In re MONONGAHELA RYE LIQUORS, Inc., et al.
Nos. 8475, 8505
Circuit Court of Appeals, Third Circuit
March 27, 1944
Argued Jan. 6, 1944.
141 F.2d 864
A. E. Kountz, of Pittsburgh, Pa. (Kountz, Fry, Staley & Meyer, of Pittsburgh, Pa., on the brief), for trustee in bankruptcy.
Before BIGGS, JONES, and GOODRICH, Circuit Judges.
JONES, Circuit Judge.
Each of the bankrupts above named respectively filed with the District Court on the same day a petition for reorganization under Chapter X of the Bankruptcy Act,
The Commonwealth of Pennsylvania filed proofs of claim with the referee in the bankruptcy proceeding for taxes in specified amounts allegedly due it by each of the bankrupts. The claims thus made were for capital stock, corporate loan and corporate income taxes for the year of the bankruptcy and for four years prior thereto. The tax claims were based upon estimates of liability which had been made by the Pennsylvania Department of Revenue with the approval of the State Auditor General upon failure by the corporations to file proper returns.
About the time of the filing of the Commonwealth‘s tax claims in the bankruptcy proceeding, the trustee filed with
Contemporaneously, the trustee filed with the referee objections to the tax claims of the Commonwealth and petitioned for their redetermination by the bankruptcy court under the provisions of Sec. 64, sub. a (4) of the Bankruptcy Act,
To the objections filed by the trustee with the referee the Commonwealth of Pennsylvania filed a motion to dismiss under Rule 12 (b) and a motion to strike under Rule 12(f) of the Federal Rules of Civil Procedure,
The questions thus raised fall into two groups, viz., (1) whether the bankruptcy court had jurisdiction to pass upon and redetermine the Commonwealth‘s tax claims and (2) whether the trustee had a right of set-off or recoupment against the Commonwealth‘s tax claims for alleged causes of action not related to the Commonwealth‘s claims. The referee, in an exhaustive and well reasoned opinion, upheld the power of the bankruptcy court to redetermine the Commonwealth‘s tax claims under the circumstances here obtaining, but denied the trustee a right of set-off or recoupment for the bankrupts’ independent claims against the Commonwealth and entered an order accordingly. Both the Commonwealth and the trustee filed petitions for review. The District Court sustained the action of the referee for the reasons contained in the opinion of the latter. The respective pending appeals followed.
Prior to the decision by the Supreme Court in Arkansas Corporation Commission v. Thompson, 313 U.S. 132, 61 S.Ct. 888, 85 L.Ed. 1244 (1941), it had been pretty generally considered that a bankruptcy court possessed broad power in the matter of reviewing and redetermining claims for taxes allegedly due by a bankrupt. See 2 Remington on Bankruptcy (1940) § 799, and 6 ibid. § 2804; 3 Collier on Bankruptcy (1941) p. 2143, et seq. The leading decision was New Jersey v. Anderson, 203 U.S. 483, 27 S.Ct. 137, 51 L.Ed. 284 (1906). The power has been exercised by courts of bankruptcy a number of times.1 And so far as any conflict existed in the decisions, it would seem to have been limited to the power of a bankruptcy court with respect to a redetermination of the taxable valuation ascribed to real estate by local taxing agencies.2
The Chandler Act, to which the instant case is subject, not only appears not to have taken away or restricted whatever may have been a bankruptcy court‘s jurisdiction to redetermine tax claims but, on the contrary, seems to indicate more clearly the existence of the power. Subdivision a of Sec. 64 of the Bankruptcy Act of 1898, 30 Stat. 563, had provided that “The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, State, county, district, or municipality in advance of the payment of dividends to creditors, * * * and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court.” The taxes so ordered to be paid were, by amendment of 1926, 44 Stat. 666, 667, given priority of payment in category (6) of subdivision (b) of former Sec. 64. But in the Chandler Act Sec. 64, sub. a of the earlier Act was eliminated, Sec. 64, sub. a of the Amendment, 52 Stat. 874, being devoted to priorities and their order of payment. Under category (4) of that subdivision, as amended,
Generally speaking, therefore, we think that a bankruptcy court has the power to redetermine tax claims in the exercise of its jurisdiction under the Chandler Act. But we also think that certain factual determinations in respect of such claims, when competently made in another forum, may be conclusive at a hearing thereon in a bankruptcy court. Such we believe is indicated by a comparative reading of the decisions in New Jersey v. Anderson and Arkansas Corporation Commission v. Thompson, supra.
