Except for that point so you aren’t just relying on being a priority creditor under Chapter X or relying of being a priority creditor under the other Section 3466.

Lawrence G. Wallace:

Well, we also rely on the idea that Chapter X grants two priorities only.

There are only two explicit priorities in Chapter X and I’ll turn into that right now.

One of them is reproduced on Section 43 of our brief and that is Section 216, number three — subsection 3 a plan oft reorganization under this Chapter shall provide for the payment of all cost and expenses of administration and other allowances which may be approved or made by the judge.

That is the only statutory basis for the priority for administrative expenses in Chapter X.

If the terminology used is the same terminology used for the Government’s tax claim priority that the plan of the right is to have the plan provide for the payment.

And we believe that Section 199 which is the provision in Section — in Chapter X which gives us our priority rights in so far as they can be followed in that chapter also in body a notion of priority.

Everyone has assumed and tried along in the administration of Chapter X that administrative of expenses are entitled to be first pay.

They do have that priority.

Byron R. White:

The cases have certainly adjudicated a whole system of priorities in Chapter X, aren’t they?

They may not be set out in the statute —

Lawrence G. Wallace:

That is correct.

Byron R. White:

But the cases have certainly adjudicated including administrative expenses.

Lawrence G. Wallace:

No one to my knowledge has contested that the administrative expenses have the priority.

Byron R. White:

Or that nobody is contesting that you have a priority?

Lawrence G. Wallace:

It’s just what is meant by priority that’s being contested here, that is correct.

Well, our claim is that as a priority creditor admittedly a priority creditor the Government cannot be required when the lower ranking creditors are being paid in cash to accept a deferral without interest of a portion of its payments or they put the matter in other way we contend that no lower ranking creditor can over the Government’s objection be paid until the Government’s claims have first been satisfied which is what we understand to be the normal meaning of priority in bankruptcy.

In the alternative, we do contend that the Government has at least entitled to interest from the time of the payment to the lower ranking creditors until the time of the deferred payment to it to compensate it for the deferral.

But out principle contention is that the Government as the priority creditor should not be the one to bear the risk that the deferred payments will not materialized but should instead be paid first.

In making our contention, we rely on several different guide posts because as I have already said Chapter X does not include a specific comprehensive provisions setting for the hierarchy of priorities as Section 64 does for ordinarily liquidating bankruptcy proceedings.

The most venerable source of the Government’s priority rights in this case is Section 3466 of the revised statutes which is on page 41 of our brief and in Title 31 of the United States Code.

This provision originated in acts of Congress of the late 18th century which they had their roots in the sovereign priority of the crown.

The statute expressly provides that the debts due to the United States shall be first satisfied whenever as is the undisputed case here that debtor is insolvent and has committed an act of bankruptcy.

Decisions of this Court as cited in our brief have established that tax debts owing to the United States or among those covered by the broad language of this provision.

The plan upheld by the courts below plainly does not comply with this statutory requirement of the Government’s claims shall be first satisfied.

And there is on the face of things no reason why this provision is not controlling.

It manifests the continuous congressional policy that the claims of the federal treasury and the important public needs to be served by the funds in that treasury are to be placed ahead of the also just claims of unsecured creditors who did business with the debtor for profit.

In light of this important public purpose of the priority statute, this Court has repeatedly said that only the plainest inconsistency would warrant the finding of an implied exception to the clear command of Section 3466.

It was said most recently in United States Department of Agriculture against Redmond in Volume 330, United States.

These considerations and others led the Court of Appeals for the Fifth Circuit to conclude five and a half years ago in a thoughtful opinion by Judge Reeves that Section 3466 is fully applicable to Chapter X proceedings that’s United States against Andersen which is discussed in our brief and the same conclusion had earlier been reached by the Court of Appeals for the Second and Third Circuits in cases cited on page 13 of our brief.

This Court has not previously had occasion to decide whether this provision is applicable to Chapter X.

