KOKOSZKA v. BELFORD
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Thomas R. Adams
Chief Justice Warren E. Burger: We’ll hear arguments next in 73-5265, Kokoszka against Belford.
Mr. Adams, you may proceed whenever you’re ready.
Mr. Thomas R. Adams: Mr. Chief Justice and may it please the Court.
This case involves the question of interpretation of the Bankruptcy Act.
The question is whether a wage earner’s postbankruptcy receipt of his tax refund check is property within the meaning of the Bankruptcy Act.
The bankrupt contends that the disposition of this case should be controlled by this Court’s decision four years ago in Lines versus Frederick.
In Lines, the Court analyzed the meaning of the word “property” and rejected a mechanistic accounting-type approach to defining property.
For example, Lines involved the question of whether or not a bankrupt’s vacation pay was property.
It was clear in Lines that the vacation pay was entirely earned and accrued at the time of the bankruptcy and it was also clear that the vacation pay was the result of labor that had been preformed in a prebankruptcy past.
The facts in this case are similar.
Mr. Kokoszka, the bankrupt was employed for three-and-a-half months in the year 1971.
He claimed the correct number of exemptions with his employer for withholding purposes and he became entitled to a tax refund check of $251.00 because the withholding was based on the premise that he would be employed for the entire year.
Thus, when Mr. Kokoszka filed his bankruptcy in 1972, his tax refund check, like the vacation pay in Lines was entirely accrued and earned at the time of bankruptcy and it was the result of prebankruptcy labor.
In Lines, this Court specifically stated that the definition of property cannot be resolved by reference to such questions as the time of vesting.
Instead, the Court emphasized that more traditional test, as in Segal versus Rochelle that property should be defined by reference to the purpose of the Bankruptcy Act.
In this regard, the Court must analyze the relationship of the asset in question to the debtor’s fresh start and a possible entanglement of the asset in a debtor’s prebankruptcy past.
Utilizing this analysis in the Lines case, certain important factors were present, which resulted in that decision and those same factors are present in this case.
For example, the tax refund check does not represent an investment or savings account, or some other voluntary form of property.
It is entirely the result of involuntary actions as the result of the withholding laws of the United States, as vacation pay --
Justice Harry A. Blackmun: (Inaudible) number of exemptions as a Voluntary Act, is it not?
Mr. Thomas R. Adams: Yes, the designation of it, but he claimed the proper number of exemptions as he should do under the law, in order to approximately end up with either no tax refund check or no tax is due at the end of the year.
Justice Harry A. Blackmun: Would the case be different in your estimation had he claimed, as he has a privilege of doing a number of exemptions that do not coincide with the facts?
Mr. Thomas R. Adams: Yes, I do think the case would be different, because in that case, for example, if he had not claimed as many exemptions as we he was entitled to, the funding question would be similar to a savings account, he would have created a greater tax refund check.
Now, in the -- one of the cases that’s discussed this issue, the Cedor case, the opinion of the Judge in the Northern District of California, specifically held that because that part of the tax refund check was a result of voluntary activity, that it should be regarded as property under the Bankruptcy Act.
In this case, we’re dealing with the tax refund check that was result of no particular voluntary action by the bankrupt, except that he was just complying with the tax laws.
Another important aspect of this asset, an important aspect that was also present in Lines is that the tax refund check is not received until after the bankruptcy.
It is a postbankruptcy event, part of the debtor’s future.
Like vacation pay, it is not particularly reachable or payable to the bankrupt, until the time that it is actually received.
In Mr. Kokoszka’s case, he filed his bankruptcy on January 5, 1972.
He filed his income tax return in February and he received his tax refund check about two months later.
Thus, vacation pay, like the tax refund check importantly is a postbankruptcy event, and part of the debtor’s future, but perhaps the most important aspect of the Lines case is that vacation pay was entirely wages.
In this case, similarly the tax refund check here is derived entirely from wages.
It consists entirely of wages.
The bankrupt has been compelled to accept the delayed receipt of wages, which he otherwise would have received, as a result of the withholding laws of the United States.
But, for the withholding laws, this money would have been available for his use and he would have used it for his support at the time of his regular pay check.
The Ninth Circuit’s decision, the Cedor case and the Eighth Circuit decision, the Gehrig case focused on the practical realities of the importance of wages to a bankrupt.
A bankruptcy, as we point out in our brief and as those courts referred to is frequently a last resort for a debtor.
He has used up all his assets by the time he’s forced to go into bankruptcy.
He depends entirely on his receipt of future wages, in order to make his fresh start.
In Mr. Kokoszka’s case, he earned only $2,400.00 in 1971.
At that level of earning, all of the person’s wages are necessary for items of immediate support and consumption, as this Court noted in the case of James versus Strange.
Additionally, Lines was a confluence of streams of decisional law, both in the Bankruptcy Act and outside of the Bankruptcy Act.
In Lines, the Court quoted and emphasized its holding in Sniadach that wages were specialized kind of property in our system.
Both the Cedor Court and the Gehrig Court felt that given the specialized nature of wages and a condition of the bankrupt that to deprive the bankrupt of his tax refund check would work in equivalent hardship as to deprive him of his vacation pay.
