Source: http://www.chanrobles.com/usa/us_supremecourt/329/565/case.php
Timestamp: 2019-10-14 18:08:43
Document Index: 358481894

Matched Legal Cases: ['§ 77', '§ 57', '§ 77', '§ 77', '§ 77', '§77', '§ 205', '§ 77', '§ 52', '§ 52', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77']

GARDNER V. NEW JERSEY, 329 U. S. 565 (1947) - US SUPREME COURT DECISIONS ON-LINE
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GARDNER V. NEW JERSEY, 329 U. S. 565 (1947)
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A railroad petitioned for reorganization under § 77 of the Bankruptcy Act after New Jersey taxes had accrued against it in an aggregate amount exceeding the value of its liquid assets and extensive litigation over the tax assessments had resulted adversely to it. The state comptroller filed on behalf of the State a claim for taxes, plus interest, claiming that, under the state law, the sums owed were secured by "a lien paramount to all other liens upon all the lands and tangible property and franchises of the company in this State." Objections to the claim were filed by the debtor, the trustee, security holders, and an indenture trustee, who claimed, inter alia, that the debtor's property was grossly overvalued, that the debtor had been intentionally and systematically discriminated against in making the assessments, that no interest accrued after the petition for reorganization was filed or during the period when collection of the taxes was enjoined and the debtor was contesting their validity, that the State had no lien on the debtor's personal property, and that no part of the State's claim except the principal amount of taxes was entitled to a lien equal or paramount to the debtor's general chanroblesvirtualawlibrary
(c) Excepting questions involving the valuations underlying the assessments and the validity of the assessments, the reorganization court may adjudicate questions pertaining to the amount of a tax claim secured by a lien -- e.g., whether the amount of the claim has been swollen by the inclusion of forbidden penalties, what claims sought to be proved by the State are "penalties," the applicability of § 57j to reorganizations under § 77, the liability of the estate for penalties incurred by the trustee in the operation of the business, chanroblesvirtualawlibrary
In a proceeding for the reorganization of a railroad under § 77 of the Bankruptcy Act, the reorganization court confirmed a report of a special master finding that (1) certain proofs of claim of New Jersey for taxes were properly filed by state officers acting in pursuance of their statutory authority, (2) § 77 confers on the reorganization court jurisdiction over the kind of claims asserted by the State in the proceeding, and such construction of the Act is not unconstitutional, and (3) the entire property of the debtor is in custodia legis, subject to the rights of lienholders, and the reorganization court is the proper court to determine the validity and amount of the tax claims, subject to certain limitations. New Jersey appealed and petitioned for a writ of prohibition. The Circuit Court of Appeals reversed the order of the reorganization court and dismissed the application for a writ of prohibition. 152 F.2d 408. This Court granted certiorari. 328 U.S. 876. Affirmed in part and reversed in part, p. 329 U. S. 584. chanroblesvirtualawlibrary
This case, here on certiorari, presents important problems under §77 of the Bankruptcy Act. 49 Stat. 9 1, 11 U.S.C. § 205. The Central Railroad Company of New Jersey (the debtor), of which petitioner is trustee, filed its petition for reorganization in 1939 shortly after receiving notice from the Attorney General of New Jersey that he would apply to a state court for a summary judgment for unpaid taxes of the debtor and seek to sell its property in satisfaction of the judgment. The tax assessments for the years 1932 to 1939 had been extensively litigated both in the state and federal courts, and the results were, for the most part, adverse to the debtor. [Footnote 1] By the end of 1939, the tax claims of the State against the debtor, exclusive of interest and penalties, exceeded $15,000,000, while the liquid assets of the debtor available to pay them were apparently less than half that amount. The reorganization court stayed suits to collect the taxes, but, from time to time, entered orders directing the debtor to make specified chanroblesvirtualawlibrary