The court below came to the contrary conclusion that Section 3466 is superseded by the provisions of Chapter X.

And our contention is that the other Court of Appeals were correct in deciding that this statute is entirely compatible with Chapter X and we go beyond that and contend that the provisions of Chapter X themselves in the light of their legislative history and as interpreted by this Court independently provide a priority right for the Government’s tax claims which the plan here did not satisfied.

The principle provision in Chapter X that is pertinent is Section 199 on page 42 of our brief and the second sentence is the pertinent language beginning at the end of line 7 of Section 199.

If in any proceeding under this Chapter, the United States as a secured or unsecured creditor on claims for taxes or customs duties and the parenthetical may be omitted.

No plan which does not provide for the payment thereof shall be confirmed by the judge except upon the acceptance of the lesser amount by the Secretary of the Treasury certified by the Court followed by a proviso which is irrelevant here.

Nothing in this language which gives the Secretary the right to demand or to forgo full payment is inconsistent with the command of Section 3466 as to the relative priority of that right to payment as against other claims.

The command of the Government’s claim shall be first satisfied.

The history of the evolution of Section 199 recounted in detail in our brief shows that Congress knew that Section 3466 had been applied in equity receivership proceedings involving insolvent corporations.

Lawrence G. Wallace:

And that in enacting the statutory successors to equity receivership which culminated in Chapter X.

Congress manifested no intention to diminish the Government’s priority rights and rejected a specific recommendation that is do so, but instead was concerned to provide for protection for the Government in Section 199 not only as insolvent debtors to whom Section 3466 applies, but more generally, as to all debtors involved in Chapter X reorganizations.

Byron R. White:

Compensating (Inaudible)

Lawrence G. Wallace:

Of course Congress also provided specifically in Section 199 in its predecessor that the Secretary of the Treasury may compromise the Government’s rights and in appropriate cases this enables the Secretary to contribute to Chapter X’s objective of fostering rehabilitation of the debtor when feasible.

But the granting of this power to compromise does not imply that the rights themselves are diminished and as I already mentioned on the face of the statute — this language providing for payment is the only language used when Congress wish to provide for a priority right in Chapter X.

And in any event the contrast within Section 199 between payment and acceptance of a lesser amount shows to us under face of the statute that the Government’s rights were not satisfied in this case.

There is another basis for the decision of the court below namely the provisions in Chapter X requiring that the reorganization plan be fair and equitable.

But these provisions do not lead each District Court free to get a fact to its own notions of what is fair and equitable.

In this field, the words “fair and equitable” are terms of art which acquired their meaning through judicial interpretations in equity reorganization proceedings that is what this Court held with respect to Chapter X unanimously in opinion by Mr. Justice Douglas some years ago.

And one aspect of the meaning of fair and equitable is broadly stated that creditors of a junior class may not be given something of value at the expense of non-consenting creditors of a senior class so called rule of absolute priority which we believe as equally applicable to the difference between the Government’s statutory right to full payment and the claims of creditors who do not have such a right as it is to the classes of creditors to which it has been applied by this Court.

But whether or not, the decision below actually violates the fair and equitable provisions of Chapter X.

Those provisions surely do not justify the refusal of the courts below to afford the Governments the rights specifically granted by Sections 3466 and 199.

I’d like to reserve the balance of my time please.

Warren E. Burger:

Mr. Beck.

Sigmund J. Beck:

Mr. Chief Justice, may it please the Court.

It’s always been my view that all cases ought to be viewed in the light of their facts and certainly it’s true in this instance in an equitable proceedings.

The facts are more fully elaborated in our brief but there are some highlights and I think should be brought out.

It’s true that this case in May of 1954, the original plan was confirmed in 1957 under the terms of that plan without going into details.

The reorganized debtor took over the assets and property from the trustee in June of 1958.

It began operating without a control of the court.

In December of 1961, the trustee filed a petition for final decree.

Hearing was to be held on that in March of 1962.