Perhaps the more so, because the debtor has already been forced to accept the delayed payment of these wages, which he needed.
In any event, the contention of the bankrupt in this case is that the tax refund check is as important a part of the family budget, as vacation pay.
Now, the Court below, the Second Circuit did not apply this same analysis and attempted to distinguish Lines versus Frederick in this regard, by claiming that vacation pay was a periodic wage payment, like a person’s regular pay check, whereas this is not.
That Court’s distinction, we submit, is both unrealistic and not in keeping with this Court’s decision in the Lines case.
It is unrealistic because a debtor needs his wages for support, whether they are paid to him on a regular basis or not, they are just as important for his fresh start.
The Second Circuit’s distinction is not consistent with Lines versus Frederick, because in Lines this Court rejected focusing on technical distinctions, such as whether or not the property was paid in a periodic way or not and focused instead on a broader examination and the practical realities to the bankrupt and the relationship of the asset to the debtor’s fresh start.
Another important case, cited by the Court below was Segal versus Rochelle.
That brings us to the question of whether or not this asset is in some way entangled in the debtor’s prebankruptcy past.
The second test, which this Court has emphasized, a bankrupt’s position in this case is that Segal versus Rochelle does not require result contrary to what the bankrupt is urging.
In that case, we dealt with the business bankrupt, who is entitled to receive a loss carry back refund.
As this Court noted in Lines, Segal really wasn’t a fresh start case.
In Segal, a business has ceased to operate, and the job of the trustee was simply to marshal the assets for the benefit of the creditors.
Also, there is not causal link to the prebankruptcy past in this case, as the Court found important in the case of Segal versus Rochelle.
There, the Court noted the peculiar nature of a loss carry back refund check and found that it was the result of those very losses, which had precipitated the bankruptcy.
There is no such problem here.
Thus, to summarize this part of the bankrupt’s position, we contend that Lines requires the Court in examining the definition of the meaning of the word “property” focus on practical realities and to analyze the relationship of the asset to the debtor’s fresh start.
Lines marked the rejection of more mechanical approach to defining property, by focusing on whether or not when it was earned, when it was accrued, whether it was a result of prebankruptcy labor.
Instead, Lines focused on the relationship of the asset to the debtor’s fresh start.
The fact that it was not an investment or other kind of voluntary creation that it was a postbankruptcy event and that it was inconsistent entirely of wages, which traditionally are the only means for bankrupt to achieve his fresh start.
Thus in Lines, this Court held that the wages represented by vacation pay were essential to a debtor’s fresh start.
Seven months later, in Perez versus Campbell, the Court also held that a debtor shouldn’t be deprived of his driver’s license because of the burden that that would place on his earnings.
The position of the bankrupt in this case is that the tax refund check, being wages, the loss of a tax refund check would be as serious of a burden on a debtor’s fresh start, as the loss of vacation pay, or the loss of a driver’s license.
The second issue in this case is whether or not the Federal Wage Exemption Statute, the Consumer Credit Protection Act exempts 75% of the tax refund check.
The Court need not reach this issue if it rules in the bankrupt’s favor on the first question.
However, we contend that the CCPA should apply by the terms of the Bankruptcy Act, by terms of the CCPA for an independent policy reason and that -- by reference to administrative materials.
First the Bankruptcy Act, many exemption statutes, state exemption statutes do not ever refer to bankruptcy.
They are not written particularly with bankruptcy in mind, but they apply to a person who goes bankrupt because the Bankruptcy Act requires that they apply.
It specifically stated in Section 6 that the bankrupt be allowed all states and federal exemptions.
The CCPA, being a partial, federal wage exemption statute should apply to bankruptcy by the requirements of the Bankruptcy Act in Section 6.
Justice Potter Stewart: Connecticut, Connecticut, as I understand it doesn’t have any exemptions relevant to this case, is that right?
Mr. Thomas R. Adams: Essentially, that’s right Mr. Justice.
There is a wage exemption statute which being smaller than the federal statute in this case was not applied.
Justice Potter Stewart: Well, let’s assume the Federal -- let’s assume that the Court decides against you, on both on your points i.e. that (a) the plaintiff have just completed arguing that the whole businesses is exempted or (b) that 75% is exempt under the federal statute.
Would there be a Connecticut statute exempting any of these?
Mr. Thomas R. Adams: To be honest, I am not sure.
There is a Federal wage Exemption -- or I mean excuse Connecticut Wage Exemption Statute.
It only applies to consumer credit, garnishments for consumer credits so I --
Justice Potter Stewart: So probably not.
Mr. Thomas R. Adams: I don’t think it would apply, but that would be a question interpretation of Connecticut law, which doesn’t presently exist.
In any event, it probably only protect about $65.00, if it did apply.
Justice Potter Stewart: And then of course it would be subject to construction as to whether or not a tax refund is the equivalent of wages too?
Mr. Thomas R. Adams: There would a number of problems interpreting the Connecticut statute to get it to apply.