In the Anderson case, New Jersey had imposed a franchise tax upon domestic corporations of a certain percentage on the amount of a corporation‘s issued and outstanding capital stock on the first of January in each year. If any corporation failed to make a return, the State Board of Assessors was authorized to ascertain and fix the amount of the tax. Prior to the bankruptcy of the corporation involved in the Anderson case, it had an authorized capital stock of $40,000,000, but only $10,000,000 of such stock was outstanding. The corporation not having made a return, the State Board of Assessors assessed a tax against the corporation on the basis of its $40,000,000 authorized capital stock; and, after the bankruptcy of the corporation, the State presented its tax claim in the amount assessed by the State Board of Assessors. The referee reduced the State‘s claim by computing the tax on the basis of the capital stock actually outstanding. The referee‘s action in such regard was ultimately affirmed by the Supreme Court, that Court saying, 203 U.S. at pages 493, 494, 27 S.Ct. at page 141, 51 L.Ed. 284, “* * * § 64a specifically provides that in case any question arises as to the amount or legality of taxes, the same shall be heard and determined by the court, with a view to ascertaining the amount really due. We do not think it was the intention of Congress to conclude the bankruptcy courts by the findings of boards of this character, * * *.” In that regard the opinion would seem to have been the unanimous view of the Court. The dissenting Justices did not question the bankruptcy court‘s power to redetermine the State‘s tax claim. They would have denied the claim priority of payment (in whatever amount it was allowed) because it did not represent “in reality ‘taxes,’ as distinguished from governmental exactions for [corporate] privileges granted.”
In the Thompson case, upon which the Commonwealth of Pennsylvania largely relies as support for its pending appeal, a different situation was presented. There, in a proceeding for the reorganization of a railroad under Sec. 77 of the Bankruptcy Act,
The view we take of the decision in the Thompson case is that where, after a hearing, a quasi-judicial body, thereunto duly empowered, determines the amount of a tax due, with the right on the part of the taxpayer to a judicial review of the determination, all conformable with the requirements of due process, such determination, upon becoming final by operation of law, is conclusive upon a court of bankruptcy save for mathematical error in the computation of the amount of the tax or legal error in its assessment. Cf. In re 168 Adams Building Corporation, D.C., 27 F.Supp. 247, 249, 250, affirmed sub nom. Steinbrecher v. Toman, 7 Cir., 105 F.2d 704, certiorari denied 308 U.S. 623, 60 S.Ct. 378, 84 L.Ed. 520; In re Schach, D.C., 17 F.Supp. 437, 438, 439; In re Gould Mfg. Co., D.C., 11 F.Supp. 644, 649. In Lyford v. City of New York, 137 F.2d 782, 786, the Court of Appeals for the Second Circuit said that “* * * the effect of the Thompson case is, in any event, to restrict the court to finding if the tax is legally due and to deny it power to review the action of a quasi-judicial taxing body in setting, after due hearing, a valuation of property for tax purposes.” And, again, in In re Hotel Martin Co. of Utica, D.C., 41 F.Supp. 392, 394, it was said that “The Arkansas case, supra, illustrates the law relative to real property assessments by state or local authorities where the review of the assessments as provided by law was not taken.”
The question in any instance, therefore, is whether the circumstances necessary to justify an exercise of bankruptcy‘s power to redetermine a tax claim are present. We think they are in the instant case. The taxpayer having failed to file a return, the tax assessments against it were based upon estimated “settlements” arbitrarily made by the State‘s Department of Revenue without hearing the taxpayer. The pertinent Pennsylvania statute, viz., the Fiscal Code of 1929, P.L. 343, as amended by the Act of February 2, 1937, P.L. 3,
For the most part, the tax claims in the instant case are based upon such estimated settlements. We think it is plain that the referee‘s hearing and determination of the amount of tax actually due did not involve a second trial of a controverted fact, such as the exercise of the power entailed in the Thompson case. We are, therefore, of the opinion that, under the circumstances here shown, the rule of the Anderson case is applicable and that the referee‘s redetermination of the Commonwealth‘s tax claims was a justifiable exercise of bankruptcy‘s power.