In February of 1962, there became a change in the directors, the corporation had had financial difficulties and they then entered into a contract of sale with Hennis Freight Lines for $1 million principal and interest included over a period of time of 78 months.

Prior to the hearing on final decree, three creditors who had come into being subsequent to the reorganized debtor taking over the assets asked the court to have the trustee retake the property and assets alleging insolvency.

This took place hearing was held and the court vested the trustee with the assets and property of the debtor corporation.

Investigations are placed to trustee then moved to affirm the contract of sale with Hennis.

The court affirmed that contract in August of 1962.

It took three years for the Interstate Commerce Commission to finally approve the sale.

When it did approve the sale, it entered a restriction upon the rights.

Now, the restriction have entered was a sort of limited restriction.

Sigmund J. Beck:

It did not include a reduction of mileage.

The original contract provided that should the ICC reduced the mileage then Hennis would be entitled to a reduction.

There was dispute between the trustee and Hennis as to what the price should be.

We finally reached an agreement whereby the maximum amount of the sale was to be viewed as $935,000.000 instead of a million and again is inclusive of the interest payable over the same period of time.

Then in addition, the trustee would offer in the plan a 20% compromise to unsecured creditors and any reduction of price would rip down then to Hennis.

Now, that of course are the facts right bearing up to this.

The plan then of course was approved subsequently hearing on approval subsequent hearing on conformation, the plan was confirmed.

The United States —

Byron R. White:

The unsecured creditors were to get only 20% —

Sigmund J. Beck:

That is correct.

Byron R. White:

— on their claims or 20% reduction of their claim?

Sigmund J. Beck:

20% of their claims.

Byron R. White:

Total?

Sigmund J. Beck:

Total.

Byron R. White:

Uh-huh.

Sigmund J. Beck:

Now, the Government is correct, this is a plan for liquidation.

Now bearing in mind that it’s a plan of liquidation something else comes into play here and that is what would happen in the event of liquidation.

I would like to point out two matters before I —

Byron R. White:

It’s still a — it’s still of reorganization plan even though it provides for complete liquidation?

Sigmund J. Beck:

It is still a reorganization — that is correct.

Byron R. White:

So, it’s judged by the rules of Chapter X of bankruptcy?

Sigmund J. Beck:

No question about.

It is our view however Mr. Justice White that in valuing the assets in this case, we obviously cannot value the assets on the basis of a growing concern but only on the basis of liquidation the value of the assets which is being transferred.

Byron R. White:

Or should (Inaudible)

Sigmund J. Beck:

No.

The Government takes its view point but they are entitled to absolute priority of the 3466.

We don’t understand what they mean by absolute priority, frankly.

Absolute priority is set forth in the Case case — Case against Los Angeles Lumber has to do with the relative priorities of the senior creditors.

We contend that the priority granted by — to the United States is incorporated in Chapter X, in Section 199 and that is the priority that they get.

Now, we never contend that they are not entitled to priority.

Sigmund J. Beck:

They are.

We contend that they’re getting it.

Now, we contend that the major question here is whether or not Section 216 (7) is applicable to the United States.

Byron R. White:

Well, do you — let me ask you.

Do you think the United — that a plan reorganization could take this particular claim of the United States and provide that it be paid in full 10 years from the date of conformation of the plan.

No payments prior to that time and all other unsecured creditors are paid in full at the time of conformation?

Sigmund J. Beck:

No, I do not think so.

Byron R. White:

Why not?

Sigmund J. Beck:

Because I don’t think in that particular point that would be fair and equitable because at that particular point you would be using money which rightfully belongs to a senior creditor for the benefit of a junior creditor.

Byron R. White:

Would you think then that fair — that fairness and equitable — fair and equity applied to be fair and equitable and not really recognized in full or priority?

Sigmund J. Beck:

I don’t think that’s quite true.

Well, I think it must recognize in full a priority and I think this plan does recognize in full a priority.

