PHELPS v. UNITED STATES
Legal provision: Internal Revenue Code
Argument of Dennis E.quaid
Chief Justice Warren E. Burger: We'll hear arguments next in 74-121, Phelps against the United States.
Mr. Quaid I think you may now proceed when you're ready.
Mr. Dennis E.quaid: Mr. Chief Justice and may it please the Court.
This case comes before the Court to review the judgment of the United States Court of Appeals for the Seventh Circuit reversing the District Court's order affirming the bankruptcy court's finding that it had summary jurisdiction over the controversy before it and adjudicating that controversy in favor of the receiver in bankruptcy over the United States and its claim to a tax lien.
The case arose in the year 1971 when the Internal Revenue Service made four assessments of taxes against Chicagoland Ideel Clieners Company, the first in March and the last in June of 1971.
Thereafter, the directors of the taxpayer made and a general assignment for the benefit of creditors on June 28 of 1971.
Nearly months later, the Internal Revenue Service filed its -- or recorded its known as a tax lien with the recorder for -- recorder of deeds of Cook County and on the same day served a notice of tax levy upon the assignee for the benefit of creditors.
Sometime thereafter, an involuntary petition for bankruptcy was filed against Chicagoland Ideel Cliener, the company was adjudicated, the receiver appointed and the petition which initiated this proceeding filed.
The petitioner feels that the essential question presented in this case is the one of jurisdiction, the summary jurisdiction of the bankruptcy Court to proceed to the merits of the controversy before it.
We feel that there are three independent and alternative basis of summary jurisdiction for the bankruptcy court in this case.
The first is Section 2 (a) Subsection 12 of the Bankruptcy Act and the second is Section 70 (a) Subsection 8, also of the Bankruptcy Act.
Although slightly different that we believe that they stand for the same principle that the bankruptcy court enjoys and can exercise summary jurisdiction over an assignee for the benefit of creditors and property in his hands.
The bankruptcy court being of course a cooperage proceeds in rem, we believe that having summary jurisdiction over the assignee and the property in the possession of the assignee.
The bankruptcy court can go on and to adjudicate property rights and interests in the property which it has gained summary jurisdiction over.
Justice William H. Rehnquist: The property we're -- talking about is money in a bank account?
Mr. Dennis E.quaid: Well the property initially started out its tangible property being the fixtures and equipment of the bankrupt, the Chicagoland Ideel Clieners.
The assignee liquidated by sale pursuant to a power of sale contained within the assignment, that equipment and fixtures, he reduced it to cash and when the levy was served it was cash.
But before then and a subject or during the time when the assessments existed, it did consist of tangible personal property and was capable of physical seizure at that time.
Justice William H. Rehnquist: It does make some difference, doesn't it as to whether the property is a pure intangible or whether as you say it's personal property subject to reduction the possession or seizure?
Mr. Dennis E.quaid: Well the courts have recognized a difference whether it's tangible or intangible property, personal property and we feel that if the Government had acted to assert its rights more promptly when it was more tangible personal property, this would have been an entirely different case.
However notwithstanding that fact, even when it was intangible property, we feel that the Government really never acted promptly to perfect its rights and reduce what there was to its possession and even of its intangible property, cash in a bank account.
They can still can compel the turnover of that money to them if they went forward with their rights.
Justice William H. Rehnquist: Can they actually no levy on a bank account but force the bank to turn over the money to them physically in the face of an adverse claim by the person who says, I don't owe the Government?
Mr. Dennis E.quaid: Well, I believe the Government is making that claim in this case that ones they served their levy, they seem to feel that they have ownership, not only possession but actually ownership of this ones and the power to require anyone to turn it over to them on the pane of penalty.
Justice Byron R. White: Well, it's perfectly clear it was a discern --
Mr. Dennis E.quaid: That would be --
Justice Byron R. White: As a matter of federal law.
Mr. Dennis E.quaid: True, yes.
Justice Byron R. White: So it's effectively parallel?
Mr. Dennis E.quaid: Well it's frozen until there's a determination if there is any contest of ownership or rights in the property.
Justice Potter Stewart: That is upon the service of the notice of levy?
Mr. Dennis E.quaid: Yes sir.
Chief Justice Warren E. Burger: In that respect, we're talking to something like a jeopardy assessment in the tax cases, isn't it?
Mr. Dennis E.quaid: Well I think it performs a different function although it does act to preserve of whatever rights the Government would have in it and protect those rights.
Chief Justice Warren E. Burger: It preserves not only the right, preserves the resource, does it, to satisfy claim.
Mr. Dennis E.quaid: Well that's correct.
Chief Justice Warren E. Burger: Which is the function of a jeopardy assessment in part at least, isn't it?
Mr. Dennis E.quaid: Yes it is.
