Earl Warren: Number 83, Hattiebelle Simonson, Trustee in Bankruptcy, et al, versus R. C. Granquist, District Director of Internal Revenue, et al. Mr. Schmechel.
Donald A. Schmechel: Mr. Chief Justice and may it please the Court. We are concerned here in these two cases which are consolidated in a single petition before the Court with two aspects of the bankruptcy law which relate also to the laws of taxation. In the two cases, both the Harris case which is a Chapter 10 pre-organization under the bankruptcy statute, and the Simonson case which is an ordinary bankruptcy proceeding, in both of these cases, there is presently issue as to whether or not a tax penalty which is a subject of a lien, whether the lien be recorded, whether the notice of lien be recorded prior to bankruptcy or not recorded, is a valid tax lien with respect to the penalty so that it can be recovered despite the language in 57j of the Bankruptcy Act. This part -- this issue which involves and could determine both the Simonson and the Harris case, will be argued by me. There is a second issue which is present only in the Simonson case, an ordinary bankruptcy case, primarily arising under Section 70c of the Bankruptcy Act and Section 6323 (a) of the Internal Revenue Code and basically it is the question as to whether or not a trustee in bankruptcy is a judgment creditor or entitled to exercise some of the rights of a judgment creditor as against an unrecorded tax lien. In the Simonson case the notice of a tax lien had not been recorded prior to the inception of the bankruptcy. This second issue which is present only in the Simonson case, would be argued by my colleague and who is the counsel in that case. Now briefly the facts of these two cases should be observed because they do have some light upon both the general policy of the bankruptcy statute and the effect which should be given to them. The Simonson case as indicated is an ordinary bankruptcy wherein upon liquidation of the assets, the trustee realized some $8000 which was sufficient to pay all tax claims and expenses of the administration and prior to the filing of the bankruptcy proceeding as indicated, the Government had a tax lien represented by its assessment procedures but no notice of the tax lien was on file. The United States filed its claim in the Simonson case as a secured creditor, relying on the lien, both as to the principle, post petition interest and as to penalties. The trustee paid both the entire principle of the taxes involved and all pre-petition interest. The trustee and the court below disallowed post petition interest and some $1442 in penalties and it is this amount which is involved in the Simonson case. The Harris case somewhat by contrast is a proceeding under Chapter 10 of the Bankruptcy Act, a corporate reorganization of a small operating telephone company. Prior to the filing of the -- initially a Chapter 11 proceeding which was soon converted into the Chapter 10 proceeding, various tax liens against the bankrupt -- or insolvent telephone company had been filed, notices of the tax lien were on file unlike in the Simonson case. Also prior to the inception of the proceeding as appears in the record, the taxpayer had made an offer in compromise to the Government as against to all these taxes in the sum of some $57,000 of which $40,000 was actually being held pursuant to that offer in compromise at the time that the Chapter 10 proceeding was instituted.
Charles E. Whittaker: Would you excuse me please, I did not understand -- did you say that the tax lien had been filed in the Harris case in advance of the bankruptcy?
Donald A. Schmechel: That is correct Your Honor in the Harris case some year or two before the inception of the reorganization, the notices of the tax lien were recorded and filed.
Speaker: Yes.
Donald A. Schmechel: Now in the Harris case, the Government came in, as shown in the record, and again filed a claim as the secured creditor, claiming not only the principle of their taxes slightly less than $57,000 but claiming also pre-petition interest, post petition interest, and penalties with no mention being made with the $40,000 then being held by the Government. During the course of the proceedings as the record shows, the Court finally ordered the Government to return the $40,000 to the trustee, and subsequently in the course of the Chapter 10 proceedings a plan of reorganization was submitted in the manner contemplated by the statute. The plan of reorganization provided as part of its very equitable and just provisions that a payment of $57,000 representing all of the principle of the taxes to United States should be paid in cash to the United States. The United State acting to the Secretary of the Treasury under Section 199 of Chapter 10 declined that to acquiesce in the acceptance of that amount which would have been payment in full of the principle of the taxes, the Court then proceeded as permitted on Chapter 10 to confirm and approve the plan and make separate provision in effect with respect to any claims of about which there was a dispute including this particular one with reference to the penalties and post petition interest. As a result of this, the trustee filed objections to the claim of the United States for penalties and to the claim of the Unites States for post petition interest and the referee in the District Court both granted the contention of the trustee, disallowing any penalties and disallowing any post petition interest. The United States appealed to the Ninth Circuit only with respect to the issue of penalties, not seeking any review of the issue on post petition interest. Now as a result of the action taken in the proceedings, of course and the order of the court below, the District Court directing payment of the full principle the taxes of $57,000, they have been paid so that in both the Simonson and then the Harris case, all principle of the taxes have been paid and any pre petition interest that was involved has been paid or would be paid as provided. The only issue before the court is then with respect to the -- whether or not the penalties can be recovered in both of those instances. Now as to both of these issues the issue on penalties present in both cases and the issue with respect to the status of the trustee as a judgment creditor, neither of these issues have been directly before this Court before as far as counsel can discover. Now turning first to the argument on the question of penalties which applies as indicated to both cases, in our -- it is our contention that a straight, simple statutory interpretation of Section 57j and 67b of the Bankruptcy Act is possible, and that it gives a reasonable effect to both of those sections and prohibits the recovery of a tax penalty as part of a lien in both the Simonson case and in the Harris case. 57j is a fairly short provision and is set forth in petitioner's brief and in the Government's brief. It provides briefly as follows that debts owing to the United States or any state or any subdivision as a penalty or forfeiture shall not be allowed except for the amount of pecuniary loss sustained by the act, transaction or proceeding are to which the penalty or forfeiture arose with reasonable and actual costs occasioned thereby and such interests may have accrued in the amount of such loss according to law. There is nothing in the record and there has never been any contention in either of the Simonson case or the Harris case by the Government that any -- particular loss has been occasioned by reason of which latter part of this section would have any applicability. It is the contention in effect to the United States and once a tax lien arises, whether or not the notice of a tax lien is on file that the associated tax penalties merge with and in effect become a part of the tax, that consequently under Section 67b of the Bankruptcy Act, such a lien is preserved not only with respect to the principle of a tax but with respect to the penalties, and despite the express language which I have cited to the Court in Section 57j. Now tax penalties of course do not compensate for a loss sustained by the United States and of course none is claimed here under this special provision of the statute as indicated and it is once apparent the penalties are not allowable of course in the case of ordinary tax claims. It has long been decided since 1924 in New York versus Jersawit which is cited in our brief that where there is not a lien -- where there is not a lien supporting the tax that no penalty can be recovered in the face of Section 57j. The Government harbor -- asserts that in the case of a lien tax where there is an adequate lien prior to bankruptcy, that Section 67b in effect bars the bankruptcy court from it -- from examining this otherwise invalid component of a tax claim. Section 67b of the Bankruptcy Act is directed to the preservation of statutory liens including tax liens as against other provisions of the Bankruptcy Act applicable to other categories of liens and reads in part briefly as follows. The provisions of Section 60 of this Act to the contrary notwithstanding statutory liens or taxes and debts owing to the United States or to any state maybe valid against the trustee even though arising or perfected while debtor is insolvent and within four months prior to the filing of the petition in bankruptcy. Section 60 referred to as the court may recall, deals with preferences and also with various requirements as to recording in another that certain other types of liens may be perfected and preferences may not be recovered and so forth. Now, since -- even though than a perfected lien may exist to support a penalty of the time of adjudication in bankruptcy, whether by virtue of Section 67b or otherwise, it is our contention that the bankruptcy court is not free to disregard the imperfect substance of the obligation upon which the lien claim is based.