In 1941, the New Jersey legislature passed a law designed to lessen the tax burden of railroads in the State. P.L.1941, c. 290, 291. This law was implemented and somewhat modified in 1942. P.L.1942, chs. 169, 241. These acts included changes in the tax rates, and provided for installment payments of the full principal amount of unpaid property taxes without interest or penalties, which were due on or before December 1, 1940. The statutory settlement of the claims was conditioned on (1) the execution of installment payment plans and the payment of the first installment, and (2) a waiver of all rights to contest the legality or amount of any assessment made prior to December 1, 1941, together with written consent to the discontinuance and dismissal of all pending suits concerning such assessments. The reorganization court authorized petitioner to settle and compromise the delinquent taxes in accordance with the provisions of these acts. Petitioner undertook to comply with the statutory requirements, filing documents and payments required of a delinquent taxpayer, discontinuing litigation, and consenting to the discontinuance of pending appeals. [Footnote 2] The state officials -- the Attorney General, Treasurer, and Comptroller -- did not accept these tenders. [Footnote 3] Instead, the Attorney General instituted suit to enjoin the Treasurer from carrying out the provisions of the 1941 and 1942 acts. The result was a holding that the acts violated the New Jersey constitution. Wilentz v. Hendrickson, 135 N.J.Eq. 244, 38 A.2d 199. chanroblesvirtualawlibrary
The debtor and trustee filed initial objections to the claim. They contended that the property of the debtor was grossly overvalued, and that the debtor and other railroads had been intentionally and systematically discriminated against in the making of the assessments. They also objected to the interest or penalty part of the claim, contending, inter alia, that no interest accrued after the date when the debtor's petition for reorganization was filed or during the period when collection of the taxes was enjoined and the debtor was in good faith contesting their validity. Subsequently, they objected to the claim on the further ground that its amount and the time allowed for its payment were governed by the terms of settlement or compromise tendered under the 1941 and 1942 acts of the New Jersey legislature. They also contended that New Jersey had no lien on the debtor's personal property. Like objections were made by a group of security holders of the debtor and by an indenture trustee. They also objected to the State's claim on the ground that no part of it other than that representing the principal amount of taxes was entitled to a lien equal or paramount to the debtor's general mortgage. chanroblesvirtualawlibrary
The special master rendered a report in 1945 in which he found (1) that the proofs of claim of New Jersey were properly filed by state officers acting in pursuance of their statutory authority; (2) that § 77 confers on the reorganization court jurisdiction over the kind of claims asserted by the State in the proceeding, and that such construction of the Act is not unconstitutional, and (3) that chanroblesvirtualawlibrary
It is traditional bankruptcy law that he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure. Wiswall v. Campbell, 93 U. S. 347, 93 U. S. 351. If the claimant is a State, the procedure of proof and chanroblesvirtualawlibrary
Nor can we conclude that the claim was not properly filed by the State. The state Comptroller, who filed the claim on behalf of the State, is authorized to "Institute and direct prosecution . . . for just claims and debts due to the state." N.J.R.S. § 52:19-10c. And see id., § 52:19-15. The state Attorney General, who resisted the objections made to the claim, is authorized to "attend generally to all matters in which the state is a party or chanroblesvirtualawlibrary
We do not agree with that conclusion. We partially answered the contention when we reviewed the broad, all-inclusive chanroblesvirtualawlibrary
§ 77(b)(1). A plan of reorganization may provide for "the sale of all or any part of the property of the debtor either subject to or free from any lien at not less than a fair upset price." § 77(b)(5). (Italics added.) It may order "the distribution of all or any assets, or the proceeds derived from the sale thereof, among those having an interest therein." Id. Or it may provide for "the satisfaction or modification of any liens," or "the curing or waiver of defaults." Id. (Italics added.) This is comprehensive language suggesting that all liens are included, not that some are beyond the reach of the court. While valid liens existing at the commencement of bankruptcy proceedings have always been preserved, it has long been a function of the bankruptcy court to ascertain their validity and extent and to determine the method of their liquidation. Whitney v. Wenman, 198 U. S. 539, 198 U. S. 552; Isaacs v. Hobbs Tie & Timber Co., 282 U. S. 734, 282 U. S. 737-738; Straton v. New, 283 U. S. 318, 283 U. S. 321. Moreover, both in receivership cases, New York v. Maclay, 288 U. S. 290; United States v. Texas, 314 U. S. 480, and in bankruptcy cases, Van Huffel v. Harkelrode, 284 U. S. 225; New York v. Irving Trust Co., supra, the authority of the court to deal with the lien of a State has long been recognized. In reorganization cases, the task of resolving disputes as to liens is a common one for the court. @See 318 U. S. 569. Indeed, before a plan of reorganization can be designed in accord with fair and equitable requirements, liens must be dissentangled, and their relative priorities ascertained. This problem, present in most reorganizations, is acute in the railroad field.