Justice Harry A. Blackmun: Well aren't we really talking about place where the merits of the controversy shall be determined whether by the referee on the one hand or in a plenary proceeding in court on the other?
Isn't this the argument?
Mr. Dennis E.quaid: Yes.
The question is one of jurisdiction, who should decide, the referee or a -- another Court, the District Court in a plenary proceeding although the merits of the controversy in a question of the summary jurisdiction of a bankruptcy court at least in part enter into the merits, enter into the determination of the summary jurisdiction as I think as adequately reviewed in the briefs on the part of both parties but what we're dealing with is a case where you have an assignee for the benefit of creditors who is holding the fonts.
The Bankruptcy Act makes special provision and special rights of the bankruptcy representatives to that assignee.
In Section 2 (a) Subparagraph 21, summary jurisdiction are at least jurisdiction as given over that representative which this Court has held to be summary in nature in order to provide a prompt and expeditious remedy for the bankruptcy trustee to reach whatever property or assets are in the hand of the assignee.
And also Section 70 (a) goes on to give summary jurisdiction by creating a theory or a fiction that the assignee is a mere agent or bailee for the purpose of the exercise of summary jurisdiction to enable the bankruptcy representative to reach the property.
The third basis and the one which is the heart of this case is whether there is constructive possession by the bankruptcy court supporting its summary jurisdiction.
And again we have to go back to the special relationship which has been created in the Bankruptcy Act which gives the bankruptcy representative these powers to compel a turnover on the part of an assignee for the benefit of creditors of whatever property or assets he has in his hand to reduce the delay and the cause in the bankruptcy proceedings and to simplify and ease their administration for the benefit of all creditors.
Now, the United States claims that they obtained constructive possession due to the service of their notice of levy upon the assignee for the benefit of creditors.
I will contend that constructive possession in this case due to the nature of the relationship provided by the bankruptcy act over the assignee went to the bankruptcy court upon the filing of the bankruptcy petition and that the Government would have to show its actual possession of the funds in question or the property before the liquidation in order to defeat this one basis of the Court's summary jurisdiction.
The levy does not give to the United States actual possession of the funds.There are some cases saying that it's a seizure of a property interest.
The case of United States versus Ivan that says that is was in a transfer of ownership of the asset and that case was a pure debt that chosen action and there is no tangible property involved.
But in this case, we feel that these cases are not well founded and that the case in fact said it in the Government's brief of In Re Bruister versus Raymond Corporation correctly sets forth the better rule that the service of the levy even upon a -- what the Government claims was their federal tax perfects the property interest of the Government in the property.
Justice William H. Rehnquist: What if you had in the possession of the assignee for the benefit of creditors while it was conducting American deal operation, property on consignment from the third party which under state law, the state -- the third party's rights would prevail over the assignees, now would you say that the bankruptcy court upon the -- the bankruptcy court had summary jurisdiction to adjudicate title of that kind of property?
Well I would say that it would but that is a different situation because here what we have is a tax lien which under Section 67 is postponed to the costs of administration and priority wage claims.
Mr. Dennis E.quaid: In the situation that you suggest, you have a different situation where there is no postponement provision, no subordination of the lien to any of the priorities of Section 64 of the Bankruptcy Act.
Justice William H. Rehnquist: Any property that's physically in the possession of the assignee even though he doesn't assert any ownership claim to it become subject ot the summary jurisdiction of the bankruptcy court?
Mr. Dennis E.quaid: I would believe so, yes.
Justice Potter Stewart: Property of the bankrupted, formally of the bankrupted --
Mr. Dennis E.quaid: Yes.
Justice Potter Stewart: -- that's assigned to the assignee.
Mr. Dennis E.quaid: Of course in a -- on a consignment situation, you would not have a question of a lien but you would have a question of title residing in the consignor.
Justice Potter Stewart: But generally that would property of the bankrupt still, would it not, if he were the only consignor rather than assignee?
Mr. Dennis E.quaid: Well I would say that --
Justice Potter Stewart: Assignor, I mean.
If you were a consignor rather than assignor, he would -- the consignor, he would still have the property, wouldn't he?
Mr. Dennis E.quaid: I don't believe he would have title to the property but only have the right to sell that subject to the authority of the consignor, the consignee would have that -- would not have title to it.
Justice Potter Stewart: No, the consignor would.
Mr. Dennis E.quaid: Yes.
Justice Potter Stewart: We don't discreet.
Mr. Dennis E.quaid: Right.
Justice William H. Rehnquist: Well, then you -- you read Section 70 (a) of the Act, that subsection 8 which appears on page 5 (a) of your brief where it says property held by an assignee for the benefit of creditors.
You read assignee for the benefit of creditors very broadly as not modifying property at all so that any property held by an assignee for the benefit of creditors regardless of whom the property belongs to become subject to the summary jurisdiction of the bankruptcy court?