Earl Warren: We'll recess now. (Inaudible)
Donald A. Schmechel: Mr. Chief Justice, may it please the Court. I was in the midst of my summary argument with respect to the penalty issue which is common to both the Harris and the Simonson cases and had cited to the Court portions of the two statutes involved 57j and 67b, both of which are cited to be full in the briefs of the Government and the petitioner. A comparison of these two Sections 67b and 57j, in our opinion, discloses no congressionally intention that the two should be construed in conflict. The provisions of 67b as I previously indicated are framed primarily to accept certain otherwise belated liens including tax liens from the defeating operation of Section 60 and there's no apparent reason in the language of the statute itself why Section 67b need become disharmonious with the clear prohibition against the allowance of tax penalties which is contained in Section 57j. Even if there were, it is still a principal statutory construction as we have argued in our brief that specific terms covering a given subject matter will prevail over general language of another statute which might otherwise prove controlling. And as also been held that where a statute general in terms is a later enactment in a special statute, the special statute will control unless repealed by necessary implication, as indicated in the briefs both for the Government and petitioner, Section 57j the special statute which is here involved has existed substantially in its present form since the Bankruptcy Act of 1898 while 67b is a creation of the Chandler Act of 1938. In the absence of a clear indication to the contrary in the language of 67b there is no reason why this Court should find or hold that these two sections must be read in conflict. In addition and for an equally important reason, the bankruptcy court of course sits as a court of equity, and it has an affirmative duty to permit and duty to avoid any inequitable distribution of the bankrupt estate which is conflict with the clearly defined policy of the Act itself. That policy under Section 57j and many other pertinent provisions of the Bankruptcy Act is aimed to preserve the bank of the state from the imposition of penalties which would tend to further away its assets and to bring about any equitable distribution of the bankrupt estate among creditors holding just demands based upon adequate consideration. As a court of equity, a bankruptcy court also has power and obligation to look behind the bare fact of a lien claim and determine the provability or invalidity in bankruptcy of the indebtedness or claim which is in subject of the lien. Thus in Pepper versus Litton which is cited in our brief, the -- this Court held that the -- that a bankruptcy court to which a claim based on a judgment lien of a state court is presented for allowance has full authority to determine the validity and priority of the claim underlying the judgment. It would seem to us beyond argument that a court which is vested with jurisdiction to look behind a judgment of another court to question the probability or provability of an underlying claim is equally empowered to determine the provability of a debt secured as here by an ex parte statutory lien for taxes. Accordingly we think the claim for penalties in both the Simonson and the Harris case must file -- must fall with the underlying debt itself. The lien cannot in our opinion directly lift into an area of provability and indebtedness by origin in nature which is unprovable directly. A penalty no matter what it may be called by the Government in the various cases where this issue has come up still remains a penalty. To hold otherwise would inequitably punish general creditors as well as creditors who were entitled to various priorities under Section 64 of the Bankruptcy Act, creditors who have contributed a consideration directly or indirectly to the bankrupt estate by enforcing a punitive provision directed at the bankrupt, namely the punitive provisions of the penalty and in effect levying them upon or collecting them from the creditors and others who in good faith have dealt with the taxpayer. We think that the purpose and mandate of the Bankruptcy Act generally is and foremost to accomplish a fair and just apportionment of available assets among the victims of the bankrupt's insolvency. The application of 60 -- of 57j under these circumstances is in aid of that purpose and ought not to be circumvented in the absence of a clear direction in the language of the statute itself to the contrary. Neither the Bankruptcy Act itself nor the Internal Revenue Laws, we suggest, are should be construed or can be construed to give any such direction or light as would require that the penalty provisions of 57j be disregarded. Now in essence this the argument of petitioner with respect to the penalty issue come to both cases and as the Court will note from my brief this is basically the position which the -- which was taken both by the Fourth and Fifth Circuits unanimously on this issue and was taken in a very searching dissent by Judge Simons in the Commonwealth of Kentucky case which is cited on page 11 of our brief and I would like to read just a portion of Judge Simons' descent in the Commonwealth Kentucky case which was cited with approval by the Fifth Circuit in the Philips case. Judge Simons said that, and incidentally the Commonwealth of Kentucky case involved a state penalty rather than a federal one, Judge Simons said a lien is a charge upon property for the payment or discharge of a debt. It is therefore dependent upon the existence, the amount of, and the provability of the debt. The debt has been paid or otherwise expunged as per fraud or by set off, the lien is extinguished. An in court lien does not write into security until a debt comes into existence. In case of private liens it may be permissible. It may be impermissible to prove a debt because of the statute of frauds or the running of the statute of limitations. “I am unable” said Judge Simons to see how a lien however valid it may be under state law will breathe life into an unprovable debt in the face of Section 57j which deals expressly with debts owing to any state or subdivision. The two provisions of the Bankruptcy Act are not irreconcilable. The tax lien is preserved to the extent that it does not include a penalty, and the tax debt other than the amount of a penalty is provable to the extent the debt is not provable in bankruptcy the lien sees these for all practical purposes to exist. Judge Simons then went on to point out the lack of uniformity which you would have in the -- applicability the Bankruptcy Act throughout the country as different states had varying provisions with respect to this and if the law or otherwise and as he argued it should be. Now that is the -- is basically the position with respect to the penalty issue. We submit that the language of 57j and 67b can be read together and when so read together in a manner indicated, we suggest that it comes out with a result which is eminently equitable and fair to all of the parties in bankruptcy proceeding. I think the Court might also take note of the fact that -- and that this is peculiarity of problem in all bankruptcies as indicated in our petition and brief in -- as the Government admitted in its answering memorandum, some $2.5 million approximately and some thousands of cases are currently pending alone involving this penalty issue. And the suggested reading of the two Sections of the statute which we find harmonious would not really seriously affect the Government because it would leave them with respect to their lien for taxes as to entire principal of their taxes, it would leave undisturbed in a pre petition interest. The question of post petition interest which the Government still contends for in many cases as they did in these cases below is not yet before this Court, but we suggest that the effect of the reading which we have urged upon the Court, 57j and 67 is not to completely do away with any distinction in the Bankruptcy Act between lien claims and non lien claims. It leaves the lien claims, a valid and subsisting with respect to the principal of the taxes but it does give full effect as it should to the letter and spirit of 57j to look into that tax lien and to the extent the tax lien includes a penalty to knock out that penalty. Now I'd