City of New York v. Saper/Opinion of the Court

The ultimate issue in these three cases is whether tax claims against a bankrupt bear interest until the date of bankruptcy as held by the court below, or until payment, as previously held by another Court of Appeals. We granted certiorari to resolve the conflict, the matter being of considerable practical importance in the administration of the Bankruptcy Act.

If the question were one of first impression to be decided in the light of the present statute alone, we should have no difficulty in affirming the court below. More than forty years ago Mr. Justice Holmes wrote for this Court that the rule stopping interest at bankruptcy had then been followed for more than a century and a half. He said the rule was not a matter of legislative command or statutory construction but, rather, a fundamental principle of the English bankruptcy system which we copied. Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.Ct. 256, 257, 55 L.Ed. 244. Our present statute contains no provision expressly repudiating that principle or allowing an exception in favor of tax claims. Every logical implication from relevant provisions is to the contrary. Section 63, sub. a (1), 11 U.S.C. § 103 sub. a (1), 11 U.S.C.A. § 103, sub. a (1), allows interest on judgments and written instruments only to date of bankruptcy. Section 63, sub. a(5), 11 U.S.C. § 103, sub. a(5), 11 U.S.C.A. § 103, sub. a (5), allows interest only to that date on debts reduced to judgment after bankruptcy. No provision permits post-bankruptcy interest on other claims in general or tax claims in particular. Section 57, sub. j, 11 U.S.C. § 93, sub. j, 11 U.S.C.A. § 93, sub. j, forbidding allowance of governmental penalties or forfeitures permits allowance of losses sustained by the acts penalized, with actual costs and 'such interest as may have accrued thereon according to law.' However, on its face this appears to delimit even such allowable debts as of the date of bankruptcy and to allow no more interest than does § 63 with respect to the claims there specified. Moreover, there is no interest except that which accrues according to law-it is exactly such interest that the 'fundamental principle' cuts off as of bankruptcy. Section 57, sub. n, 11 U.S.C. § 93, sub. n, 11 U.S.C.A. § 93, sub. n, requires governmental claims to be proved in the same manner and within the same time as other debts and only for cause shown may a reasonable extension be granted. Tax claims are treated the same as other debts except for the fourth priority of payment, § 64, sub. a, 11 U.S.C. § 104, sub. a, 11 U.S.C.A. § 104, sub a, and the provision making taxes nondischargeable, § 17, 11 U.S.C. § 35, 11 U.S.C.A. § 35. But each of these sections is silent as to interest.

The long-standing rule against post-bankruptcy interest thus appears implicit in our current Bankruptcy Act. To read into such a statute an exception to that rule would be unwarranted and, as an original proposition, we should decline to do so. However, the issue comes here after forty years of bankruptcy administration under the Act of 1898 followed by ten years under the 1938 Chandler Amendments. Petitioners contend that judicial decisions during those periods have now been incorporated into a legislative policy allowing interest on tax claims to payment, thereby producing a rule of law beyond further judicial scrutiny.

It is contended that decisions under the Act of 1898 definitely established such a rule. And petitioners challenge the lower court's holding, despite those decisions, that the Congress through the Chandler Act completed the assimilation of taxes to debts and manifested an intention that such claims be treated, interest-wise, the same as other debts. They assert that the pre-Chandler Act allowance of interest to date of payment was grounded in judicial construction of § 57, sub. j, approved at least sub silentio by this Court in United States v. Childs, 266 U.S. 304, 45 S.Ct. 110, 69 L.Ed. 299, and adopted by Congressional reenactment of that section in the Chandler Act. They also contend that even after the Chandler Act the lower courts, and this Court in Meilink v. Unemployment Reserves Commission, 314 U.S. 564, 62 S.Ct. 389, 86 L.Ed. 458, affirmed the alleged prior interpretation of § 57, sub. j. In such a situation, it is said, the courts cannot modify what has now become legislative poli y even though originally it may have been a judicially developed rule and one which now, as a matter of statutory construction, we should reject.