Mr. Dennis E.quaid: I believe that it would become subject to the summary jurisdiction of the bankruptcy court but I think that in that case, the rights in the third party would probably prevail and be superior to that of the bankruptcy representative.
Justice William H. Rehnquist: But that would be decided by the bankruptcy court.
Mr. Dennis E.quaid: Yes.
Justice William H. Rehnquist: Well supposing, I'm the assignee for the benefit of creditors of Joe Dokes who becomes the bankrupt and I have chair in my house that never belonged to Joe Dokes, it's nonetheless held by me, is that subject to the summary jurisdiction in that proceeding?
Mr. Dennis E.quaid: Well I think the question is who is the property party or proper Court to decided these questions and I think that the bankruptcy representative and the claim of any party to title or lien to property in the possession of -- in the possession of assignee for the benefit of creditors that someone who is now bankrupt.
If there had to be a plenary proceeding on every such claim that a very heavy burden will be cast upon the administration of bankruptcy states.
Justice William H. Rehnquist: So possession by the assignee confers the same sort of summary jurisdiction on the bankruptcy court as possession by the bankrupt does.
Mr. Dennis E.quaid: What's the -- it's a different situation because the Bankruptcy Act creates special provisions for the assignee for the benefit of creditors but if we've come involved with the tax lien and the levy at this point where the levy upon the property in the hands of the bankrupted would give to the United States greater rights and it does upon a levy upon the assignee for the benefit of creditors.
Justice Byron R. White: United States claims that ones it serves as levy, it isn't -- the assignee isn't holding any longer for the general benefit of creditors.
Mr. Dennis E.quaid: Well they claim that and that is the point that we dispute.
Justice Byron R. White: I suppose you would concede that if the assignee for the benefit of creditors took possession of a piece of property that have been mortgaged by the bankrupted to his creditor in which the bankrupted claim some equity and the mortgagee then repossess the property, took it from the assignee benefit of creditors and held it under a claim of right under his right to foreclose that the bankruptcy court would have no summary jurisdiction over that property and over the claim of the secured creditor.
Mr. Dennis E.quaid: Oh, in that case the property would be in the actual possession of the mortgagee.
Justice Byron R. White: I know but it was and it had been and was in possession of the assignee.
Mr. Dennis E.quaid: Yes but it no longer is.
Justice Byron R. White: So -- and the United States claims that the lien, the levy achieves that very same purpose.
Mr. Dennis E.quaid: Well that is the point that we contest that it does not.
Justice Byron R. White: That's the issue in this case.
Mr. Dennis E.quaid: Yes it is.
We feel that the levy does not transfer ownership to the Government but it merely perfects their rights to property interest in the property now in the hands of the assignee for the benefit of creditors.
As I mentioned in the case of In Re Bruister versus Raymond the -- where there was a tax lien upon the bankrupt, prior bankruptcy and the levy upon a debtor of the bankrupted, the court held that the property was still subject to the administration of the bankruptcy court and the bankruptcy state.
We feel that this is the better decision and that it gives affect to brining together the decision making powers in the bankruptcy court who is the court that is going to administer the assets of the bankrupted in these proceedings and who is a court who is familiar with these problems and we also serve to protect costs of administration and the priority wage claims that Congress is seeking to protect.
Now the Government is claiming in this case, availed it to tax lien upon the property or rights to property of Chicagoland Ideel Clieners.
We do not believe that they did have availed it to tax lien since the lien attaches to property or a right to property belonging to the tax payer with the assignment by Chicagoland Ideel Cliener to the assignee for the benefit of creditors.
There was a trust created for the benefit of all creditors.
The assignor no longer had any property interest in the property and that there was a transformation of the assets of the property at that time which deprived the tax lien of any property or right to property belonging to the tax bear upon which it could attach.
We believe that this principle has been recognized in the case of United States versus Bess where they held that a tax lien existing upon a tax payer did not attach to the proceeds of his life insurance policy after his debts do not attach to the full face value of that policy but rather only to the cash surrender value which was a fund which was being accumulated and held to him and which he could have reached.
In this case after the assignment, the only interest remaining in Chicagoland Ideel Cliener was the possibility that there would be an excess in the value of the property which he had assigned over his total indebtedness and in this case where the Government's tax lien is in the sum of $141,000.00 and there's only one claim against the state and the proceeds of the sale to bankrupts property that monitors trust over $31,000.00.
There's obviously no revert or interest which could have comeback to the -- comeback to the tax payer of the assignor Chicagoland Ideel Clieners.
Justice Harry A. Blackmun: Let me see if I understand you then, did your position that this subordinates the tax collector to the general creditors?
Mr. Dennis E.quaid: It subordinates him to the cost of the bankruptcy administration and priority wage claims.