like to turn very briefly to part of the judicial history of this problem which I think has bearing and particularly upon the argument which the Government has made as to the probable intention of Congress and the amendments to the Chandler Act in 1952. This issue first arose appropriately enough in the Ninth Circuit from which we come with these cases with the decision in Knox-Powell-Stockton in 1939. That was the First Circuit Court decision with respect to this penalty issue and curiously enough and as a matter of history, in that case it was a California tax penalty which was involved and the United States Government at that time in that case was contending for the very position which petitioners here are contending for today. In that case it was of course to the advantage of the United States to try and upset the penalty which the State of California was trying to collect. They were unsuccessful in that decision in a fairly short decision insofar as it related to this penalty issue and the Knox-Powell-Stockton case in 1939 was the first case on this. The issue next came up in the Commonwealth of Kentucky case in 1943 in the Sixth Circuit to which I've already referred and that case which is a very brief page and a half decision again involving a state tax penalty rather that a federal tax penalty both the Knox-Powell-Stockton and the Commonwealth of Kentucky cases were state tax penalties, in a very brief page and a half decision, the Commonwealth of Kentucky case the majority of the two in effect cited in Section 57, they quoted very briefly from Knox-Powell-Stockton and then in effect recited the usual matter that with respect to giving due deference to the opinion of other Circuits in trying to maintain uniformity particularly in tax matters. The dissent by Justice Simons is much more in detail and as a much clearer in lengthier analysis of the problem actually. The only other decision which occurred prior to 1952 and as the Government points out, Section 57 was amended with respect to some minor matters the only other decision was In re Burch which was a 1948 District Court case in Kansas, which went the -- went against the Government in favor of petitioners, noting among other things that since Knox-Powell-Stockton had been decided, that the Chandler Act had been amended and accordingly they didn't think that the Knox-Powell-Stockton decision was binding and of course it was in another Circuit as well and in addition they apparently were impressed by the dissenting opinion of Judge Simons, so as of 1952 when Congress was making its minor amendments to the statute contrary to the suggestion made by the Government and its brief, the law if anything was at perhaps unclear. Knox-Powell-Stockton and Commonwealth of Kentucky with a divided decision in that second case had indicated only with respect to state taxes that penalties were recoverable, but on the other hand of the -- at least this one District Court case said -- indicated to the contrary. Now after 1952 a series of decisions came, first of all in the Tenth Circuit, the Grimland case which is cited in all of the briefs and later in the same Circuit, the Mighell case, both of which first in 1953 and 1959 followed the lead of Knox-Powell-Stockton, but again without any very lengthy discussions both in the Grimland case and in the Mighell case, the Tenth Circuit in effect more or less relied upon the earlier lead of Knox-Powell-Stockton and Commonwealth of Kentucky with very little discussion of the impact of this penalty problem and no reference in the Grimland case for example to the Gardner case which I'll refer to shortly. When the matter came up in 1959 in the Tenth Circuit in the Mighell case, and by that time of course the -- at least either the Phillips or the Harrington case in the Fifth and Fourth Circuit had been decided and the Court failed -- said, “We will not reconsider this issue because now it is apparent there is split between the courts which can only be resolved by this -- by the Supreme Court”, so actually they didn't reexamine the matter. In the Harrington and the Philips case however, the Harrington case in the Fourth Circuit and the Philips in the Fifth as I previously indicated, they basically took exactly the position which petitioners are urging here today which allows for an interpretation of both 57 and -- 57 and the other Sections of the statute and reconciles them and throws out the penalty. I think it might be of interest also to note that in connection with the Philips case and the Harrington case both of which were decided adversely to the Government, and no certiorari was sought. And in the Philips case for example the penalty which was involved in that case of some $2000 was even a penalty on a tax which had been paid by taxpayer some six months prior to the bankruptcy and the Government was in the position of coming in to assert and try to collect the penalty in the bankruptcy with respect to a tax which have been paid long before the bankruptcy proceeding. Then in addition after these decisions of the Harrington and Philips case, a number of District Court cases followed and actually at the present time District Court cases in the Third, Second and Eighth Circuit as cited in our briefs have sustained the position taken by petitioner and only one in affect or two, but one of those is in a Circuit where it was already decided to followed the position of the government. Now I mention this only because I think it brings out two points. First of all that it is not at all clear as the Government has suggested that when Congress amended the Section 57j in 1952 that it somehow must have taken recognition of the fact that the law was in the state and was apparently happy to leave it in that state with penalties being recoverable. The decisions were by no means consistent and they could just as well have concluded that the law in this area of bankruptcy as in others was a little bit in doubt and there was certainly opportunity that a judicial decision would straighten this out without the necessity of actual change in the statute itself. Of course subsequently Congress did amend the statute with respect to making penalties non-recoverable very specifically but that as the reports indicate that was -- was vetoed and accordingly did not change the law. I would like to close then very briefly with only two comments with respect to the Gardner case and the Goggin case, both of which had been cited by the Government. The Gardner case, we have cited in our brief as authority for the fact that was the unanimous decision with the Court speaking through Mr. Justice Douglas in 1946, in which the Court discussed in a railroad reorganization this whole issue as to whether or not penalties were recoverable and the -- and other issues and specifically the Court discusses and recognizes that the -- that the bankruptcy court in this case, a reorganization court can look into what -- what lies behind a tax lien, there was a tax lien of New Jersey, and among other things if they find it in includes penalties which are not permissible or not recoverable, to look into that. Now we concede as we do in our brief that the Gardner case is dicta because of the procedural manner in which in came up but nevertheless we suggest that it is very persuasive dicta and it deals and discusses in considerable detail and with specific mention of tax penalties, this very question with which we are concerned here today. Now the Government has made much in its brief, and in the other Courts of the Goggin case which followed some two years later by the very same court, and where the court speaking through Mr. Justice Burton has some general discussion about the status of lien claims with which we do not disagree, but I like to remind the Court only of this one additional point about the Goggin case. If the Gardner case was dicta, certainly the Goggin case was equally so for what that is worth because in a footnote on page 3 of 100 page -- of footnote 3 on page 124 of the decision, we find the following language, there is no issue here as to the amount of penalties or interest included in the collector's claim for taxes or as to the data -- date to which interest on such claim should be computed, in fact the amount of money involved -- excuse me Your Honor --
Speaker: (Inaudible)
Donald A. Schmechel: I'm reading from the Goggin case Your Honor.