Byron R. White:

Well, there’s available cash it’s paid to junior creditors and not paid to a senior creditor.

Sigmund J. Beck:

That is not quite true.

The available cash that’s available comes in on installments.

There will be available cash.

Byron R. White:

Well, at the first distribution there is $18,000.00 paid to — for miscellaneous taxes and $14,000.00 paid for another tax claim and certain damages for cargo loss.

They have larger amounts of money are paid out that are available and not paid to the senior creditor.

Sigmund J. Beck:

Well, let me put it this way then.

I don’t believe that the senior creditor is any more senior in this particular program than the other tax claimants though the wage claimant and remember that in this particular case it is not just the United States that is being deferred there are three other tax creditors that are also being deferred and they are being protected by the asset, by the fund which has been set aside.

Byron R. White:

Where is the priority in the statute for Ohio use taxes?

Sigmund J. Beck:

There is no priority in the statute.

In this particular point, I would say that in my view we have to go on what the Congress has enacted and it would appear —

Byron R. White:

So the United States tax claims is senior to this Ohio use tax claim?

Sigmund J. Beck:

In a straight Chapter X, I would say yes.

I would not disagree.

Byron R. White:

Wasn’t this in Chapter X?

Sigmund J. Beck:

Yes, but I think we must view in the light of liquidation and what the bankruptcy priorities would be because what the alternative to this is, is the bankruptcy.

Byron R. White:

Well, so you’re — you’re really saying that the priority rules and the rules of reorganization shouldn’t apply to this case?

Sigmund J. Beck:

I am saying that the rules of reorganization are equitable rules and they are flexible and that this Court has decided time and again that the rules in equity proceedings must be flexible depending upon the type of situation and I think we have such a situation here.

Warren E. Burger:

What do you think about the holdings in the Case opinion and in Consolidated Rock?

Sigmund J. Beck:

I think that we follow them.

I think there is no question —

Warren E. Burger:

I noticed that — unless I missed it in the Court of Appeals’ opinion they didn’t refer to them or cite them.

Did I miss them?

Did I overlook them?

But don’t stop now.

Did you have a recollection of that or did you not?

Sigmund J. Beck:

My recollection is I don’t recall whether they cited the case in them or not.

I didn’t think —

Warren E. Burger:

They cited four or five case but they didn’t mention either of those if I read it correctly.

I was a little puzzled by that?

Sigmund J. Beck:

Well, I can’t answer that.

We’ve cited it.

We think we followed and we believe that this actually fits the Case against Los Angeles.

Dictum or even not dictum really is the policy and that is equity proceedings in Chapter X reorganizations must be governed by flexible rules.

Warren E. Burger:

But even if the Court of Appeals thought they were following these cases which would certainly be [Sneezes] that’s curious they don’t think to cite them.

Sigmund J. Beck:

I can’t answer of course for the judges of Court of Appeals.

Warren E. Burger:

You might — even though your lunch hour is short you might check that out to see if I missed something.

Sigmund J. Beck:

I’ll be happy to do that.

With your honest permission, I see we have got about 30 seconds left and I will defer my chance until the opening of the recess.

Warren E. Burger:

Very well.

[Recess]

Mr. Beck.

Sigmund J. Beck:

Mr. Chief Justice, you asked before the recess as to the Circuit Court’s opinion with respect to this case.

In looking at it, the only reason that I can believe that they did not cite the case or consolidated proceedings was that they based their decision one, on the grounds of 3466 did not apply at Section 199, 216 (7), and 221 are the provisions of Chapter X which apply.

And in talking in terms of even the absolute priority rule, their view was written on page 79 of the appendix in which they stated that in the case at bar, the approved plan contemplates that the United States will be paid in full.

Going on further they cite we hold that the trial court did not urge in permitting lesser ranking creditors to receive payment simultaneously.

Under the plan, the Government does not surrender its right to full payment.

Now, nowhere in the Act in fact nowhere can we find that the Government or anyone else is entitled to cash payment in a Chapter X proceeding.