Justice Potter Stewart: But in any event, unlike many States, there isn’t as you submitted a state exemption statute that cuts much significance here at all, is it?
Mr. Thomas R. Adams: That’s correct Your Honor, that’s correct.
For example, in California, which is known for having liberal exemption statutes, only 50% of the earnings attributable to the last 30 days would be exempt, so a cash refund check would come to a very small percentage.
Justice Potter Stewart: We dealt with that in Lines, you mentioned it.
Mr. Thomas R. Adams: Yes, you referred to it specifically.
Justice Harry A. Blackmun: Mr. Adams you have cited the Eighth Circuit’s Gehrig case on the CCPA issue the Court was unanimously against you, was it not?
Mr. Thomas R. Adams: Yes, Your Honor.
Justice Harry A. Blackmun: And, on the other, the main issue it was two to one in your favor?
Mr. Thomas R. Adams: Was it two to one?
Yes, it was two to one, that’s right, excuse me Mr. Justice.
Let me just -- although the Lines issue is often thought to be the main issue in this case as Mr. Justice Blackmun just referred to it, the value to the bankrupt of the application of the 75% Federal Exemption Statute is an important right, which we are seriously urging before this Court.
Well, I was saying a number of state exemptions statutes apply not because in their own terms they refer it all to application in bankruptcy or because of the Bankruptcy Act.
In the CCPA, we have a slightly different statute.
It should apply in a bankruptcy context not only on account of Bankruptcy Act, but on account of its own terms.
Congress specifically stated that the CCPA was passed in order to achieve the uniform application of the bankruptcy loss.
In this case, a uniform wage exemption statute rather than the widely varying wage exemption statutes which apply in the states.
Most of the criticism in the CCPA, both by the Court below, by the Gehrig Court and by opposing counsel has been an attempt to narrow the meaning and the terms of the CCPA.
The examination of that statute however shows that it is a broad statute, very broadly drafted by Congress, and additionally being a remedial statute, it is entitled to be liberally construed in favor of achieving its purposes.
Thirdly, there is a policy ground for the application of the CCPA.
This was noted by the District Court in the Cedor case, involving a question of fairness that creditors, the exemption should not be defeated and creditors should not be allowed to get the entire tax refund check merely because the debtor has been forced to accept the delayed receipt of that money due to the operation of the withholding laws.
Finally in this regard, there are number of administrative materials, which are cited in our brief, which support our position, our interpretation of this Act and its application of this situation and those administrative materials are entitled a great weight.
In conclusion, an examination of the relationship of this asset to the debtor’s fresh start in the same practical way this Court made that analysis in Lines should yield a result that a wage earner’s postbankruptcy receipt of his tax refund check is not property within the meaning of the Bankruptcy Act.
As far as the Federal Wage Exemption Statute is concerned, it should apply here by the terms of the Bankruptcy Act.
It should apply by the terms of the CCPA or an independent policy reason, and by reference to supporting administrative materials.
Chief Justice Warren E. Burger: Very well, Mr. Adams.
Argument of Benjamin R. Civiletti
Mr. Benjamin R. Civiletti: Mr. Chief Justice and may it please the Court.
We are dealing here with a tax refund claim, which at the time of the petition in bankruptcy was fixed and certain as to amount and demandable and collectible.
The argument made by the petitioner is that a wage earner’s bankrupt’s tax refund claim is not property because it is necessary to his fresh start, I think runs counter to the meaning and the purpose of the Bankruptcy Act, its historical development and interpretation, and specifically conflicts with the pertinent parts of the definitional sections of the Act, under Section 70a (5) and under Section 6 of Exemptions.
Furthermore, the petitioner’s argument misinterprets, I believe, the concept of a fresh start and the rationale of the petitioner’s position would impose substantial confusion and uncertainty in the Bankruptcy Law.
First, the scheme of the Bankruptcy Law generally is in two parts.
First, marshaling the assets at the time of the filing of the petition, all the property of the bankrupt vest by operable with certain exceptions, which is not nonexempt, vest by operation of law in the trustee.
The second part of that scheme is Section 6, the exemption part, which provides specifically that local conditions shall govern local statutes, which assets maybe maintained by the particular bankrupt in order to assure that he can survive and so that he can have at least those basic essential requirements in which he can then cause to begin his new life.
The concept of a fresh start incorporates both those ideas of assets to the trustee and exemptions to the bankrupt and also, and most importantly the idea provided by Section 17 of a discharge, an effective valuable discharge to the bankrupt, so that he can begin his new economic life, free of the burden of these preexisting debts.
So that the three elements, I suggest for a fresh start, are: (1) the proper discharge; (2) specified assets or items of value, which provide a base and an opportunity to start anew, provided by exemptions; and (3) the opportunity and the safeguard that future earnings and after acquired property can be used, retained, and accumulated by the bankrupt in his new economic effort.
The petitioner twists and distorts the traditional concept of fresh start into the overriding proposition that the Bankruptcy Law must provide, it seems to me, a protected fund sufficient to meet the needs of the bankrupt.
The primary support suggested by the petitioner in his argument and his brief, is the case of Lines v. Frederick decided in 1970.