Speaker: (Inaudible)
Donald A. Schmechel: G-O-G-G-I-N. In fact in the Goggin Case the total amount of money which the bankruptcy court had was less than the principle amount of the taxes which the Government -- which were being claimed so it really never was an issue as to whether or not any penalties were to be included or not. And the real issue of the Goggin case which is decided as they say by the same Court that decided the Gardner case, the real issue there was simply the one whether or not where the Government had taken possession as they have there a personal property prior to the bankruptcy proceeding being started whether or not under those circumstances with possession prior to bankruptcy whether the Government would prevail as against certain wage claimants under the priority Section of the statute. And the Court held we think quite properly on a very narrow issue that the rights were determined as of the time of the filing of bankruptcy and that as of that time the Government having possession of the personal property that notwithstanding the fact they later came in and allowed the trustee to sell it that they were not to be placed below the wage claimants under Section 64 of the Act.
Earl Warren: Mr. Granata.
Fred A. Granata: Mr. Chief Justice, may it please the Court. I am concerned here only with the one issue found in the Simonson case and that issue stated briefly is whether the language of Section 70c of the Bankruptcy Act gives the trustee in bankruptcy the status of a judgment creditor so that under Section 6323 of the Internal Revenue Code, he prevails to invalidate an unrecorded tax lien. I emphasize that although the tax lien arose prior to bankruptcy by virtue of a demand the notice of the lien was not recorded until subsequent to the bankrupt filing his involuntary petition or his voluntary petition. The Government has contended that this lien is valid against the trustee in bankruptcy because he is not one of the classes of persons mentioned in Section 6323 which in part reads that the lien imposed by Section 6321 shall not be valid against any mortgagee, pledgee, purchaser or judgment creditor until notice thereof has been filed. The trustee contends that Section 70c of the Bankruptcy Act in effect makes him a judgment creditor or gives him all the rights, remedies and powers of a judgment creditor. Section 70c reads in part that the trustee as to all property, whether or not coming into possession or control of the court upon which a creditor of the bankrupt could have obtained the lien by legal or equitable proceedings at the date of bankruptcy shall be deemed divested as of such date and with all the rights, remedies and powers of a creditor then holding a lien thereon by such proceedings, whether or not a creditor actually exists. The plain meaning of this section is that the trustee has the rights, remedies and powers of a judgment creditor. It could not be any more definitive in its language. The statute does not say that he is a judgment creditor, but it says that he has the rights, powers and remedies of a creditor holding a lien which is in the effect what a judgment creditor is. Logically then, the trustee should prevail over an unrecorded tax lien because he has such rights, in fact he has all the rights, remedies and powers of a judgment creditor. If he does not so prevail then we must conclude that he does not have all the rights, remedies and powers given to him by Section 70c. Now this Court has never precisely ruled on this question. It did skirt it in United States versus Gilbert Associates in 345 U.S. In that case this Court held that the language of the Internal Revenue Section 6323 meant judgment creditor only in the usual conventional sense of those terms, but we submit that this instant case is distinguishable from the Gilbert case. The Gilbert case was not deciding a bankruptcy question. It was not concerned with whether the trustee was a judgment creditor within the purview of Section 6323 of the Internal Revenue Code. It was deciding priorities between the lien of a city in New Hampshire whose tax was found by the state court in New Hampshire to be in the nature of a judgment and the Federal Government's unrecorded, but antecedent tax lien. Further, the Gilbert decision was predicated by a desire to procure uniformity of tax law among the states. At page 364 the Court said, the cardinal principle of Congress in its tax scheme is uniformity in as far as maybe. In this case, the Simonson case, there could be no danger of such non-uniformity because it involves the construction of federal law by federal courts. In the Gilbert case, there could possibly be construction of law by state courts which would interfere with the federal tax lien. Now all lower federal courts that have decided this precise question have ruled adversely to the trustee -- oh, there's one exception to that in I believe the Second Circuit but they later after the decision in the Gilbert case took a contrary position. However in the Simonson case Judge Hamley while concurring with the rest of the court expressed that he would have ruled otherwise had it been the case of first impression. In the In re Fidelity Tube Corporation decided by the Third Circuit in 1960, Judge Kalodner joined by Judge Hastie wrote a very exhaustive dissenting opinion in which he cited various cases concerning the interpretation of 70c. Now, when Congress passed Section 70c it made it abundantly clear what it intended. The report of the Senate Judiciary Committee which considered and eventually -- which considered the amendment to Bankruptcy Act is quoted in our brief at page 21. Briefly the intention was to protect general creditors of the bankrupt from secret liens, and to give all creditors rights they might have acquired under state law have there been no bankruptcy and rights from which they are debarred by bankruptcy. Once a petition in bankruptcy is filed the creditors may not seek to become judgment creditors. They can only pursue their rights if the Bankruptcy Law gives them. To rule that the Government's lien is inferior to the rights of the trustee would in no way hurt the Government because if they wish to be secured, then you'd only file their lien duly. The revenue sources could be protected in this manner. Now in its brief the Government has made reference to Section 67b of the Bankruptcy Act which in effect would allow perfection of a lien subsequent to bankruptcy where it arose prior to bankruptcy but was not perfected prior to bankruptcy. Now this statue and I quote in part reads, “Whereby such laws, such liens are required to be perfected and arise but are not perfected before bankruptcy they may nevertheless be valid if perfected within the time permitted by and in accordance with the requirements of such laws.” Now, first it is to be noted that the language here is permissive not mandatory since they may be nevertheless valid. Now this has been interpreted by authorities such as Collier on Bankruptcy to mean that where the applicable lien law would hold the statutory lien inferior to the rights of a creditor with a judicial lien which we contend are rights, powers, and remedies given to the trustee by 70c, then the judicial lien or the trustee shall prevail. In other words the trustee may invoke Section 70c to (Inaudible) a lien unperfected under the law if such lien is not valid against any other judgment creditor. Now the importance of the defeating of the lien is this that if there is no lien then Section 57j of the Bankruptcy Act which specifically prohibits payment of penalties to the United States comes into play. The Government has not contented that if it has a non-lien tax claim that it is entitled to penalty. Their contention is only that if the claim is lien that they are entitled to collect penalty from the bankrupt estate.
