Source: https://m.openjurist.org/521/f2d/844/rochelle-v-united-states
Timestamp: 2019-11-21 21:38:22
Document Index: 688457386

Matched Legal Cases: ['§ 5', '§ 5', '§ 5', '§ 5', '§ 5', '§ 23', '§ 5', '§ 57', '§ 60', '§ 96', '§ 57', '§ 60', '§ 68', '§ 5', '§ 57', '§ 57', '§ 93', '§ 67', '§ 107', '§ 44', '§ 72', '§ 57', '§ 63', '§ 77', '§ 205', '§ 68', '§ 64', '§ 104', '§ 5', '§ 68']

521 F2d 844 Rochelle v. United States | OpenJurist
521 F. 2d 844 - Rochelle v. United States
521 F2d 844 Rochelle v. United States
521 F.2d 844
75-2 USTC P 9792
William J. ROCHELLE, Jr., Trustee, Plaintiff-Appellant,
I. Section 5g
The United States cites cases to illustrate that tax liabilities of a partnership are also the individual liabilities of each partner. It further asserts that its tax claim against the partner is "not solely derivative upon its failure to obtain satisfaction of its claim against the partnership, instead, Wynne . . . is individually liable . . . whether there are sufficient assets available in the partnership estate." We take it that the government is suggesting that its tax claim, insofar as assertable against the partner's estate, enjoys a better status than the claims of other partnership creditors. But every case cited by the government for this argument relies on the syllogism that partners are liable for the debts of the partnership, tax liabilities are debts of the partnership, therefore the partners are liable for the tax debts.6 Moreover, in every case the government's claim against the individual partner was pressed only after the bankruptcy of the partnership or its failure to pay the taxes due. In Adams the court refers to the partner's joint not joint and several liability, 228 F.Supp. at 232, and in Ross the court noted the creditor's duty to pursue the partnership assets before turning to a retired partner, 176 F.Supp. at 935. Indeed, the government lost in Ross exactly because the partner, then retired but active when the tax debt was incurred, was only a surety, and the government failed to protect his interest by retaining a lien for his benefit on the principal debtor's assets. Thus these cases not only do not support the government's claim that Wynne was liable even if there were sufficient partnership assets, they actively refute it.7 Whatever the status of the United States' claim against the bankrupt individual partner for the purposes of § 5g, it is no different than that of any other creditor of the bankrupt partnership.
56 F.2d at 1025. See Farmers' & Mechanics' Nat. Bank of Phila. v. Ridge Ave. Bank, 240 U.S. 498, 36 S.Ct. 461, 60 L.Ed. 767 (1916). To the same effect, see, E. g., In re Janes, 133 F. 912 (CA2, 1904); In re Knowlton & Co., 202 F. 480, 482 (CA3, 1913); Bank of Reidsville v. Burton, 259 F. 218, 219 (CA4, 1919); Cutler Hardware Co. v. Hacker, 238 F. 146, 147 (CA8, 1916). We know of no case to the contrary. See 1A Collier on Bankruptcy § 5.26 at 734.2-736. Even reducing a partnership claim to judgment against the partner does not alter the result, Id. at 736 n. 6. Thus the government's tax claim on the partnership, like every other partnership debt, is subordinated to the claims of individual creditors by § 5g.
In support of its argument that partnership debts on which the individual partner's liability has matured are to be treated as individual debts under § 5g, the government says it should be permitted recovery against both estates, so-called double proof,8 and cites in support thereof § 5h, 11 U.S.C. § 23h, and Mitchell v. Hampel, 276 U.S. 299, 48 S.Ct. 308, 72 L.Ed. 582 (1928). Under this argument if a partnership and a general partner both bankrupted and each estate paid 50 cents on the dollar, the partnership creditors would be paid in full, getting 50 percent from each estate, while individual creditors whose claims did not derive from partnership liabilities would receive but 50 percent.