Sigmund J. Beck:

I think perhaps, it best can be shown as to why we think that the absolute priority rule —

Byron R. White:

But that isn’t whether they’re entitled to cash payment may not be the question is whether they’re entitled to payment before a junior creditor?

Sigmund J. Beck:

I don’t believe there is any place in the Act which says they must be paid before a junior creditor.

Byron R. White:

Well, is the United States a senior creditor or isn’t it?

Sigmund J. Beck:

I would state in my view whether the United States is a senior creditor or a junior creditor.

They are not entitled to get paid before any other creditors receive anything.

They are entitled to be assured of satisfaction and ensured of their payment and this is done in this instance.

Byron R. White:

And you must take that position I — by thinking the way (Voice Overlap)?

Sigmund J. Beck:

Oh!

Yes, I do.

Byron R. White:

Yes.

Sigmund J. Beck:

I don’t have any qualms about taking that.

Byron R. White:

That a senior creditor may be postponed in payment for 10 years as long as he’s assured — he’s being paid but junior creditors can be paid immediately?

Sigmund J. Beck:

No, junior creditors may not take something from the senior creditor.

But in this case, they’re not taking anything from the senior creditor.

In fact, they are giving something up and that’s what I think we have to show.

Byron R. White:

Well, let’s just take the case where a senior creditor is provided for in the plan by a promise and security that he’ll be paid for full 10 years in the date of conformation of the plan.

Sigmund J. Beck:

Yes.

Byron R. White:

And junior creditors are paid in full in cash upon the date of conformation?

Sigmund J. Beck:

I’m assuming now we have valued correctly and that they are entitled to that payment.

Byron R. White:

Apparently.

Sigmund J. Beck:

I would say I find nothing wrong in terms of that.

There were other factors have to be considered as to other reasons for equitableness.

It’s just not the question of whether they’re going to be paid.

It’s a question of how it’s going to be.

How the security is fashion?

How it’s going to be paid out?

And that fact that the creditors are paid out in full —

Byron R. White:

Well, the senior creditor doesn’t question in my example the fact that he will be paid in 10 years.

Sigmund J. Beck:

Then I say it’s —

Byron R. White:

As I agree, all will be paid, there’s plenty of security there but he says, I want my money now before these junior creditors get it.

Sigmund J. Beck:

I don’t think he’s entitled to it.

Byron R. White:

Uh-huh.

You have to take that position.

Sigmund J. Beck:

I think I’m correct in view of all the other cases.

Warren E. Burger:

Well, if that isn’t your position, you are in difficulty aren’t you?

There is not alternative position for you to take.

Sigmund J. Beck:

No, I wouldn’t say that necessarily but I will stick by that position.

Warren E. Burger:

Well, another thing isn’t it possible that taking Justice White’s hypothetical case that the payment out to all the unsecured general creditors in full at the outset has at least the potential for so undermining the position of the debtor that they might never get to paying the United States or the deferred creditors at the end of the line.

Sigmund J. Beck:

I agree.

I agree, that’s why you cannot take it out of context.

Warren E. Burger:

Well, isn’t that why the priority was granted to the United States for tax purposes?

Sigmund J. Beck:

No, I think that’s not the historical reason to bear in mind.

The historical reason for the priority at least 3466 was the right of the sovereign to see to it that its taxes were obtained in order for the benefit of everybody.

Warren E. Burger:

Well, isn’t that just what I have said?

I thought I said it.

Sigmund J. Beck:

Well, I must have misunderstood.

Warren E. Burger:

(Voice Overlap) priority to see that the United States is paid.

Sigmund J. Beck:

Yes and there’s nothing in this case that says they won’t be nor other cases where I can see where solvency is at issue.

Now, any true reorganization involving that situation that Mr. Justice White contemplates would necessarily have to have a solvent corporation coming out or the senior creditor would be jeopardized.