Earl Warren: Mr. Medalie.
Richard J. Medalie : Mr. Chief Justice, if it pleases the Court. The Government is in perfect agreement with the petitioners that Section 57j does operate to disallow unsecured claims of the United States or of any state for penalties. Wherein we disagree, of course, is in the petitioner's contention that 57j also operates to disallow secured claims. It is our contention that 57j has no such effect. Now, before going into the detailed reasons for support of the judgments below, I should just like to make one point with respect to petitioner's argument on the equities. We don't dispute petitioner's contention that a secured claim for tax penalties may create some harmful effect on unsecured creditors. Indeed Congress itself has indicated time and time again that it is concerned with the possible deleterious effect of allowing liens to come before unsecured creditors and therefore leaving the unsecured creditors without sufficient funds in the bankruptcy of estate to pay out their claims. But while it has recognized these injustices, it has made specific provision, and indeed it has amended the statute time and again, in order to deal with or in order to subordinate specific liens or invalidate specific liens, nullifying or void specific liens, but in none of these instances that has Congress seem fit to nullify or invalidate a federal or state tax lien. In fact quite the contrary, Congress in 67b has stated that state and federal tax liens shall be or may be invalidated as against the trustees. In the ‘may' is with respect to the particular laws which create these liens. In other words, if these liens are not perfected in accordance with these laws then of course the trustee prevails. If they are, so says Congress or at least the way we interpret 67b then the lien shall prevail as against the trustee. Now this, therefore, when we come to the question of whether a specific federal tax lien for penalties is valid or invalid in bankruptcy, the Government believes that that question cannot be decided on the equities. Now mind you, I'm not using the term in the sense that a bankruptcy court being a court of equity cannot operate to investigate the nature of the lien but it cannot determine it on the equities in the layman's sense. It must look to the specific provisions of the Bankruptcy Act and it must look to the particular powers of the trustee in the court in order to establish whether that lien is or is not valid. Now –
Speaker: (Inaudible)
Richard J. Medalie : We do not -- yes?
Speaker: (Inaudible)
Richard J. Medalie : Oh, it's constantly recurring.
Speaker: What has been the general practice (Inaudible) --
Richard J. Medalie : Well the -- as we've seen there is a considerable split of a --
Speaker: (Inaudible)
Richard J. Medalie : Yes, and district --
Speaker: (Inaudible)
Richard J. Medalie : That's right and the District Court said --
Speaker: (Inaudible)
Richard J. Medalie : I'm getting that just in a minute. For many years according to my expert here, referees have been granting penalties as a matter of course along with the tax liens and it's only been -- well, when this problem specifically arose before the particular courts. At some time, at one time, this began to be questioned and therefore we've now had the split of authority. I should point out as petitioners now that in the Goggin case itself in which the Government's lien was validated, that was a lien for penalties as well as taxes. Now we agree that that issue was not in the case, but the fact that the issue was not in the case indicated that both parties and indeed the referee, the District Court, the Court of Appeals as well as the Supreme Court, I imagine, didn't really consider that this was a crucial issue. The crucial issue was whether when we were in possession of the property, we should be subordinated. So it has been a matter of course and it has only been in recent years and I speak of recent years advisedly it does go back to the 1940s that this problem has come up --
Speaker: (Inaudible)
Richard J. Medalie : Oh the difference -- yes, in Section 57j says that that's for penalties of the United States or of any state shall not be allowed in bankruptcy. Our contention is that that refers to unsecured claims only without -- in other words a claim which does not have a lien attached to it. Let me give you an example. For example --
Speaker: (Inaudible)
Richard J. Medalie : Well, that's the effect, I -- what I -- but we don't say that you have to read this in. Our position is that this is the effect of 57j because if you will look at the context of 57j namely section 57, that deals exclusively with the proof and allowance of unsecured claims and of the unsecured portion of secured claims.
Speaker: (Inaudible)
Richard J. Medalie : Well, only in -- well, only insofar as 67b gives general validity to federal and tax -- federal and state tax liens. Now --
Speaker: (Inaudible)
Richard J. Medalie : No, it doesn't say anything about it. Perhaps an example may clarify this. In 270 --
Speaker: (Inaudible)
Richard J. Medalie : If --
Speaker: (Inaudible)
Richard J. Medalie : It's specifically silent.
Speaker: (Inaudible)
Richard J. Medalie : Yes.