Chief Justice Warren E. Burger: But not over creditors.
Mr. Dennis E.quaid: No, not over the creditors.
It could not have that effect because they will be contrary to the priorities established in the Bankruptcy Act in Section 64.
Justice Harry A. Blackmun: I want to get that straight because as I understood your argument, I thought you went farther than that.
Mr. Dennis E.quaid: No, the United States will be protected in these proceedings since the -- even if they had it no lien, they would have a fourth priority preference under Section 64 of the Bankruptcy Act to payment.
There -- the priorities ahead of them are costs of administration, the priority wage claims and certain costs of creditors in defeating plans of arrangement and wager in their plans and as far as the third priority is concerned, there are no such claims.
So the United States will except to the extent that they are subject to costs of administration and priority wage claims, both of which exist, they will not be subordinated to the claims of general unsecured creditors or put into the same category as those creditors.
Justice William H. Rehnquist: Even if the referee were to decide against them as to the perfection of their lien?
Mr. Dennis E.quaid: Yes, they would still enjoy their priority under Section 64 whether or not they have a lien or not.
Of course if they do have a lien and if they are subordinated under Section 67, they end up in the same priority slot.
Turning to Section 67, Congress has expressed its concern over the fact that tax claims are eating up diminishing the assets of bankruptcy estates at the current time and for the last several years.
Consequently, they have established a provision subordinating tax liens although no other liens to the first two priorities of Section 64 being costs of administration and priority wage claims.
This Court has held that when the tax lien and the words of the statute is not accompanied by possession that that possession is being defined as actual possession in the case of Gorgon versus the Department of Labor Enforcement of California.
They stated that the purpose of this provision was to give a public warning to all parties, rights may be affected by the tax lien which is unknown to third parties and is characterized as a secret lien that if the United States takes actual and physical possession of the assets, third parties and in particular general unsecured creditors who may extend further credit to such a company will be warned or forward and can take measures to protect themselves and sell which what they can form this relationship.
However the United States did not do this, they served the notice of levy and took no further steps, instead they waited after the assignment for the assignee to perform the liquidation of the tangible equipment and fixtures which were in the hands of the assignee.
Therefore we feel that the assets -- I'm sorry, that the tax lien is subordinated and postponed to the first two priorities being caused of administration and priority wage claims.
We feel that this Court should be guided by the policy of the Bankruptcy Act or the policy expressed by Congress in the Bankruptcy Act that tax claims should be subordinated and that there should be something else for other parties in the bankruptcy administrations or bankruptcy estates at least to provide the bare minimalist being the costs of administration and the priority wage claims earned by wage earners within three months preceding the initiation of the bankruptcy.
We feel that the Bankruptcy Act is a one statute which deals with all of these problems not only with the administration of an insolvent corporations assets but also with the treatment of the tax liens or other claim for taxes of the Internal Revenue Service.
We also feel that this is not an action to restrain the collection of taxes since we are dealing here with the Government's lien and levy, not taxes and that the Government's claim that this is not appropriate for a summary proceeding, is not applicable since the case of New Hampshire Fire Insurance Company versus Kan and recognized as a -- an expressed statutory exception to that rule, the summary jurisdiction of the bankruptcy court.
After the argument of counsel for the United States, we'll have a short time for rebuttal.
Chief Justice Warren E. Burger: Very well.
Argument of Keith A.jones
Mr. Keith A.jones: Mr. Chief Justice and may it please the Court.
United States did not oppose the grant of certiorari in this case for it was hope that the case would serve as a suitable vehicle for the resolution of the question of substantial importance to the Federal Government's powers over internal revenue collection.
That question is whether the Government's interest in tangible property that had as levied upon and tangible properties such as bank accounts is terminated or impaired by the taxpayer subsequent bankruptcy.
Unfortunately for purpose of clarity of exposition, that is not the only question that has been raised in this case.
The petitioner has raised at least two major subsidiary issues that do not relate to the Government's general power to levy or its power to rely upon the effectiveness of its tax levies or rather relate only to the factual peculiarities of this particular case.
And since this is so, I would like at the outset of my argument to focus the Court's attention on what we feel to be the more important issue in this case, that is the question of the Government's right to rely upon its tax levies not withstanding the taxpayer subsequent bankruptcy and then I will at the end of my argument address the subsidiary questions that the petitioner has additionally raised.
I think that the case can be initially understood more clearly if it is taken in form of a hypothetical example that is somewhat less complicated than the actual facts of this case.
I would post it as that example, a common situation where the Government levies upon a bank at which the tax payer has a bank account in order to seize the account of the taxpayer.
Now, under the Internal Revenue Code and the accompanying regulations as our brief discusses at some length.