When § 77 is read against this historical background and in light of practical requirements, we cannot conceive that chanroblesvirtualawlibrary
Third. We held in Arkansas Corporation Commission v. Thompson, supra, that the reorganization court lacked the power under § 77 to redetermine for state tax purposes the property value of a railroad where that value had already been determined in state proceedings which afforded ample protection to the railroad's rights. We adhere to that decision. Its ruling precludes redetermination by the reorganization court in this case of the valuations underlying the assessments made by the state authorities and the validity of those assessments used as the basis for the computation of the taxes. It may not, therefore, entertain the objections to New Jersey's claim which tender those issues. The proper tribunals where chanroblesvirtualawlibrary
(1) The validity and priority of one lien, whether or not claimed by a State, as against other liens are questions for the reorganization court. Illustrating but not limiting the range of that inquiry are questions whether local law creates the lien asserted; whether it was sufficiently perfected prior to the petition for reorganization as to be good against other liens, cf. New York v. Maclay, supra; United States v. Texas, supra; whether, if it were inchoate at that time, it could be perfected subsequent to the petition, Lyford v. New York, 140 F.2d 840, and whether the lien, though paramount, is subordinate chanroblesvirtualawlibrary
(3) The reorganization court may also adjudicate questions pertaining to the amount of a tax claim secured by a lien without crossing the forbidden line marked by Arkansas Corporation Commission v. Thompson, supra. There is, for example, the question whether the amount of the claim has been swollen by the inclusion of a forbidden penalty. and thus. to that extent. does not meet the bankruptcy requirements for proof and allowance of claims. Section 57(j) of the Bankruptcy Act provides that debts owing a State as a "penalty or forfeiture" [Footnote 10] shall not be allowed. What claims accruing before bankruptcy and sought to be proved by a State are "penalties," New York v. Jersawit, 263 U. S. 493, and what are not, Meilink v. Unemployment Reserves Commission, 314 U. S. 564; the applicability of chanroblesvirtualawlibrary
(4) We noted in Case v. Los Angeles Lumber Products Co., 308 U. S. 106, 308 U. S. 130, that one useful and fitting function of a reorganization court was the compromise or settlement of claims so that interminable litigation might be ended and the interests of expedition in promulgating a plan of reorganization served. That power, expressly included in the Bankruptcy Act [Footnote 12] and governed by our General Order No. 33. [Footnote 13] is part of the broad authority granted the reorganization court by § 77. [Footnote 14] Through the appropriate chanroblesvirtualawlibrary
A phase of this controversy was before the Circuit Court of Appeals in In re Central R. Co. of New Jersey, supra. That court had before it on appeal the order of the reorganization court (entered prior to the decision in Wilentz v. Hendrickson, supra, holding the acts of 1941 and 1942 unconstitutional) which, on the basis of the compromise, allowed New Jersey's claim only in a reduced amount. The Circuit Court of Appeals held (1) that it would have been more appropriate for the reorganization court to have stayed its hand pending determination of the state litigation and (2) that, in any event, it should not have passed on the constitutionality of the 1941 and 1942 acts without giving New Jersey an opportunity for a hearing and argument on the issue. This controversy is now in a different posture. New questions of local law emerge -- whether Wilentz v. Hendrickson, supra, controls this case; whether a valid settlement can be made under an chanroblesvirtualawlibrary
These issues bristle with questions of New Jersey law on which we should not pass, even if we were to assume they are properly here, without the benefit of the views of judges who sit there and have a greater familiarity with local law and local practices than we. See Huddleston v. Dwyer, 322 U. S. 232, 322 U. S. 237; Brillhart v. Excess Insurance Co., 316 U. S. 491, 316 U. S. 497; Hammond v. Schappi Bus Line, 275 U. S. 164, 275 U. S. 169; Wilson Cypress Co. v. Del Pozo, 236 U. S. 635, 236 U. S. 656-657. And, for a review of the earlier cases, see dissenting opinion of Mr. Justice Brandeis in Railroad Commission v. Los Angeles R. Co., 280 U. S. 145, 280 U. S. 164-165. Moreover, we are now advised that there is presently pending before the Circuit Court of Appeals an appeal by the Attorney General of New Jersey from an order of the reorganization court denying leave to join the trustee as party defendant in a suit in the New Jersey courts to determine whether there was a valid settlement of the tax claims and to stay further determination of that controversy in the federal court until the state courts have chanroblesvirtualawlibrary
"This is the equity rule (5 Collier on Bankruptcy (1944) p. 537) which permits the filing of claims out of time provided the claim is equitable, the claimant is not chargeable with laches, and the assets have not been distributed (see Conklin v. United States Shipbuilding Co., 136 F.1d 06, 1009, 1010; Pennsylvania Steel Co. v. New York City R. Co., 198 F.7d 1, 740-742), and provided further that the late filing does not unduly delay the proceedings. Guaranty Trust Co. v. Henwood, 86 F.2d 347, 353."