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : That's precisely so and if you will allow me I shall try to explain why we come to this conclusion. Before doing so or as the preliminary in this argument, let me give you an example, an example that this Court itself said of and in fact decided in the case of Security Mortgage Company versus Powers which is at 278 U.S. and which we cite at footnote -- or in one of the footnotes in our brief at page 14. The question there was dealt with a lien for a contingent claim. Now there is no question that a contingent claim in bankruptcy is unprovable under Section 63d and because it is unprovable the Act states that under Section 57d, mind you another subsection of our General Section 57, under Section 57d, an unsecured claim for unsecured contingent claim shall not be allowed.N ow, the problem in this Security Mortgage Company case was that there was an un -- there was a claim, a contingent claim, but it was secured by a lien. In this Court found no problem with the case at all. They said, “There is such a distinction of status between secured and unsecured claims that while an unsecured contingent claim will be disallowable under Section 57d, a secured claim, a claim, a contingent claim secured by a lien is perfectly valid. It is perfectly collectible in bankruptcy and we say that applying this analogy to 257j which is again within the same structure, while an unsecured claim for penalties is quite disallowable under bankruptcy, a lien for those secured penalties must be considered valid and must be considered therefore collectible. And to carry our argument one step further and I think that this will really highlight the -- what we really are talking about, when we're discussing disallowance of claims as opposed to invalidity of liens, we do not disagree with petitioner that this Court or I should say a bankruptcy court has complete powers as a court of equity to look behind the lien, to inquire into the validity of the lien itself as well as the validity of the debt underlying the lien. They have full powers to do that. The peculiarity of this case is that petitioners do not question the validity, the validity of our lien, nor do they question the validity of our debt nor can they, because after all the debt is validated by the statute which creates the tax lean statute which is referred into 67b, a debt for penalties specifically validated. What petitioners says is that a valid lien for a valid debt must be disallowed if the debt underlying debts -- underlying debt is for penalties, but we submit that Pepper v. Litton cannot be used as a basis for doing that. It doesn't stand for this proposition. What in effect the petitioners want to do is strip away the lien itself and then disallow the un -- the claim underlying as an unsecured claim.
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : No question about it. Congress has ex --
Speaker: (Inaudible)
Richard J. Medalie : It said it in specific language --
Speaker: (Inaudible)
Richard J. Medalie : No -- that's right, no question about it.
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : Well --
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : Well that's right, they -- the --
Speaker: (Inaudible)
Richard J. Medalie : Well, the difference is that --
Speaker: (Inaudible)
Richard J. Medalie : The difference is the lien itself. I meant the fact of matter is that dating back to the even English practice the whole history of bankruptcy has been this fundamental distinction of status between secured claims on one hand and unsecured claims on the other.
William O. Douglas: I know but the security may not be sufficient to satisfy the claim so you may have to file under -- for deficiency --
Richard J. Medalie : Well --
William O. Douglas: -- for a deficiency that reflects (Inaudible) than I would think 57 (Inaudible) --
Richard J. Medalie : Oh yes. Well, the problem --
William O. Douglas: I don't think you can put it (Voice Overlap) --
Richard J. Medalie : Well, except for one thing, in very rare cases does the -- is the Government's lien unsatisfied by --
William O. Douglas: I am not talking about the Government's lien exclusively, I'm talking about 57j.
Richard J. Medalie : Well 57j only relates to Government debt -- penalties, state and federal penalties. It relates to nothing else. I mean for example, I think I can highlight this but I do make that a contractual --
William O. Douglas: But you'd have to bring 57j into effect.
Richard J. Medalie : For the -- for an unsecured claim, yes.
William O. Douglas: Oh for the unsecured or the part of a claim -- of a secured claim that wasn't satisfied by the --
Richard J. Medalie : Well that's -- well, it depends. Let's say the Government, sorry, the Government may come into bankruptcy and let's say its lien for $5000 which is $3000 taxes and $2000 penalties, that disproportion could be possible. But the bankrupt status is for -- the bankrupt estate involves only $4000. Now the Government if it comes in on a first prior or -- well, first of all, you would have administrative expenses paid and you'd have wage claims paid and then the Government will have its lien to be satisfied. Now it may only satisfy its lien perhaps there's only $2000 left of that estate. It may then get the $2000. And I suppose then the question is well now -- well it can't get no more you see because there is nothing left in the estate, so that's the extent of it. One of the peculiarities of course by Government lien is that in attaches to all property of a bankrupt, not only for a specific part of property.
Hugo L. Black: As a heavy priority --
Richard J. Medalie : It is a very heavy priority, that's right.
Hugo L. Black: And you want the same priority given to a penalty which Congress has indicated in some kind of an act it didn't enact.
Richard J. Medalie : The -- but Congress -- but our position is that although Congress has indicated that it does not like penalties, on the other hand it has said that a lien is a -- it should be considered a valid lien and --
Hugo L. Black: (Inaudible) a lien on something that is owing I guess.
Richard J. Medalie : Well, the -- certainly the penalties are owing--
Hugo L. Black: It's not owing so far as the bankrupt is concern than 57j is valid, is it?
Richard J. Medalie : Well --
Hugo L. Black: You can get it into a bankruptcy court out of that security. That is (Inaudible) --
Richard J. Medalie : Well --
Hugo L. Black: (Inaudible) the whole thing in (Inaudible)
Richard J. Medalie : Well perhaps I can try and explain it this way.
Hugo L. Black: Can I ask you when 57j was passed?
Richard J. Medalie : 57j was in the original Act of 1898.
Hugo L. Black: 1898.
Richard J. Medalie : That's right. I should men -- I should mention that in the original Act of 1898 there was 67d as well which said that that a lien, a valid and existing lien shall not be affected by the provisions of the Bankruptcy Act and the reason for this is very clear because --
Hugo L. Black: They're not affecting it as a lien. They're affecting it as a penalty (Inaudible) --
Richard J. Medalie : Well but the whole -- here we get into the question of Pepper v. Litton again I suppose.
Hugo L. Black: I wasn't thinking about Pepper and Litton.
Richard J. Medalie : No well -- alright, here we get into --
Hugo L. Black: (Inaudible) purpose to do and waive a collection of --
Richard J. Medalie : Right. Here we get into the problem at least what is -- what may have bankruptcy court do when it is faced with the lien for penalties and our fundamental position is that, while it may investigate the validity of the lien as such and the validity of the underlying debt and we make this distinction that a debt for penalty is a valid debt. All that -- 57j does not say that a debt for penalty shall be invalided. It says that that a debt for penalty shall be disallowed. In the very language there is a fundamental distinction between the concept of disallowance on the one hand and invalidation on the other. The term disallowance only relates to unsecured claims, you cannot --
Hugo L. Black: Why do you think Congress wanted to protect a bankrupt estate against the collection government liens (Inaudible), what was its reason?