The service of such a notice of levy upon the bank imposes upon the bank in affirmative duty that is enforceable by personal liability to turn over the entire amount of the account to the United States and there is no doubt that this form of levy is generally effective for internal revenue purposes.
I say that is no doubt about it because this method of seizing intangible property, the method of serving a notice to the person that holds the intangible rights has been used by the Government and approved by this Court at least since the civil war and I would refer the Court to the cases of Miller against United States at 11 Wall.268 which we did not cite in our brief by is cited by the Court of Appeals and also to the more recent cases, Sims against United States at 359 US 108.
As to this much of the case, I take it that there is no dispute between the parties.
The petitioner does not contend that as a general matter such a levy would be invalid.
Where we part company with the petitioner is over the consequence to be derived from the tax payer subsequent bankruptcy after the levy.
Now, our view in the hypothetical example on using the banks duty to pay over the moneys to the Federal Government is not affected by the intervention of subsequent bankruptcy proceeding, such proceeding should not terminate or impair in any way.
The government's right to reduce that account to its actual possession and those right should not be subject or the rights and obligation to establish by the levy should not be affected by the subsequent bankruptcy proceeding.
Now, in taking this position, we do not rely upon any special preference for the Government or upon any special exigencies in favor of federal tax collection although of course we feel it that should be taken into account but our reliance here is upon a long established and sound rule of bankruptcy practice that this Court has applied on many occasions in the past.
That rule is that a bankruptcy court lack summary jurisdiction over property held by a third party as custodian agent or bailee for a third person who is an adverse party to the bankrupted.
The property so held is not subject to administration in bankruptcy unless the adverse claimant so consents to that administration.
Now compilation of --
Justice Byron R. White: Let the property away from --
Mr. Keith A.jones: That's right.
Justice Potter Stewart: And it's not subject to summary proceedings.
Mr. Keith A.jones: It's -- in a summary proceeding, the property would be turned over without regard to the validity of the adverse claimants claim and then he would have to rely upon his rights as a creditor in the bankruptcy proceeding.
Justice William H. Rehnquist: Well he filed a petition for reclamation, can he?
Mr. Keith A.jones: I suppose so and by his co-counsel that he could but in a plenary proceeding, the question turns exclusively upon the rights of the adverse claimant if he have rights in the property the it belongs to him and is in subject to administration of bankruptcy at all so that the distinction between a summary proceeding and a plenary proceeding is not merely a matter of the elaborateness of the procedures but it affects the substantive rights as well.
Justice William H. Rehnquist: We didn't quite get that last Mr. Jones, why do you say it affects the substantive rights as well?
Mr. Keith A.jones: Well in this case for example in a plenary proceeding, the only issue before the Court would be whether the Government's levy was valid and whether the tax payer owed a tax, if so then the moneys would be paid over to the Government in full.
In a summary proceeding the -- I take it that petitioner's position is the question is whether those properties had been the properties of the tax payer, if so they are turned over to the bankruptcy court and then the United States only has an interest as a creditor in whatever is left after the payment of expenses in bankruptcy.
Justice William H. Rehnquist: That's the consequence of what's going into the jurisdiction in the bankruptcy court for any kind of problem.
Mr. Keith A.jones: That's right.
Well as I say, the general rule upon which we rely here is a property held by a third person on behalf of an adverse claimant is not subject to the summary jurisdiction of the bankruptcy court and a compilation of the cases applying this rule is set forth at volume two, paragraph 23.06 bracket 1 of colliers treaties on bankruptcy and I stress that paragraph because although we adverted to a number of related paragraphs and colliers, we did not include that one in our brief, I repeat it's paragraph 23.06 bracket 1.
I will discuss just two of those cases here for purposes of example.
In Taubel against Fox, 264 U.S. 426, a sheriff had pursuant to a judgment levy seize the property of a debtor and while the sheriff was still holding the property, the debtor was adjudicated a bankrupt and the bankruptcy court sought to require the sheriff to pay over the property to the receiver in bankruptcy, and this Court concluded that since the property was being held by the sheriff on behalf of an adverse claimant, that is the judgment creditor, it was not subject to summary turnover instead the sheriff was free to release the property to the judgment creditor.
In this connection, I would like to refer to page 23 of our brief footnote 10 where we mis-discribed Taubel against Fox to our own disadvantage.
We stated in that footnote that in that case, Taubel against Fox, this Court merely held that property and so forth and we should have said this Court merely stated that property in the hands of a nonadverse third person who is not holding a decision for any adverse claim was subject to turnover.
In face the Court in Taubel went on to hold that since the sheriff in that case was holding for an adverse claimant then the property was not subject to summary turnover.
The other case of this Court that I would mention was First National Bank against Title and Trust Company at 198 U.S. 280 and in that case, the third party in possession was ware housemen who was holding the property for a third person who was an adverse claimant to the bankrupted to whom the bankrupt had assigned the warehouse receipt and once again, the Court held that the property in the warehouse men's hands was not subject to summary turnover.