There in essence, the question was presented whether the credits are accrued or pay accrued during prebankruptcy work for vacation and layoff time periods to come about in the future, after the date of the filing of the petition in bankruptcy, were property within the meaning of the Act.
This Court determined that whatever characteristics of property for other purposes that those credits are accrued pay might have or possessed, they were overshadowed in comparison to their similarity, the future earnings and the purposes of the act, as embodied in the term “fresh start.”
The similarities of the accruals to future wages were one the fact that the accrued credits or pay were not payable and collectible on demand by the petitioner at the time of the filing of his petition at all, but would ordinarily be payable at the future event, vacation or layoff.
In fact, the accrued pay or credits were designed and specifically tied to one of the other of those two events as a substitute payment for future period of time, which but for vacation or layoff would be working time and which the bankrupt would receive the very weekly earnings, which would be cause to sustain him.
The only relation back at all of the accrued credits or the pay, the vacation pay to the prebankruptcy past was at the prior regular working period was the basis for accumulating the accrual on a percentage formula, as to hours or days and it’s equivalent in money.
I believe it was one hour per month or one hour per week.
It is readily apparent that here, if the facts are entirely different from those crucial determinations there which made accrued vacation pay look like and be treated the same as future wages, which indeed are protected and should be protected both by the discharge and by the concept of fresh start.
One, the tax refund claim here is fixed and certain as to amount, demandable and collectible.
Two, there is no design, no specification or intent to relate or identify the accumulation of periodic payments, required as withholding for expected tax liability and which constitutes a reason for the refund claim to any period of future working time or as a substitute for regular earnings as sustenance to the wage earner in the event of future loss time for layoff, vacation leaves, sick leave, or any other reason.
The tax refund claim is simply not the equivalent to future wages or a substitute for future wages during the suspended working period in the future.
Lastly, it seems to me that all the characteristics of the tax refund claim relate back to the prebankruptcy past, during the very accumulation of debt, which resulted in the filing of the petition of bankruptcy.
In this regard, I think it is speculation to suggest, as perhaps the Eighth and Ninth Circuits have suggested, in the case of in re Gehrig and in re Cedor that the wage earner would not have used the amounts periodically withheld for the payments of debts.
Certainly, they are small amounts and they would not have made a tremendous impact on the debts at the time of proceeding, but it is certain and probable that they would have been spent and they would have been spent either to reduce in part the debts or prevent the further accumulation of debt for expenses incurred at the time.
And thus, it seems to me that they relate to the very part of the period, which created the debt and necessitated bankruptcy.
The further argument is made by the Ninth Circuit’s adoption of this recorded opinion, in an effort to bring the tax refund closer within the Lines the Frederick case that the amount of a tax refund may be generally be said to be an amount that by reason of past experience is anticipated by the wage earner as an annual event, i.e. the vacation pay and the potential layoff, and that to deprive the wage earner of that planned on annual recurring payment cannot be said to be less severe than the deprivation of two weeks paid vacation.
It seems to me that statement, that type of analogy, not only being somewhat illogical is a further distinction between the tax refund claim and accrued vacation pay or credit because in the ordinary course of events and if the taxpayer follows the withholding guidelines properly, although vacation pay is indeed paid and received in the future by a wage earner as an annual event, the minimum payment of income on taxes withheld periodically during the year and accumulated over the course of the year is not calculated, nor anticipated to be repaid as an annual event to the taxpayer, rather its intended, designed, and anticipated to be paid and retained by the Government, as the wage earner’s income tax on those earnings.
It seems to me that in fact to its essence, the petitioner’s argument is that because the tax refund claim had has its origins in withheld payments from wages, the refund is wages and because the debtor has not collected the refund at the time of the filing of the petition, although he had right to do so, it is somehow future wages.
The petitioner’s argument amounts to ignoring the definition of property in Section 70a (5), ignoring the definition and design of exemptions, I think ignoring the traditional concept of “fresh start” and the entire fabric of the Bankruptcy Act, in adopting a new and controlling rationale for inclusion or exclusion of items of value in the debtor’s estate.
And to base that decision entirely in a wage earner’s case on a determination of the amount of a fund, free of creditors and necessary are sufficient to meet the bankrupt’s needs.
I don’t think that this rationale has any place in this Court’s decision on the existing and statutory case law.
If there is to be such a change and such a drastic one, then certainly the legislature and the Congress should mandate it.
And, in fact the commission on the bankruptcy laws of the United States has reported to the Congress, as of July 30, 1973 proposing substantial revisions in the Bankruptcy Law and proposing that as to this particular issue, under a provision with regard to exemptions that income tax refunds, accrued vacation pay, receivables, cash and securities be considered to be exempt in the aggregate of not more than $500.00.
But the standard proposed by the petitioner is unsound and its application would result, it seems to me, in severe discrimination between bankrupts.
One bankrupt may indeed need $75.00 for medical treatment.
The second $500.00 for his wife’s operation, and the third $2,000.00 for the tuition for his children’s education, all certainly are legitimate and valid needs.