At the outset it may be admitted that in practice under the Act of 1898 the lower courts generally did allow interest on tax claims until paid. The parties and the lower courts trace that practice to In re Kallak, D.C., 147 F. 276, and cases following that decision. But we do not believe those cases support petitioners' contention that the pre-Chandler allowance of post-bankruptcy interest reflects a construction of § 57, sub. j. The Kallak opinion itself refutes that contention insofar as it may be based on that line of cases. The court there first decided that since § 64, sub. a, of the Act of 1898 gave taxes absolute priority over claims of every kind, 'public taxes do not constitute a 'claim' in bankruptcy.' 147 F. 276, 277. The statute did not require that taxes be proved but that the trustee should seek them out and pay them in full. In view of that requirement and since taxes were not claims, the court saw no reason why the rule stopping interest on ordinary claims should apply. The court found that rule was based on considerations of expediency and practical convenience not present in the case of taxes. First, it said that allowance of such interest at the varying rates applicable to the different claims sharing the estate would prevent definite determination of each claimant's proportionate share. Secondly, such recurring readjustments would complicate administration of the estate. Since neither difficulty would result from allowing post-bankruptcy interest on taxes not sharing the fund with other obligations, the rule against such interest was held to be inapplicable. This conclusion was grounded entirely in reasons of practical convenience. If the case involved construction of any part of the Act of 1898, it clearly was § 64 sub. a, with its requirements of absolute priority in payment of 'all taxes legally due and owing,' which, together with the dispensation from proof, the court considered as indicating that taxes enjoyed a status entirely different from that accorded ordinary claims. Those provisions were considered controlling, while § 57, sub. j, was not mentioned in the opinion. Consequently the latter section's reenactment could not be considered a legislative adoption of any 'judicial gloss' on that section resulting from the Kallak line of cases. The only section relied upon in Kallak, § 64, sub. a, has been significantly amended to deprive taxes of their preferred status, first by the amendment of 1926, and later by the Chandler Act. The former expressly provided that taxes yield priority to administration expenses and certain wages, neither of which bear interest. The latter amendments finalized the subordination of taxes to other priority items. They also wrote into § 57, sub. n, the requirement of proof, formerly dispensed with under § 64, sub. a. Consequently the argument based on alleged Chandler Act recognition of lower court interpretations of § 57, sub. j, seems entirely without force. And, on the contrary, that enactment did significantly change the provisions of § 64, sub. a, which were decisive in Kallak and similar cases.

Petitioners rely most heavily, however, upon this Court's decision in United States v. Childs, 266 U.S. 304, 45 S.Ct. 110, 69 L.Ed. 299, reversing In re J. Menist & Co., 2 Cir., 290 F. 947. It is urged that this decision reflected a construction by this Court of § 57, sub. j, which the Congress adopted in enacting the Chandler Amendments. We do not believe this contention survives scrutiny of that case or that it is supported by the legislative history of the Chandler Act. The Court of Appeals stated that the only issue before it was 'whether an exaction of 1 per cent a month as the price of delay amounts to a penalty.' 290 F. 947, 949. It decided that anything in excess of 6% per annum would be a penalty barred by § 57, sub. j. It is true that court also stated the allowable interest could run until payment. However, that statement was also based on the 'highly preferred' status of taxes and the requirement of § 64, sub. a, that absolute priority be given to 'all taxes legally due and owing.' Section 57, sub. j, was considered as establishing that 12%, as a penalty, could not be allowed but that 6% was a 'pecuniary loss' within the meaning of that section, and allowable as such, in full. But the Government challenged in this Court only the holding that the 12% interest was a penalty barred by § 57, sub. j. This Court reversed as to that point and the opinion makes it clear that it was the only issue considered and decided here. The question whether interest could run to payment, although discussed in respondent's brief on the merits, was not the issue which induced the Court to bring the case here, and it is not discussed in the opinion. We cannot agree that the case represents even a sub-silentio approval of allowance of post-bankruptcy interest. Even assuming, arguendo, such approval to be implicit in the decision, it would not help petitioners, relying solely on reenactment of § 57, sub. j, since we have shown the lower court's holding was based largely on provisions of § 64, sub. a, which have since been changed by the Act of 1926 and the Chandler Act.

Other decisions of this Court cited by petitioners on this point do not help their cause and require little discussion. Dayton v. Stanard, 241 U.S. 588, 36 S.Ct. 595, 60 L.Ed. 1190, approved payment of interest to individuals who, during the course of a bankruptcy, paid off tax liens binding property of the bankrupt. The Court's decision was only that such parties, whose tax deeds were invalidated because at the time they were issued the property was in custodia legis, could be reimbursed out of the estate's general fund for both their advances and interest at the legal rate. This was simple equity since the claimants had paid taxes which the then § 64, sub. a, required the trustee to seek out and pay in full. People of State of New York v. Jersawit, 263 U.S. 493, 44 S.Ct. 167, 68 L.Ed. 405, is clearly a holding limited to the determination that the claim there assert d was a penalty not allowable under § 57, sub. j. The case was so described in the Childs opinion, 266 U.S. 304, 309, 45 S.Ct. 110, 111, 69 L.Ed. 299, and the discussion there confirms our conclusion that the latter decision was similarly limited to that point. Coder v. Arts, 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772, 16 Ann.Cas. 1008, states as a subsidiary point only that, where the estate was adequate, interest could properly be allowed on a mortgage which the Court had held not to be a voidable preference.