Now, we believe that this general rule annunciated and applied in these cases governs this case as well.Property held for the United States pursuant to a levy like property held by other third persons for other adverse claimants is beyond the reach of the bankruptcy court summary turnover orders and a hypothetical example I propounded, a bank upon which the Government has served a valid notice of levy holds the taxpayer's account for the Government as the Government's agent.
Government as an adverse claimant is entitled to receive the moneys in that account.
The moneys in the account like the property sees by the sheriff in Taubel against Fox.
It should be payable to the Government as an adverse claimant and not to the receiver in bankruptcy for distribution and accordance with the priority rules of bankruptcy.
Justice William H. Rehnquist: Well how about the provision of subsection 8 that Section 70 (a) of the Act so that equates the possession of the assignor to the possession of the bankrupt.
You don't have that in your hypothetical example.
Mr. Keith A.jones: That's true, that's why I used that hypothetical because I wanted the Court's attention first to be focused upon the general case of the Government's levy and I intended at a later point to address the special considerations that arise when the person upon him, the levy has been served is a general assignee and I hope to get to that point in a moment.Well,
The petitioner here as we understand it does not challenge the general rule upon which we rely, is not challenged the rule that a third person in custody for an adverse claimant is not subject to summary turnover.
His argument on this aspect of the case is simply the taxing authorities unlike all other similarly situated adverse claimants are unable to avail themselves of the benefit of this general rule.
The basis of this argument exclusively upon Section 67 (c) 3 of the Bankruptcy Act but as we read that statute, it has absolutely nothing to do with the issue in this case.
The petitioner's argument has confused the question of inclusion of property into the bankrupt estate with that of distributing property out of the bankrupt estate.
This case is one of inclusion that is the issue is whether the property that has been levied upon is to be included in the bankrupt estate by virtue of the bankruptcy court summary turnover orders.
Section 67 (c) 3 does not address that question at all.
It is addressed to the separate and distinct question of distribution of whether -- of what priority various claimants have to the property that is being distributed out of the estate.
Nothing in Section 67 (c) 3 was intended to treat the Government any less favorably than other adverse claimants in constructive possession as we have seen such claimants are entitled to reduce their property to actual possession without any interference from the bankruptcy court.
Well, this are the basic legal consideration as to the general issue as we feel is involved here.
I think I should also call the Court's attention however to certain practical considerations.
It is of great importance that the United States in its capacity as a collector of taxes be able to rely upon its notice of levy.
If the internal revenue service cannot so rely, that will be forced to resort to more summary collection procedures and to enforce more immediate compliance with its notices of levy.
And this would entail the use of hasty collection devices that inevitably will cause disruption would be burdensome and annoying to taxpayers and to the third parties with whom they deal.
We see no social objective that would be achieved by forcing the Government to scramble in this way for actual possession.
All the legitimate concerns of bankruptcy administration and internal revenue collection can be served by giving to the United States the same rights as are presently held by all other similarly situated adverse claimants.
In short, both for practical reasons of internal revenue collection and as a matter of established bankruptcy procedure, the Government's levy should be honored whether or not the taxpayer subsequently becomes bankrupted.
The United States is entitled to rely upon its valid pre-bankruptcy levy is placing the property levied upon beyond the reach of the bankruptcy Court.
Now, this completes my presentation of the Government's position on what we believe to be the central issue in this case, the issue that the Court presumably took the case to decide that as its evident, there are other subsidiary issues in this case and I now turn to the consideration of those issues.
As Mr. Justice Rehnquist has noted, the petitioner contends that this case was governed by a special rule in favor of general assignees.
He contends that regardless of the effect that a notice of levy might have in other circumstances that the property held by a general assignee must be turned over to the receiver in bankruptcy whether or not there has been a levy and he relies both upon Section 70 (a) 8 of the Bankruptcy Act and also on Section 2 (a) 21 of that Act.
That although those provisions do state that the bankruptcy court has jurisdiction to require assignees for the benefit of creditors to deliver the property in their possession to the receiver in bankruptcy, they have never been construed as running the bankruptcy court summary power to reach property held by the assignee in a manner adverse to the bankrupted and to the general creditors.
The bankruptcy court summary jurisdiction under those provisions extends only to the property that the assignee was holding for the exclusive of general creditors at the time of bankruptcy.
For example, in Galbraith against Valley at 256 U.S. 46, this Court was presented with the contention by a receiver in bankruptcy that property held by an assignee adversely to the bankrupt was subject to summary turnover.
In that case, the assignee had incurred certain expenses of administration applied to bankruptcy and he claim that he was entitled to take the property that -- or take property in the value of the amount of his expenses and hold those for himself as an adverse claimant and this Court upheld the assignees contention.