But in no sense can it be said that such a standard would achieve the purposes of the Act nor that the tax refund claim in varying amounts, which in some instances may amount to in excess of a $1,000.00 would serve these varying purposes or needs.
There is a suggestion in the brief that because the amount of a tax refund in this case is small, and because administration costs and expenses are significant in some instances that very little of this amount of money will trickle down to the creditors and therefore, wouldn’t it be better to give it to the needy bankrupt.
The answer to that, I think comes in different ways.
One, administration costs and expenses are not necessarily evil.
They are in the Act and they are in fact, under Section 64, given first priority with regard to payments from the assets accumulated.
Secondly, there is no support in the record in this case that the $250.90 would be exhausted by administrative costs and expenses.
And in other cases where the refund may be substantially greater, there is no suggestion that such administrative costs and expenses will even substantially beat it into the assets.
Justice William H. Rehnquist: Of course, if one were to follow that argument, I suppose you might just as well give up the idea of having any kind of a bankrupt turnover any property?
Mr. Benjamin R. Civiletti: If you would follow the argument of the petition --
Justice William H. Rehnquist: Yes.
Mr. Benjamin R. Civiletti: I think that is correct, especially in a wage earner’s case, because it seems to me that in one route or another, one either direct or indirect all of the property or all assets are derived from his only source, which is wages.
Justice William H. Rehnquist: And there’s very seldom anything left for distribution to creditors in a large majority in those cases?
Mr. Benjamin R. Civiletti: That’s true.
I think the Brookings study showed that in 70% of the cases, there were no asset cases at all.
Third, if as the petitioner points out on page 16 of his brief, a survey indicates that the average dividend to unsecured creditors is only 7%, then that alone does not seem to me a justification to further reduce the percentage on one of the basic designs of the Act to return money to the creditors, from 7% closer to zero.
Fourthly, and perhaps most importantly and I think it occurs in varying degrees, in varying in districts and jurisdictions, abandonment is available, where appropriate in such small asset cases.
I think the California cases suggest that some of the referees there and the District Courts there have adopted the policy of -- if the refund claim is the only asset and it’s less than $150.00, that they would treat it as abandonment, as a no asset case and no trustee would be appointed and the $10.00 will be even saved in the cost of the bankrupt.
Justice Potter Stewart: This varies from district to district, as a matter of sensibly of practice or policy?
Mr. Benjamin R. Civiletti: Yes, indeed it does, at least that is my understanding from review of the cases and the record.
Justice Potter Stewart: Does the law purport to give the trustee that kind of discretion?
Mr. Benjamin R. Civiletti: It purports to, yes.
(Voice Overlap) Whether or not it’s a proper exercise of the discretion or as views in those instances, where for instance the amount of the tax refund claim might be several $700.00 or $800.00, or $1,500.00, I believe in the Cedor case, the amount was about $660.00.
Justice Potter Stewart: The statute does give the trustee what, the discretion to abandon?
Mr. Benjamin R. Civiletti: The trustee has the discretion to abandon if authorized by the referee.
The referee would have to authorize the abandonment, and then the trustee, I believe, would do so without that authorization.
Justice William H. Rehnquist: But, the trustee didn’t abandon the $660.00 in Cedor case, did he?
Justice Potter Stewart: No.
Mr. Benjamin R. Civiletti: No.
Chief Justice Warren E. Burger: Does the new proposed code alter that in any way?
Mr. Benjamin R. Civiletti: The abandonment provision?
I do not know Your Honor.
Justice Byron R. White: Well, I thought in good many no assets cases no trustees were appointed at all?
Mr. Benjamin R. Civiletti: That’s true.
Justice Byron R. White: And, the referee himself determines the no asset case and trustees were not applied.
Once trustees were appointed, you do have a problem there In marshaling assets, then there must be a decision of that event.
I’m not sure --
Mr. Benjamin R. Civiletti: Well, there is a decision.
There are two decisions Mr. Justice White.
One is if the referee finds that there is only for instance a tax refund which looks to be $150.00, he can at that point determine that, that asset should abandon the referee and not appoint a trustee and treat it as a non-asset case.
The second situation is where the same -- let us take the same a $150.00 tax refund claim and perhaps some uncertainty as to other assets and then a trustee is appointed.
Then, a second decision would seem to me to have to be made by the trustee initially, as to whether to pursue the tax refund claim if he determined there were no other further assets, and then have the authorization receive for such abandonment by or from the referee.
Justice Byron R. White: So, what did the Court of Appeals suggest to the District Courts here?
Mr. Benjamin R. Civiletti: In the Second Circuit case in our case, suggested that if the needs of the bankrupt were great enough that a deprivation of the amount of the tax refund claim, $150.00, $200.00, $300.00 would amount to a substantial inequity, a severe hardship or harshness, then it could reasonably conclude that abandonment was proper.
Justice Byron R. White: But, how about for situations, where administrative expenses would eat up any asset, including a tax refund?
Wouldn’t the Court address itself to those situations?
Mr. Benjamin R. Civiletti: Yes, that was another reason, I believe, stated or expressed in a few sentences why the Court suggested that either the appointment of a trustee was unnecessary or if one had been appointed then, a very quick determination that then it was proper.