Section 5h does not authorize allowance of such double claims but merely "remove(s) all arbitrary rules of practice and procedure which had interfered with the distribution of the estates of bankrupt partnerships and partners, in accordance with the settled rules of equity." 1A Collier on Bankruptcy § 5.22 at 730, n. 2, citing Farmers' & Mechanics' Nat. Bank of Phila. v. Ridge Ave. Bank, supra, and In re Effinger, 184 F. 728 (D.Md., 1911). Indeed, Collier specifically notes that
II. Section 68
Each of these two groups of relations can give rise to either of two situations, often termed by the cases as "reciprocal," corresponding to the different parties who can attempt to utilize setoff. In the first situation (AB C A), either the third party (C) or the partner (A) may seek to utilize a setoff. In case (a), the partner in debt to the third party may seek to offset against that claim the partnership's claim on the third party. In case (b), the third party in debt to the partnership may seek to offset against that claim his own claim on the partner. In neither case are the debts mutual, however, and in neither should the setoff be permitted. The reason is that in both cases B's share of the partnership claim against the third party is being taken away without B's consent and without any benefit to B since it is being set off against the third party's claim against A. A is relieved of his liability to C at the expense of the partnership, that is, both A and B. Gray v. Rollo, 85 U.S. (18 Wall.) 629, 21 L.Ed. 927 (1874) is an example of case (a); In re T. M. Lesher & Son, 176 F. 650 (E.D.Pa., 1910) and In re Crystal Spring Bottling Co., 100 F. 265 (D.Vt., 1900) are examples of case (b).
In the second situation (A C AB) either the third party (C) or the partnership (AB) may seek to utilize a setoff. In case (c), one sued on the partnership debt to third party may attempt to set off against that claim the partner's claim against the third party. In case (d), the third party in debt to the partner may attempt to set off against that claim his own claim against the partnership. In both cases the liability of both A and B is being exchanged for the claim of A. B gains and gives up nothing. A loses his sole claim against C, but he gains his release from the partnership debt for which he was severally liable in any event.14 C loses his claim against B on the partnership debt, but he gains his release from the liability to the partner A. Examples of case (c) include Beauregard v. Case, 91 U.S. 134, 23 L.Ed. 263 (1875), In re Shults, 132 F. 573 (W.D.N.Y., 1904), and In re Sherman Plastering Co., 346 F.2d 492 (CA2, 1965).15 Examples of case (d) include Tucker v. Oxley, 9 U.S. (5 Cranch.) 34, 3 L.Ed. 29 (1809), In re Neaderthal, 225 F. 38 (CA2, 1915),16 and the instant case.
The meaning of the term preference in § 57g is the same as that term is used in § 60a(1), 11 U.S.C. § 96a(1), see 3 Collier on Bankruptcy § 57.19(3.1) at 311-312. No property has been transferred from the debtor to the creditor, as defined in § 60a(1). Thus, there has been no preference. Cf., New York County National Bank v. Massey, 192 U.S. 138, 24 S.Ct. 199, 48 L.Ed. 380 (1904).
C. Setoff of subordinated claims
Our analysis of the relationship between § 68a and § 5g rests on the notion of Expressio unius est exclusio alterius. Section 68a broadly permits setoff of all mutual claims. Section 68b "makes certain specific exceptions to this allowance of set-off," New York County National Bank v. Massey, Supra, 192 U.S. at 145, 24 S.Ct. at 200, 48 L.Ed. at 383. It requires claims to be provable and then further limits that with a single precise exception of lack of allowability, though not lack of allowability generally but lack of allowability only under § 57g. A provable claim may not be allowable for any of a wide range of reasons. "Allowability implies, not only provability, but also validity. If for any reason the claim is improper, or if there be a good defense to it, it is not allowable, although it may be provable as a debt." Williams & Co. v. U. S. Fidelity & Guaranty Co., 11 Ga.App. 635, 75 S.E. 1067, 1070, Rev'd on other grounds, 236 U.S. 549, 35 S.Ct. 289, 59 L.Ed. 713 (1915); Lesser v. Gray, 236 U.S. 70, 74-75, 35 S.Ct. 227, 59 L.Ed. 471, 475 (1915). A court may disallow a claim for reasons specifically related to bankruptcy, for example, that it was not proven on time under § 57n, 11 U.S.C. § 93n, or was fraudulently obtained within the meaning of §§ 67d(1)-(4) and (6), 11 U.S.C. §§ 107d(1)-(4) and (6), or because of the close relation between the debtor and the claimant, such as close relatives, §§ 44a and 59e, 11 U.S.C. §§ 72a and 95e, or stockholders or officers of a corporate bankrupt, Richardson's Executor v. Green, 133 U.S. 30, 10 S.Ct. 280, 33 L.Ed. 516 (1890), or because it was held by a creditor who would not surrender a preference under § 57g. The trustee's defenses to claims include all the defenses of the original debtor, and these also go to allowability, E.g., compromise, duress, fraud, limitations, statute of frauds, and the like. Subordination of provable claims may also be ordered in other situations as a species of disallowance, 3A Collier on Bankruptcy § 63.08.