Richard J. Medalie : In order to protect the unsecured creditors --
Hugo L. Black: Protect what?
Richard J. Medalie : The unsecured creditors so that could get a higher pro rata share of --
Hugo L. Black: Or any other creditor?
Richard J. Medalie : Or any other creditors, that's to be sure.
Hugo L. Black: It didn't want them subjected to -- the effect of -- they didn't (Inaudible) tried to invalidate penalties as a general (Inaudible) -- but they were entered as (Inaudible) protecting the estate of the bankrupt.
Richard J. Medalie : No question. Well let me get back to this example I gave at the beginning again. Congress made perfectly clear that a contingent claim shall not be allowed in bankruptcy just as it made absolutely clear that it was against penalties for unsecured claims for penalties yet this Court had no difficulty in saying that a lien for contingent claim, a lien on -- that secured a contingent claim was perfectly valid, despite the fact that Congress made specific mention in 57d that contingent claim shall not be allowable. This -- incidentally, this argument has continuously come up before this Court. For example in the City of Richmond versus Berg, the Government itself at that stage said that we have a first priority as far as taxes are concerned. At that time of the Governments tax on -- even and unsecured claim was first priority, therefore, since taxes are taxes it doesn't make any difference whether liens are first or unsecured claims are first, we should come first because of our priority. Yet, this Court had no difficulty in saying that a lien for a contingent rent claim was perfectly valid as against our priority, even though a contingent rent claim if it had not been secured by a lien would of course have been unprovable under 63d and disallowable under Section 57j.
Charles E. Whittaker: Mr. Medalie --
Potter Stewart: (Voice Overlap) -- disallowed that -- as a claim which is disallowed after discharge of bankrupt then, can that claim be sued on? It is disallowable under bankruptcy proceedings?
Richard J. Medalie : No, no -- no.
Potter Stewart: Is it dischargeable?
Richard J. Medalie : (Inaudible) -- it's discharged, except for a -- as Section 17 allows of the claims to continue. For example a Government's claims for taxes whether or not its -- it may realize it in bankruptcy that continues.
Potter Stewart: That survives bankruptcy.
Richard J. Medalie : That survives bankruptcy, as those liens survive bankruptcy if it cannot be realized. But a claim that is unprovable and disallowable, that is discharge in bankruptcy.
Speaker: (Inaudible)
Richard J. Medalie : No. It is -- so long -- well for example, I think perhaps you're thinking of a -- perhaps a preferential lien or judicial lien. Now, those liens are avoided in bankruptcy but the lien holders at that stage might -- may come in as unsecured creditors in order to try to get their claims realized as an unsecured creditor. In other words the fact that a bankruptcy court may disallow a lien -- I'm sorry, not just avoid the lien.
Potter Stewart: This reduces them then to general credit.
Richard J. Medalie : It reduces them to general credit.
Potter Stewart: If they are allowable claims in the bankruptcy --
Richard J. Medalie : Their allowable claims in the bankruptcy --
Potter Stewart: (Voice Overlap) --
Richard J. Medalie : But there are -- sir for example, a contingent claim is not allowable under any circumstances because under 63d it is unprovable.
Potter Stewart: But you say it is discharged by the (Inaudible)
Richard J. Medalie : It is discharge. Absolutely discharge --
Potter Stewart: A lawsuit could be brought on it --
Richard J. Medalie : No, if it is unsecured by a lien and that was precisely the distinction. That was the precisely the distinction that this Court made in the Powers case in 278 US. The reason why we have this distinction between disallowance of unsecured claims, its invalidation of liens is because a lien is a charge on the property which comes in to bankruptcy. For example, if a valid and preexisting lien exists -- if property which has a valid and preexisting lien passes to the trustee its virtually black letter law that it passes as they say (Inaudible) passes subject to the lien and this is why Section 67b of the Bankruptcy Act of 1898 which was incidentally the predecessor of 67b. This is why 67b stated that a valid lien shall not be affected by bankruptcy and indeed this is why the Ninth Circuit in the Knox-Powell case specifically stated that since an adjudication in bankruptcy does not affect the valid lien Section 57j cannot be operative to disallow -- disallow a lien for penalties and indeed this Court Goggin and I might point out which we stated did involve a lien for penalties although that was not an issue, this Court in Goggin did cite the Knox-Powell case with authority and did say that the Chandler Act amendments did nothing to harm, destroy or changed the congressional purpose of maintaining the vitality of claims which are secured by liens. Perhaps, I can highlight this in a slightly different way. We have to approach it from different directions to try to perhaps overcome as I see it a very perfectly normal idea in your mind that when Congress does say liens are -- penalties are invalid, they're invalid, but let me highlight it from this point of view. Let us contrast the secured creditor on the one hand and the unsecured creditor on the other. The procedures to which they must go before they may realize on their claim. Now it's clear that if an unsecured creditor wishes to even get a pro rata share of his claim, he must come into bankruptcy and file and prove his claim under Section 57. This is just a pro forma thing. This is what he must do. On the other hand, a secured creditor has a variety of choices. For example, if the secured creditor has the property, solely and properly in his possession, he can ignore the bankruptcy proceeding entirely. He can decline to file his claim and rely solely on his security. Thus for example, if the Government had possession of this property prior bankruptcy and indeed this was an example which this Court discussed in the Goggin case. If it have possession, it could have refused to enter bankruptcy and realized on its claim and no Section of the Bankruptcy Act including Section 57j could have harmed, could have influ -- could have affected the Government's claim whatsoever. The Government may have -- could have sold the property and realized out of that -- the proceeds of that sale, its claim, and its secured claim for penalties as well as taxes.
Charles E. Whittaker: Mr. Medalie, may I ask you in that connection if at that stage --
Richard J. Medalie : Yes.
Charles E. Whittaker: -- the trustee had paid the principle sum of the debt, leaving only the penalty, would not that have ended the secured claim?
Richard J. Medalie : No, because the secured claim would also have attached to the penalties of the tax -- under the bankrupts -- under the federal tax statute, under the income tax act, I think it's 63596371 or well we cite it anyway in our brief, a penalty is as integral a part of the lien as the tax which that lien secures. In other words, they are part and parcel of it.