Justice Byron R. White: So, in the Second Circuit, I take it this question about tax refund will never arise unless there’s a possibility of a distribution of creditors after administrative expenses would be paid?
Mr. Benjamin R. Civiletti: I am not certain of that, of agreement with that statement.
Chief Justice Warren E. Burger: We’ll resume there after lunch.[Luncheon]
Mr. Civiletti, you may proceed.
Mr. Benjamin R. Civiletti: Mr. Chief Justice and may it please the Court.
Mr. Justice White, I misspoke myself in answer to a question that you addressed to me prior to the noon recess with regard to abandonment in the Second Circuit’s opinion and direction to the lower courts in Kokoszka.
There, they restricted the application of abandonment to the situation wherein the assets available to the trustee would be entirely consumed by the trustee’s fee and other administrative expenses.
And, there was no creditor who showed other available assets, which could be reached and Judge Webster in the dissent in Gehrig took the same position, so that my --
Justice Byron R. White: Anytime predicted administrative expenses would eat up for the assets, including the tax refund, there won’t be any trustee appointed at all.
Mr. Benjamin R. Civiletti: I would think that is a fair conclusion.
My argument has proceeded along the lines that there is no legitimate distinction between the principles applicable to this case and those past cases concerning properties, Segal v. Rochelle and the antecedent cases, Legg v. St. John and in mind, the concept of “fresh start” Local Loan v. Hunt.
The Segal case, I suggest was a more difficult case than the one presented here because the petitioners had filed for bankruptcy before the end of the tax year, and thus any refund was demandable nor collectible immediately nor at the time of the filing of the petition in bankruptcy, nor was the amount there of fixed, nor truly determinable with the exact certainty.
Furthermore, the carry back tax loss resulted in a tax refund, which the trustee was found entitled to receive.
Even though the tax was paid, it had been paid from the individual earnings of the bankrupt taxpayers.
There was no suggestion in that case, in the opinion in that case by this Court that the amounts in Segal respectively of $283.00 and $1,600.00 for Gerald Segal in the carry back years of 1960 and 1959 and like amounts for Sam Segal could not have been well used by them in obtaining the necessary fresh start in their new economic life.
The Court took, I suggest, pains to emphasize the lost carry back claim there was sufficiently rooted in the prebankruptcy past and so little entangle with the bankruptcy to make unencumbered fresh start that it should be regarded as the property under Section 70 (a) (5), despite the substantial differences, which I suggest make this case considerably easier in determination of the question of property.
The tax refund claim is fixed and certain as to amount demandable and collectible at the time of the filing of petition and I suggest has no relationship to future wages nor after acquired property, both of which elements were certainly controlling in the Lines case and had some effect in the Segal case.
A decision upholding the Second Circuit and the trustee would not only be consistent with Lines v. Frederick, but would further serve to confirm the plain meaning and intent of the principles recognized so clearly in the case, future wages and after acquired property are necessary, essential elements of the concept of a fresh start.
There is no legitimate distinction, I suggest between a tax refund claim and any other moneys or funds obtained by payroll withholding from past wages pursuant to a savings plan, a Christmas club, a bond the month plan, a retail lay away plan, an educational loan repayment plan, or agreement, union dues, auto insurance, real estate tax or any other established payroll deduction, which could result in a refund or repayment from a second or third source.
Justice William H. Rehnquist: I suppose petitioner’s argument is that most of the things you mentioned are voluntarily undertaken by the wage earner was the income tax withholding is not voluntary?
Mr. Benjamin R. Civiletti: Well, the term voluntary, I think that is true, Mr. Justice Rehnquist.
I think that they would argue that that is a distinction.
I suggest that number one, the meaning of voluntary varies, depending on its application and that pursuant to a loan agreement for instance, once the decision is made, then that payment or deduction from payroll might well no longer be considered to be voluntary.
Similarly here, as Mr. Justice Blackmun pointed out, the voluntariness to some extent is available to the taxpayer in the manner in which he proscribes his withholding and it is adjustable during the course of the year, depending on changes and circumstances by him.
Turning to the Consumer Credit Protection Act, my argument there is a very short and brief one.
It is not applicable, because the tax refund claim here does not come within the definitional term of earnings in that Act.
It is not compensation paid or payable for past services.
It does not come within the definition of the term disposable earnings, because it is not that part of earnings remaining after deductions allowed by law.
And lastly, it is not within the term the definition of garnishment, which in the language of the statute means any legal or equitable procedure through which the earnings of any individual are required to be withheld for the payment of any debt.
Here, if this is property then it vests in the trustee by operation of law and it is not required to be withheld for the payment of any debt pursuant for instance, to provisions of seizure or collection under Section 70 (c) of the Bankruptcy Act.