Let me indicate to you the practicalities of this and why I say this is true in this instance and I can think of many others where it might not be.

This is the plan.

The plan provides for a total payout of $925,600.00 under the plan, that’s the total cost.

No one disagrees that the administration claims are entitled to be paid first.

There is some disagreement as to the why do the wages should be paid first in a true Chapter X.

There is no such quarrel in a straight paragraphs.

This is the United States claim for $375,000.00.

These are the other form or taxing authority, these three class three, four and five received are in the same position as the United States.

The first distribution indicates what happens.

The United States receives $37,500.00 or 10%.

Sigmund J. Beck:

Indiana then the Broward County and Ohio also received their 10%.

The miscellaneous taxes incidentally some 30 other taxing authorities received this $14,000.00 or 100%.

Thus, these two which would ordinarily in bankruptcy at least have the same established priority or out in the way in order to solve the problem.

Warren E. Burger:

But that last item 100% tax claim is to just to get rid of the cats and dogs?

Sigmund J. Beck:

That’s correct, but in bankruptcy that they entitle to pro rate with the United States.

Now, these are all the general claims and they’re receiving 20%.

It will take under the plan.

This is how it will go, at the end of 54 equal monthly payments the United States together with the other three will have receive 72.3% of their debt.

And at the end of the six and a half years, I suppose they have received the whole 100%.

The question is whether or not the value was there.

I will come to it in a minute.

What I would like at this particular point to show the other chart and what would happen in the alternative in the bankruptcy.

Hugo L. Black:

Before you leave that chart, may I ask you one question.

Is it the general creditors they’re getting 20% and the other is getting 10%?

Sigmund J. Beck:

At the initial distribution.

Hugo L. Black:

Why is that?

Sigmund J. Beck:

Because Your Honor the 20% is a compromise of their claims as I will show in liquidation.

They would be entitled to anywhere from 26% to 36% depending upon the cost of administration in the straight bankruptcy.

Hugo L. Black:

For settlement in full of their claims?

Sigmund J. Beck:

That is correct.

Potter Stewart:

And that’s all they ever get?

Sigmund J. Beck:

That’s all they ever get.

Potter Stewart:

That’s the end of the line for them?

Sigmund J. Beck:

That’s the end of the line.

Potter Stewart:

Whereas all the others ultimately you say get a 100%.

Sigmund J. Beck:

Get 100%.

Hugo L. Black:

Get 100%?

Sigmund J. Beck:

Yes sir, everybody else receives 100% except the creditors.

The stockholders of course are wipeout.

Warren E. Burger:

That is if the company is still in business at the —

Sigmund J. Beck:

Well, let me put it at this way.

There is no question in so far as the record is concerned as to the capability of Hennis to continue to pay it.

The testimony in the court indicates not only that the asset itself has increased in value.

Remember, that the asset which is being sold to Hennis is still belonging to those four creditors under a general mortgage, a security agreement.

And their addition to which Hennis is shown by the record is continually making a profit and it continues to grow.

Now, here is the alternative to the plan because there is no question that in so far as the sale of this asset is concerned I cannot foresee how the District Court is going to go back on the sale that took so long to be approved.

Here’s what happens in bankruptcy.

This is the order of priority.

The administration cost $60,000.00 again 100%, $15,000.00 for the wages a 100%.

Remember now that the United States on the bankruptcy shares equally with the remainder of the taxing authorities.

They therefore, will receive at the initial distribution 42.5% nothing gets paid to the general creditors.

At the end of January 1975, in other words about four and a half years, the United States then gets paid in full.

So it takes four and a half years under bankruptcy for the United States and the other taxing authorities to be paid in full.

At that point, the general creditors then have 30.04% which will be distributed to them in the remaining two years.

At that point, that’s what they’re giving up.

If the administration expenses go up to a maximum in our brief of $90,000.00 and we don’t anticipate it.

That would indicate they still get 26%.