The Court held that as to property with respect to which the assignee had himself an adverse claim, that property was not subject to turnover to the receiver in bankruptcy that it was outside the bankruptcy courts summary jurisdiction.
Justice William H. Rehnquist: That wasn't modified by the Chandler amendments.
Mr. Keith A.jones: Section 2 (a) 21 was enacted after the decision in Galbraith Valley but it was generally considered as being merely a codification of prior law and collier and his treaties as we indicated in our brief so treats that enactment and I don't think that anyone has construed as being a general requirement that the assignee turnover the property in his possession willingly without regard to any adverse claims then I believe that after the passage of the Chandler Act, lower courts, not this Court but lower courts have had the opportunity to apply Galbraith against Valley to a situation such as the one involved here and they have done so to bar the summary turnover of property held by the assignee for his own self or as custodian or agent for a third person from summary turnover to the receiver in bankruptcy.
Justice Byron R. White: Was the levy made before bankruptcy?
Mr. Keith A.jones: That's correct.
Justice Byron R. White: And the levy wasn't -- and the -- but -- the levy was made after assignment?
Mr. Keith A.jones: That's also correct.
Justice Byron R. White: And so the assignee for the benefit of creditors who acquired -- who took possession to property before bankruptcy and sold it then was subjected to a levy.
Mr. Keith A.jones: That's right, that's right.
Justice Byron R. White: And then came bankruptcy and any right to the Bankruptcy Act that the assignee may have had any rights to trustee or the state against the assignee only arose with the filing of the bankrupt.
Mr. Keith A.jones: Well any rights that they had in bankruptcy arose at that time.
It's correct of course that they were creditors prior to the --
Justice Byron R. White: And you are asserting any rights to the United States arose before bankruptcy.
Mr. Keith A.jones: Well, let me distinguish between various kinds of rights.
Of course the Government had a right to payment of its taxes longer for --
Justice Byron R. White: But your levy arose before bankruptcy.
Mr. Keith A.jones: The levy was served upon the assignee before bankruptcy.
One of the petitioner's arguments in this case a second subsidiary kind of argument is that the assignee wasn't holding any property subject to levy.
He claims that the proceeds in the assignees hands were in subject to levy under the Internal Revenue Code.
We believe that contention is plainly wrong.
The assignee -- let me backtrack.
The taxpayer was holding a property subject to the Government's lien.
When the taxpayer sign the property to the assignee, the assignee took the property subject to the lien.
Now, petitioner concedes that much.
Justice William O. Douglas: May I interrupt at that point?
What did happen up to that time had been -- that notice of a deficiency assessment as I understood it.
Mr. Keith A.jones: There was an assessment of taxes to, that's correct.
Justice William O. Douglas: Right, but did that create a lien?
Mr. Keith A.jones: It did.
Justice William O. Douglas: Not a lien which gave any notice to other creditors though, did it?
Mr. Keith A.jones: No and that lien until perfected would not have been valid as against for example a bona fide purchaser.
It only became perfected when the notice of lien, not the notice of levy but the notice of lien was properly filed.
Justice William O. Douglas: And that was filed with the assignee?
Mr. Keith A.jones: No that was then -- the notice of levy was served upon the assignee.
The notice of lien was served -- was filed in the appropriate state office but they were both filed after the assignee took possession of the property.
Justice Potter Stewart: And the notice of levy was filed if I understand it after he had sold the channels for the benefit of creditors.
Mr. Keith A.jones: After he'd reduced the property to proceeds, to cash, that's correct.
Justice Potter Stewart: For the benefit of creditors who under 4741 the beneficiaries of the trust, is that right?
Mr. Keith A.jones: That's right, that's right.
Of course our argument is that federal law supervenes.
Justice Potter Stewart: Yes but also the federal law talks about property rights to property of the tax payer.
Mr. Keith A.jones: Oh, yes, you're talking about Section 63 31.
Justice Potter Stewart: Which is the whole basis of this lawsuit.
Mr. Keith A.jones: Yes it is but one aspect to that provision that the petitioner has consistently overlooked in this case is the fact that the Government's levy does not reach only property of the tax payer seemed to be searching in vain for the statutory language.
It's Section -- Section 63 31 (a) which is set forth at page 12 (a) of the petition for a writ of certiorari provides that if any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice in demand shall be lawful for the secretary or his delegate to collect such tax by levy upon all property and rights to property belonging to such person or on which there is a lien provided in this chapter for the payment of such tax and it is our contention that the Government's lien in this case be attached to the proceeds in substitution and --
Justice Potter Stewart: That's really the question.
Mr. Keith A.jones: Well that's one of the three questions and I regard that as a subsidiary question.