The reference in the Consumer Credit Protection Act, specific reference in that Act, Chapter 13 of the Bankruptcy Act and saying that the provisions of the Consumer Credit Protection Act do not apply to Chapter 13 arrangements was made because Chapter 13 arrangements do apply to future wages, do specifically provide for the deduction for the payment to creditors for past debts, pursuant to the plan approved by the referee, and therefore, was necessary in order to make clear that the 25% limitation would not apply to such arrangements that Chapter 13 should be specifically referred in the Consumer Credit Protection Act.
Chief Justice Warren E. Burger: Thank you, Mr. Civiletti.
Mr. Adams, do you have anything further?
Rebuttal of Thomas R. Adams
Mr. Thomas R. Adams: Mr. Chief Justice and may it please the Court.
I would like to take a few moments to discuss some brief items in rebuttal.
First, I want to object to characterization of the bankrupt’s position in this case that we’re arguing at any time of the bankrupt has some sort of needs that the Bankruptcy Act letting to keep some property or that we’re arguing that all property derived from wages is somehow not property within the meaning of the Bankruptcy Act.
Now, it’s true that there is a material in our brief on the needs to the bankrupt here, but that material is there to emphasize an important point.
And as this Court found in Lines versus Frederick, wages are special kind of asset in our system.
The material on Mr. Kokoszka’s situation and material on his needs are there to show the importance of wages.
Justice Byron R. White: But, what if the bankrupt has owning to him six months of unpaid wages, say his employer is in financial trouble and he just hasn’t pay them.
And then, the employee goes in the bankruptcy, because he can't pay his bills either.
Now, the wages owing him are property that past the trustee, I take it.
Mr. Thomas R. Adams: Well, that’s a similar example as was dealt with by the Sixth Circuit in the Vinnie case.
Justice Byron R. White: But, the Federal law doesn’t particularly make that an exempt, that the wages are an the exempt item?
Mr. Thomas R. Adams: I think the Federal law, as far as the exemption statute is concerned, the Federal law protects wages whether they’re paid or yet payable.
So, if the wages held by the employer are already been paid, they would be exempt if the employer was holding in account of wages due, so that wages were payable (Voice Overlap)
Justice Byron R. White: They are not excluded for not -- but, because they are not property?
Mr. Thomas R. Adams: Well, I was -- excuse me I was getting to that point, I thought you’d move on to the exemption statute (Voice Overlap)
Justice Byron R. White: They are deemed to be property, they wouldn’t be exempt, wouldn’t have to exempt them, I suppose?
Mr. Thomas R. Adams: Well, conceptually that’s true.
I think the problem -- I would argue Mr. Justice White, that they would not be property under the bankruptcy.
Justice Byron R. White: I know you do.
Mr. Thomas R. Adams: And, I think that the same reasons would apply.
It was involuntarily created asset, it’s derived entirely from wages and it’s received entirely as a postbankruptcy event.
In many ways --
Justice Byron R. White: Now, you’re proposition is and my example I gave you that if a bankrupt has six months of back wages due him from his employer, he may collect them from his employer and not turn them over to the trustee?
Mr. Thomas R. Adams: I would like to point, you mean (Voice Overlap)
Justice Byron R. White: Is that really your proposition?
Mr. Thomas R. Adams: I’d like to say it wasn’t my proposition, [Laughter Attempt] because it’s a very hard example, but I would say that --
Justice Byron R. White: You really can't cite anything under the Bankruptcy Act that would let him keep six months worth of back wages?
Mr. Thomas R. Adams: What I would say to that point is that the bankrupt in that situation, I mean, I wouldn’t be interested in the examination of additional facts.
I think you can see that, that is in a very exceptional circumstance, but (Voice Overlap)
Justice Byron R. White: I don’t know.
Mr. Thomas R. Adams: Under the straight analysis --
Justice Byron R. White: Wouldn’t that be so uncommon?
Mr. Thomas R. Adams: I think in my experience, as a bankruptcy attorney, I’ve never seen that (Voice Overlap)
Justice Byron R. White: As my example is not the situation of Lines, at least in Lines the amount that was involved there, on its face was to sustain a person for a future period.
Mr. Thomas R. Adams: That’s correct.
Justice Byron R. White: Not so in my example, when the wages were payable at the time and not so apparently in the case we have before it because the withheld wages weren’t to sustain him at all if they were to be taken away from him and pay to the Government?
Mr. Thomas R. Adams: I think the only real difference your case, Mr. Justice White, and the case of Bar is that you’ve just given me an example, where there’s potentially a very large amount of money involved, whereas typically we have a very small amount of money involved in a tax refund case. Now, I don’t think that’s a distinction.
Justice Byron R. White: I think the State law might exempt wages up to that certain amount and so the exemption section might think that, it might think some of those wages (Inaudible).
Mr. Thomas R. Adams: Well, let me get to my point, Mr. Justice White and that is I think that the situation in the example that you have given is one where we have -- you’re talking about a fund of wages, which would have never been available in a practical sense for the creditors if they didn’t paid out --
Justice Byron R. White: (Inaudible)
Mr. Thomas R. Adams: Well --
Justice Byron R. White: This is what distributing in the bankruptcy (Inaudible) wages?