We have been able to locate only two cases involving setoff of subordinated claims. In re Phoenix Hotel Co. of Lexington, Ky., 20 F.Supp. 240 (E.D.Ky., 1937), held that setoff was not available to subordinated claimants but its reasons are unpersuasive, and we decline to follow it.24
Finally, although setoff is no longer to be considered generally available in reorganizations under § 77, 11 U.S.C. § 205,26 earlier courts applying § 68 to setoffs in the reorganization context were expected to consider, inter alia, "the superior liens, if any, to that of the creditor seeking set-off . . . ," Susquehanna Chemical Corp. v. Producers Bank & Trust Co., 174 F.2d 783, 787 (CA3, 1949). Consideration of superior creditors could only be necessary if the holders of subordinated claims might have setoff available in the first place.
Underwood v. U. S., 118 F.2d 760, 761 (CA5, 1941); Young v. Riddell, 283 F.2d 909, 910 (CA9, 1960), Aff'g. 60-1 U.S.T.C. par. 9381, p. 76,054 (S.D.Cal., 1959); Adams v. U. S., 328 F.Supp. 228 (D.Neb., 1971), relies on Underwood v. U. S., supra) U. S. v. Ross, 176 F.Supp. 932, 935 (D.Neb., 1959); In re Crockett, 150 F.Supp. 352 (N.D.Cal., 1957); Baily v. U. S., 350 F.Supp. 1205 (E.D.Pa., 1972), relies on Young v. Riddell, supra ; American Surety Co. v. Sundberg, 58 Wash.2d 337, 363 P.2d 99 (1961), relies on Underwood v. U. S., supra, without discussion. Purvis v. U. S., 73-2 U.S.T.C. par. 9628 (CA9, 1973) is a summary affirmance with no discussion of facts or citations to any authority
The United States does not rely on any theory that its tax claim has statutory priority over other creditors' claims, Cf., Lewis v. U. S., 92 U.S. 618, 620-621, 23 L.Ed. 513, 514 (1876); In re Vetterlein & Co., 20 F. 109 (S.D.N.Y., 1884), in particular under § 64a(5) of the Bankruptcy Act, 11 U.S.C. § 104a(5)
Robinson v. Seaboard National Bank of New York, 247 F. 667 (CA3, 1918), Aff'g, In re W. S. Kuhn & Co., 241 F. 935 (W.D.Pa., 1917) (partners liable as endorsers of the partnership's note); In re McCoy, 150 F. 106 (CA7, 1906) (same)
Lewis v. U. S., 92 U.S. 618, 23 L.Ed. 513 (1876) (priority of certain federal tax claims); In re Vetterlein & Co., Supra (same)
There may be situations in which there is doubt whether a debt is a partnership or individual debt. See 1A Collier § 5.30. Whatever ambiguity may be inherent in these terms they pose no problem in the instant case. The tax liabilities resulted from the activities of the partnership and were incurred by the partnership in the first instance. The partner may be liable, but his liability is only that of any partner for the debts of his firm, and so for the purposes of this distinction this tax liability is a partnership debt. Cf., In re Green, 116 F. 118, 122 (N.D.Iowa, 1902)
Willcox v. Goess, 92 F.2d 8, 16 (CA2, 1937), Cert. denied 303 U.S. 647, 58 S.Ct. 646, 82 L.Ed. 1108 (1938); Norfolk v. W. Ry. Co. v. Graham, 145 F. 809 (CA4, 1906). See 4 Collier on Bankruptcy § 68.08 at 890
Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 474, 94 S.Ct. 2504, 41 L.Ed.2d 243, 250 (1974)