Justice Potter Stewart: It's not the big question that you hope to.
Mr. Keith A.jones: That's correct.
Justice Potter Stewart: That you did not oppose certiorari to be because you hope the court would decide that that is more particularized question in this case.
Mr. Keith A.jones: That is an important question and -- that's true.
Now in our brief, we cited Justice Stewart's opinion in Shepherd against Tailor as an example of this Court's application of the federal common law rule that a lien does attached proceeds and substitution.
That is also the rule under Illinois law as we cited number of Illinois cases in our brief that stand for the proposition that when a -- an assignee under Illinois law takes property subject to a lien and sells that property, the lien reattaches to the proceeds.
Same rule under both Federal Common Law and Illinois Common Law.
Petitioner sole reliance for alleged contrary authority is upon United States against Bess but in that case, that case holds at the very most that the government's lien will not reattach proceeds that were not fully realizable by that -- in the taxpayer's hands.
In that case, the Government had a lien on a taxpayer's insurance policy and after the death of the taxpayer, the moneys face amount policy was paid to the beneficiary and the Government claim the face amount.
This Court held that as to the proceeds that would have been realizable in the taxpayer's hands, that is the case surrender valued, the Government's lien reattached as to the proceeds that were not realizable in hands of the taxpayer, that is the additional insurance proceeds above and beyond, the cash surrender value lien would not reattached.
Now petitioner tries to fit himself within this narrow exception to the general rule of the lien that reattaches to proceeds and substitution that I frankly don't see how he is able to do that.
The taxpayer in this case could just as easily as did the general assignee convert the property into cash.
Taxpayer could have sold off the property, liquidated its receivables and receive cash in exactly the same manner as the general assignee.
There is no reason whatsoever in this case why the taxpayer -- why the Government's lien should not reattach to those proceeds and substitution and since we believe that lien clearly did so reattach to those proceeds.
There was property subject to a lien on which there was a lien which under Section 63 31 of the Code was subject to levy and it is clear that the Government's levy serve notice upon the assignee that not only all property of the taxpayer but also all property on which there was a federal tax lien was thereby seized on behalf of the United States for the payment of taxes and demand was made upon the assignee for the payment of those amounts to the United States.
If there are no further questions, I ask that the Court affirm the judgment below.
Chief Justice Warren E. Burger: Do you have something further Mr. Quaid?
Rebuttal of Dennis E.quaid
Mr. Dennis E.quaid: Just very briefly Mr. Chief Justice.
The assignee was not holding for adverse claimants as in the cases cited by counsel for the Government.
He was holding for the benefit of general creditors who is not holding for a particular creditor as was the sheriff in 5327 Fox case cited by the Government.He was holding as a state appointed receiver or representative of creditors.
Justice Byron R. White: What would you say if there ever been a bankruptcy?
Mr. Dennis E.quaid: Well then it would be an entirely different situation.
Justice Byron R. White: Well I know but the -- could they -- who would have gotten -- who would -- would the levy have been good?
Mr. Dennis E.quaid: Well, I think it would have become a moot question because the United States would have had a first priority under Secition 34 66 of the revised statutes.
Justice Byron R. White: That maybe so when the assignee finally distributed and paid its expenses out of it.
Mr. Dennis E.quaid: Well only its expenses --
Justice Byron R. White: My question here was even if it have to turn the proceeds over to the Government.
Mr. Dennis E.quaid: Oh I think he may have in that situation to the fact that bankruptcy did not subsequently occur and alter the situation and the relationship --
Justice Byron R. White: So you should -- except to the Bankruptcy Act, you would say the assignee was subject to he levy and would have had to turn the proceeds over.
Mr. Dennis E.quaid: Oh, I think the important factor in this case is the Bankruptcy Act and the policy that Congress has set forth in the Bankruptcy Act.
Justice William H. Rehnquist: Yet that case, the case of Galbraith against Valley does seem to say that where the assignee holds adversely to the interest of the general creditors there is no summary jurisdiction of the bankruptcy court.
Mr. Dennis E.quaid: Well there, he was holding in his own personal sense adversely.
Justice William H. Rehnquist: But here the Government says as a matter of tax law, the levy had proceeded to such a stage that he was holding for the benefit of the Government.
Mr. Dennis E.quaid: Well we feel that tax laws wrong and inappropriate in bankruptcy situation where there is another federal statute more comprehensive and which considers the rights of all parties which are involved.
Justice Byron R. White: Yes but they admit for bankruptcy, you say the government levy is good and that you would have to turn it over and that bankruptcy had 5538 that the assignee was not going to take benefit solely 5547
Mr. Dennis E.quaid: But the bankruptcy did come and did change the rights of the respect of parties.
I thank you gentleman for your consideration.
Chief Justice Warren E. Burger: Thank you gentleman.
The case is submitted.