Mr. Thomas R. Adams: The wages, I want to speak in terms of a practical matter here, wages are 75% exempt at least, according to the Federal Stature, in order for the creditors to obtain those wages, there are number of state law, procedural safeguards, as well as federal constitutional safeguards.
Now, this fund has been created, which has only increased the incredible hardships on the bankrupt.
Now, I think that although what we’re talking about in your case is a substantial fund of money from the point of view of the bankrupt, it was also a substantial loss, a deprivation of wages, which he needed for his support in the past.
Justice Byron R. White: That drove him in the bankruptcy?
Mr. Thomas R. Adams: Threw him in a bankruptcy.
Justice William H. Rehnquist: But, surely the administration of a nationwide Bankruptcy Act can't depend on whether or not a particular asset that’s claimed to be property, is or is not “substantial?”
Then we just have an endless line of cases through the Federal Courts, saying a $150.00 wasn’t substantial, but $600.00 was.
Mr. Thomas R. Adams: No, I -- Mr. Justice Rehnquist, I agree entirely on that point.
I was stating that although I felt the only distinction between our case and Mr. Justice White’s example was the size.
I don’t think that is a valid way to distinguish the assets within the meaning of the Bankruptcy Act.
Although I would note that if the Court is concerned about the line drawing problem in this case, which is really only presented in my view by exceptional circumstances, another alternative is to apply the Federal Wage Exemption Statute to the tax refund check, which clearly does draw lines such established by Congress.
I would like to go on and discuss the problem of abandonment.
The Second Circuit suggested that abandonment was an alternative.
I don’t think in the first place it's a practical alternative.
At the time of the filing of the schedules, the referee is not going to know, especially if a tax refund check hasn’t been received yet or returned, hasn’t even been filed, whether or not they are going to be any assets in the estate.
Once he appoints a trustee, he is going to feel that he’s going to have to pay that trustee, whether or not any of the assets are going to passed on to the creditors.
Secondly, it's gong to resolve to non-uniform application of the Bankruptcy Laws, the material in our brief, the Stanley and Girth material supports that.
Thirdly,just as a practical matter abandonment is never used or used very rarely in the administration of the bankruptcy courts.
Since, that is supported also by the Stanley and Girth survey, since the Kokoszka opinion, we have done a survey of our own, which I can submit to the Court with its permission in a form of an affidavit from one of the attorneys in this case, demonstrating that in the Second Circuit since the Kokoszka’s opinion, there haven’t been any abandonments pursuant to that opinion.
Justice Byron R. White: How about in no asset cases just a matter of pointing trustees?
Mr. Thomas R. Adams: Well, although that’s an alternative that is recognized by the -- it’s never done, it’s never done.
Justice Byron R. White: You mean appointment -- in every case, trustees are appointed?
Mr. Thomas R. Adams: In very rare cases.
The reason being that the referees don’t know whether or not to believe in the material, on the schedules or not and they want to point someone to look into it (Voice Overlapping)
Justice Byron R. White: You mean the referees don’t know whether to believe it, so they appointed trustees?
Mr. Thomas R. Adams: Right, to look into this situation and once they do, then you’re caught up in a circle again. (Voice Overlap)
Justice William H. Rehnquist: In the District of Arizona, where you have all sorts of no asset, wage earner cases, where there really wasn’t any doubt about the fact that there were no assets, the same was true in Colorado?
Mr. Thomas R. Adams: [Laughter]
Justice Potter Stewart: And this, according to the materials in the brief is done right quite routinely in California apparently?
Mr. Thomas R. Adams: No, it’s a trustee is appointed in California in virtually every case.
Justice Potter Stewart: But, then --
Mr. Thomas R. Adams: Similarly, in Connecticut, where Mr. Kokoszka come --
Justice Potter Stewart: But, then in California, when -- how’s the abandonment is utilized apparently on tax refund claims below a certain dollar figure?
Mr. Thomas R. Adams: There are court rules, as to a $115.00 tax refund check was established in some districts in Southern California.
Justice Potter Stewart: Right.
So it isn’t apparently wholly unworkable or impractical?
Mr. Thomas R. Adams: Well, I don’t know Mr. Justice Stewart as to whether or not fees and so on had to come from some other area in the application of that rule, but I know that as a practical matter, that referees feel that they don’t -- they can't believe the bankrupt necessarily may want to appoint a trustee to see if there were other assets, savings account, that sort of thing.
Finally, I just like to say that as to the Gehrig court’s analysis of the CCPA issue, they were dealing only with an analysis of the voluntary aspects of the tax refund check that had been created due to over withholding.
Chief Justice Warren E. Burger: Mr. Adams, I doubt that the supplemental material that you suggested would be helpful to us.
We think the record is adequate as its now before us.
Mr. Thomas R. Adams: Thank you, Mr. Chief Justice.
Chief Justice Warren E. Burger: Mr. Civiletti, you appeared in this case at the request of the Court and invitation of the Court to file a brief amicus after we encountered a different kind of abandonment on the part of the trustee, and on behalf of the Court I thank you for your assistance to us in this matter.
Mr. Thomas R. Adams: I welcome the privilege.
Chief Justice Warren E. Burger: The case is submitted gentlemen.