It is thus clear that when the Chandler amendments were under consideration in Congress the reported cases established only that lower courts were allowing interest on tax claims until payment, either as a matter of practical convenience or because § 64, sub. a gave those claims absolute priority and dispensed with proof. There was no basis for belief that the lower courts, much less this Court, had applied any judicial gloss to § 57, sub. j, requiring similar preferred treatment, interest-wise, for tax claims. If any conclusion could have been drawn from the cases it was that § 64, sub. a, might have justified a judicial belief that taxes need not be considered, for any purpose, the same as other debts. And, as we have seen, both significant provisions of that section were amended with adverse effects on the status of tax claims. Consequently, reenactment of § 57, sub. j, does not support petitioners' position on this issue. This conclusion is confirmed by the complete lack of any indication in the legislative history that Congress considered § 57, sub. j, in this connection. Petitioners are in fact asserting that adding to an alleged sub-silentio ruling here on § 57, sub. j, Congressional silence in reenacting that section precipitated a legislative command that post-bankruptcy interest be allowed on tax claims which, at the same time, were deliberately being reduced to the level of other debts. Mere statement of the proposition indicates its rejection.

The Court of Appeals concluded that by the 1926 amendment and the Chandler Act, Congress assimilated taxes to other debts for all purposes, including denial of post-bankruptcy interest. We think this is a sound and logical interpretation of the Act after those amendments to §§ 64, sub. a, and 57, sub. n. Considered in conjunction with the general rule against post-bankruptcy interest as well as § 63's limitations of interest on other claims to date of bankruptcy, they compel our conclusion, already stated, that the statute as amended did not contemplate any exception in favor of tax claims.

Petitioners' final contention is that even after the Chandler Act the lower courts continued to allow post-bankruptcy interest, that this Court in Meilink v. Unemployment Reserves Commission, 314 U.S. 564, 62 S.Ct. 389, 86 L.Ed. 458, approved the practice, and that Congressional recognition of that interpretation is reflected in an unsuccessful attempt to modify § 57, sub. j. It may be admitted that lower courts, other than the one whose judgment is now being reviewed, did continue to allow such interest after the 1938 amendment. But this Court has not, in the Meilink case or otherwise, passed on the question. That case involved the same issue that had been presented in Childs: whether or not the interest there challenged was in fact a penalty proscribed by § 57, sub. j, which had been left substantially unchanged by the Chandler Act. We decided only that question.

But, irrespective of that decision, petitioners contend that Congress has considered the lower courts' post-Chandler Act decisions as a statutory interpretation which can be overruled only by legislation. The argument is based on a Committee Report accompanying a bill approved by the House during the 80th Congress but not acted upon in the Senate. Among Bankruptcy Act amendments proposed in this bill was one designed 'both to clarify and modify' § 57, sub. j. The change, it was said in the House Report, was to make it clear that the section referred to interest on the 'pecuniary loss' and that such interest stops at bankruptcy. The clarifying clause was 'intended to overrule an obsolete rule' as to interest on delinquent taxes. It was stated that although §§ 64, sub. a, and 57, sub. n, as amended by the Chandler Act rendered the reasoning of the Kallak case obsolete, nevertheless its rule had not been changed and legislation was necessary, citing Davie v. Green, 1 Cir., 133 F.2d 451, the case which conflicts with the decision now being reviewed. The text of the section of the report devoted to this proposed amendment is printed in the margin. We believe a fair reading of it leads to the conclusion that the Committee believed, not that the Chandler Act either allowed post-bankruptcy interest or left the matter open, but that the courts in allowing such interest were ignoring the necessary and intended implications from the Chandler amendments to §§ 57, sub. n, and 64, sub. a. The court below did not have this report before it, but in a well-considered opinion reached the same conclusion. We believe that conclusion is confirmed by the report and that petitioners' contentions find no support in either the Chandler Act or this abortive attempt at clarification.

The case thus presents only the conflict between two Courts of Appeals as to the proper interpretation of the current statute. We agree with the court below and resolve the conflict by affirming its judgments.

Affirmed.

Mr. Justice REED dissents for the reasons given in Davie v. Green, 1 Cir., 133 F.2d 451.