As to the trustee‘s appeal at No. 8475, it is his contention that the court below erred in affirming the referee‘s denial to the trustee of a right to set-off or recoupment for the liquor sold by the bankrupts to the State Liquor Control Board. In the alternative, and evidently to avoid the bar of the sovereign‘s immunity from a suit to which it has not consented, the trustee argues that the referee could have, and
While Sec. 68, sub. a, of the Bankruptcy Act,
A distinguishing feature of set-off is that it arises out of a transaction extrinsic to that out of which the primary claim arose. Cf. Hastorf v. Degnon-McLean Contracting Co., D.C.N.Y., 128 F. 982, 983. In short, a set-off rests upon a claim or demand based upon an independent cause of action. The independent nature of set-off is plainly recognized by the Federal Rules of Civil Procedure. Thus, Rule 13 (b) allows for the assertion of set-offs as “Permissive Counterclaims“. But, unlike in the instance of a true counterclaim, i.e., a claim or demand arising out of the same transaction which gave rise to the primary claim and which must be asserted timely as a counterclaim (Rule 13 (a)), failure to plead a set-off as a counterclaim does not defeat the right of action upon which it is based. The present importance of the distinction between a counterclaim and a set-off lies in the fact that, under both federal and local law, in a suit by a sovereign a plea of set-off, being based as it is upon matter unrelated to the primary claim, is the equivalent of an independent suit against the sovereign which, of course, may not be sued without its consent. See Nassau Smelting & Refining Works, Ltd., v. United States, 266 U.S. 101, 106, 45 S.Ct. 25, 69 L.Ed. 190; Commonwealth v. Matlack, 4 Dall.Pa. 303, 1 L.Ed. 843.
Art. I, Sec. 11, of the Pennsylvania Constitution,
It is, of course, true that when the United States or a State institutes a suit, it thereby submits itself to the jurisdiction of the court, but, as to claims against the sovereign, the latter‘s submission to a court‘s jurisdiction, because of its suit, draws in only such adverse claims as have arisen out of the same transaction which gave rise to the sovereign‘s suit. Cf. Bull v. United States, 295 U.S. 247, 261, 262, 55 S.Ct. 695, 79 L.Ed. 1421; United States v. Dugan Bros., Inc., D.C.N.Y., 36 F.Supp. 109, 110; State v. Holgate, 107 Minn. 71, 119 N.W. 792, 793. A defendant‘s right in such regard is one of recoupment. And in Bull v. United States, supra, it is said (295 U.S. p. 262, 55 S.Ct. 700, 79 L.Ed. 1421) that “recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff‘s action is grounded.” The rule of recoupment in bankruptcy derives from the rule that the trustee takes the bankrupt‘s property subject to the equities therein. It does not attach by reason of the set-off provisions of Sec. 68, sub. a. 4 Remington on Bankruptcy, 5th Ed., § 1435.
In the instant case the trustee‘s claims for liquor sold by the bankrupts to the State Liquor Control Board were manifestly unrelated to the Commonwealth‘s tax claims. The bankruptcy court was therefore without jurisdiction to entertain the trustee‘s claims in the absence of the Commonwealth‘s consent to such procedure.
As to the trustee‘s alternative contention that his claims might be enforced as a condition to the allowance and payment of the Commonwealth‘s tax
The orders of the District Court are affirmed at the cost of the respective appellants.
BIGGS, Circuit Judge (concurring).
While I concur in the results reached in both of these cases, I think that in respect to the appeal of the Commonwealth of Pennsylvania at our No. 8505 this court should go no further than to state that the facts before us are unlike those of Arkansas Corporation Commission v. Thompson, 313 U.S. 132, 61 S.Ct. 888, 85 L.Ed. 1244, but are very similar to those in New Jersey v. Anderson, 203 U.S. 483, 27 S.Ct. 137, 51 L.Ed. 284. In the appeal at our No. 8505 the estimates of liability were made by the Pennsylvania Department of Revenue which is a purely ministerial agency and the trustee in bankruptcy did not appear before that body to contest the estimates. These facts take the case out of the ruling of the Supreme Court in the Arkansas Corporation Commission case. The ruling of New Jersey v. Anderson is applicable.