Warren E. Burger:

But counsel, if the United States is right on their argument about the priorities, then these matters become irrelevant because the wisdom of their challenging the plan is not for us if indeed there is a priority.

Sigmund J. Beck:

But I contend that even with the priority they are still bound by Section 216 (7) of the Act which indicates that a dissenting creditor can be satisfied by various means and in this case they are satisfied by two means.

One, the sale of the property has been sold with their rights attaching to it and in this case the United States does not have a specific lien against it.

Warren E. Burger:

But there you’re arguing the wisdom of it again?

Sigmund J. Beck:

No, I’m talking of terms of 216 (7) and I’m talking in terms of 216 (7) which is pointed in the appendix to our brief.

We’re talking in terms any plan of reorganization under this Chapter shall include in respect to creditors generally or some class of them means or provisions for overruling or modifying their rights.

This 216 was placed in there under Chapter X for the very reason that we’re here, a dissenting class of creditors could not insist upon being paid out in cash as the all in equity receiverships require.

Now, under the all equity receivership there was no way for this to happen because the senior creditors had to be paid out in cash if they insisted.

We contend that that’s what 216 (7) was for and we also believe that there is nothing that excludes the United States as a claimant from the application of 216.

Now, this is where we disagree with the Government and we contend that this is true with in other cases and other security cases where they are been secured creditors on a particular piece of property.

There hasn’t been any question that other claimants could get paid and if the security or secured creditor’s rights would be altered in one of the many ways of 216 (7).

Now, I think the big question here is the interest question because there, we’re talking in terms of a question that Mr. Justice Stewart asked.

Are they getting a discounted value?

Sigmund J. Beck:

I contend they are not and the reason I’m contending they are not is because post petition interest is not available to tax claims.

Potter Stewart:

That really isn’t the point, is it?

Sigmund J. Beck:

Well, I think it is.

Well, I think —

Potter Stewart:

Do you concede that they’re entitled to full payment?

Sigmund J. Beck:

I do.

Potter Stewart:

And full payment of $375,000.00 now is not made by paying installments that add up — that arithmetically add up to that sum over a period of many years, that’s not full payment.

Sigmund J. Beck:

Well, if Justice will allow me I would say this; I think the question is one of substance not a form.

If we were to continue these proceedings and begin to payout as the money has come in then the United States will not receive interest and it will receive its full principle as we go along.

There is nothing as a matter of fact even in these first seven chapters of the Bankruptcy Act which provide that the United States must be paid before anyone else.

It provides that there must provisions made for the payment of the United States.

Now, that to me is the real crux of it when we’re talking in terms of substance or form.

I would go further of course and that is this; the Government insists that 3466 applies.

The Circuit Court held it did not.

I am convinced that 3466 does not apply in Chapter X proceedings.

I believe that Section 199 provides the priority that the legislature granted the United States.

They indicated that this was to make certain of the United States was going to be paid its taxes and custom duties and I just don’t think that that’s the question.

Now, I don’t even believe that there’s a conflict between U.S. against Andersen and this case.

I think that the Court stated the difference and that was in the United States against Andersen case.

They were talking about non-tax debts.

We’re not talking about non-tax debts here.

We’re talking about the priority granted by 199 because all of these taxes.

I think the question of the interest is important only from one reason if I am correct that just thought of these proceedings and continuing on, there’s only one step in the way than the Saper case applies and the Edens case applies and the Government is not going to be entitled to the interest on its money.

And for that reason, I contend that it isn’t discount and true one more thing.

There isn’t any question that if interest has to be paid the United States then it has to come out of the pockets of the general creditors.

Now, that to me is the real crux of it here.

If there are no further questions from the Court, I will rest.

Warren E. Burger:

Thank you Mr. Beck.

Do you have any thing further counsel?

Lawrence G. Wallace:

I would just like to make two brief points, Your Honor.

Lawrence G. Wallace:

In the first place, it seems apparent to us from counsel’s own chart that somebody is taking something away from the United States in this case compared to what we would have had in a liquidated distribution where the initial payment would have been $160,000.00.

Now, it’s $37,500.00.

It’s not fair and equitable under established principles for the priority claimant to have to suffer the expense of giving something of value to claimants with less priority against its will.

Byron R. White:

It rather begs the question, doesn’t it?

I mean, that you assume as the result must be exactly the same in Chapter X is it isn’t straight bankruptcy and that is the question to this case.

Lawrence G. Wallace:

Well, this is not my assumption.

The contention is being put by the respondent that this is the appropriate comparison.

I wish to point out also that depending on the cost of administration perhaps the unsecured creditors would in fact eventually get more but then that some really should be discounted by the period of waiting for it in addition to taking into account the risk that it will not materialize which would be born by unsecured creditors in that situation.

Now, this Court has recognized in a recent opinion, Mr. Justice White’s Protective Committee against Andersen that in Chapter X there is authority in the Secretary of the Treasure to bargain to compromise and that bargain and compromise among claimants place a very important role in accomplishing the objects of Section 10.

And while it may seem that in this case we are arguing for a rigid rule of priority.

The fact is that it is the priority that gives the Secretary to bargaining power to induce others to enter into these compromises and accomplish the objectives.

We did bargain previously and accept the plan in 1957 in this very case which shared our rights with others.

Thank you.

Warren E. Burger:

I don’t know whether this record contains it but is there any indication of what the discounted value of $375,000.00 paid over that basis.

I suppose it’s somewhere 7 years somewhere on $225,000.00 at 6%.

So, in effect, the Government is saying to us I take it that as a matter of judgment being aside of priority judging the equitable aspect of the plan.

The Government’s preference is to get $60,000.00 now then $225,000.00 over period of seven years with the attendant risks that they might not get all of it

Lawrence G. Wallace:

That is correct sir.

Our own contention would have been that we should be paid now what was being paid under the plan that we have the right to be paid what was being under the plan to the junior creditors rather than this particular comparison.

We would look at the distribution as being made under the plan and certain of those we had a right too if we insisted on it.

Warren E. Burger:

Suppose it’s not relevant here but from what you said before I take it that some plan less than the distribution under bankruptcy but more than the one offered might have been acquiesced by the Government.

Lawrence G. Wallace:

There is the authority to do that.

We did previously acquiescence such a plan 1957 in this case.

At that time, that plan had rehabilitative purposes and that is a factor in our acquiescence.

Warren E. Burger:

Thank you Mr. Wallace.

Hugo L. Black:

Counsel, the other counsel stated to me that payment to thereto other creditors at the first line was the payment in full but it looks like over the last line it was a not a payment in full, what is that?

Potter Stewart:

That was the other chart, Mr. Counsel.

Lawrence G. Wallace:

In the other chart, I think his contention was that eventually there would be payment in full even though the initial payment was only 10%.

His contention is that our right is satisfied so long as the Government will eventually be paid 100% by the end of the 78 months.

Warren E. Burger:

100% without interest?

Lawrence G. Wallace:

Without interest, I think that was the point he was making when he said we would get 100%.

Potter Stewart:

And that the other creditors get 20% now and that’s all they ever got under the plan?

Lawrence G. Wallace:

That was the contrast he was trying so that even though initially under the plan, we get only 10% compared to their 20%.

We would get the additional payments.

Hugo L. Black:

I don’t understand still then.

You say that that’s all the creditors will ever get?

Lawrence G. Wallace:

The general unsecured creditors well, this is not the plan.

This is the —

Hugo L. Black:

Yes, I understand it but what is that figure over here for?

Lawrence G. Wallace:

This is the hypothetical figure that counsel suggest as what the — are general unsecured creditors would eventually get if these were not at Chapter X proceeding but an ordinarily liquidation.

Hugo L. Black:

Yes.

Warren E. Burger:

Thank you Mr. Wallace.

Thank you Mr. Beck.

The case is submitted.