Charles E. Whittaker: May I ask you --
Richard J. Medalie : Yes.
Charles E. Whittaker: -- I may be wrong about this. This has been my understanding that the lien is only a security for the debt.
Richard J. Medalie : That's right but the debt is also for penalties.
Charles E. Whittaker: And yes --
Richard J. Medalie : Yes.
Charles E. Whittaker: But in bankruptcy to be allowable the debt must be provable, isn't that so?
Richard J. Medalie : Yes if -- well --
Charles E. Whittaker: Now, (Inaudible) -- under 57j is that a prohibition against the provability of penalties?
Richard J. Medalie : No, no, no, no. No, no. We could prove our debt for penalties. The only thing that 57j says is that it's disallowable. In other words --
Charles E. Whittaker: Well -- of course that's what --
Richard J. Medalie : Well, yes --
Charles E. Whittaker: You mean not provable?
Richard J. Medalie : Yes it does. There is a distinction between provability and allowability. One may prove a claim but not allow it.
Charles E. Whittaker: Well, let me speak of provable debts and bankruptcies, we speak of those that maybe allowed, do we not?
Richard J. Medalie : Well not necessarily although I will grant you that for practical purposes I suppose it doesn't make any difference. But again, I think what's happening from our interchanges that again you are discussing an unsecured claim. Now it's whereas a lien which secures that claim maybe realized and what I'm trying to differentiate is the secured creditor in possession and the secured creditor out of possession because if we were in possession of our -- of the pro -- of property, not all of the property but of some of the property, we would not have had to come into bankruptcy. We could have sold that property. We could have received -- we could have realized our claim for penalties and taxes out of that property and the trustee could not have done a single thing about it outside the bankruptcy.
Charles E. Whittaker: That would be so and it would not (Inaudible) this debt in the bankruptcy --
Richard J. Medalie : That's -- well, that's right but my -- our position is that when a secured creditor comes into bankruptcy, he does not prove his debt. What he does is he files his secured claim or an intervening petition in order to preserve his secured status but he doesn't prove it in the sense that he proves an unsecured claim. He proves his lien if -- or he shows that this is a valid lien which has arisen and as we know, a tax lien arises on the assessment and is perfected on the demand for payment. So that he doesn't prove it has an unsecured creditor proves his unsecured claim. He comes into bankruptcy but the nature, the change in the proceeding does not or should not change the nature that lien. The status of the lien remains the same because the status depends not on possession of the property. The status depends on the lien on that property entirely, that is the decisive factor.
Hugo L. Black: Are you saying that the status of the claim remains the same but the status of the penalty doesn't. Somehow the penalty has changed the status.
Richard J. Medalie : Well sure, that's --
Speaker: (Inaudible)
Richard J. Medalie : No, that's -- it's not case of --
Hugo L. Black: How can you say it was so much ensured?
Richard J. Medalie : Yes.
Hugo L. Black: I'm just curious. I don't (Inaudible). That is the Government had possession of the property --
Richard J. Medalie : Yes.
Hugo L. Black: -- of the bankrupt.
Richard J. Medalie : Yes.
Hugo L. Black: -- they could sell that property and wouldn't have to make them count --
Richard J. Medalie : Oh--
Hugo L. Black: -- for the penalty that it -- they took out.
Richard J. Medalie : Well, I say it with assurance it must of course make an accounting for --
Hugo L. Black: (Inaudible)
Richard J. Medalie : -- for the surplus over --
Hugo L. Black: How can you be so sure that it be allowed to hold that penalty?
Richard J. Medalie : Well so --
Hugo L. Black: If the statute should be held to mean that the (Voice Overlap) --
Richard J. Medalie : Oh well, now --
Hugo L. Black: (Inaudible)
Richard J. Medalie : Well, I simply --
Hugo L. Black: (Inaudible)
Richard J. Medalie : Oh, well.
Hugo L. Black: Against bankruptcy.
Richard J. Medalie : Well, I suppose that that puts different slant on it I suppose. We don't disagree that if the statute itself had said that's for penalties secured as well as unsecured --
Hugo L. Black: But -- I'll tell you where you bother me. I have somehow been brought up to assume and that is you didn't find penalties (Inaudible) --
Richard J. Medalie : No, that's -- that's --
Hugo L. Black: That the law is not seeking and searching for penalty.
Richard J. Medalie : No. Oh, I agree with you.
Hugo L. Black: Here is the statute which says that you can't be allowed (Voice Overlap) --
Richard J. Medalie : That's right. But --
Hugo L. Black: And you want us to find by implication --
Richard J. Medalie : No.
Hugo L. Black: Well, you said you should --
Richard J. Medalie : Well, not (Voice Overlap) --
Hugo L. Black: What the language -- it says --
Richard J. Medalie : I think wher -- as I -- I think from the beginning to the end, we do approach this from two different points of view. I don't want you to find anything by implication. What we're trying to say is that --
Hugo L. Black: Point that to me in some language where I can see that Congress has said that so far as penalties are concerned they can be collected by the Government against bankrupt if they flied it so as we get a lien under an ordinary claim.
Richard J. Medalie : Well, the only thing I can point out to you is -- if we were in possession of this property, the trustee would have absolutely no power and I say this really unequivocally, the trustee would have absolutely no power to get -- to attempt to get to that portion of our lien claim for penalties.
Hugo L. Black: You mean you attempt to get (Inaudible) -- maybe the Court has decided against you but it's certainly a penalty.
Richard J. Medalie : Oh, he may attempt but he -- but what, of course what we're saying is you can try anything. The question is, does the law allow -- does the law allow you to do anything?
Hugo L. Black: I must say that I would think if you have a heart for the Government (Inaudible) in that position?
Richard J. Medalie : No, I don't think so. For example, the only powers that a trustee has was --
Hugo L. Black: Unless you are right on your interpretation of the --
Richard J. Medalie : Yes. The only --
Hugo L. Black: (Inaudible)
Richard J. Medalie : The only powers that the trustee has in bankruptcy are given with respect to liens in possession are in -- is in Section 23b. 23b first of all gives the trustee the right -- gives him the same rights as he bankrupt himself would've had. If the bankrupt may have brought a plenary suit against the Government, so to -- may the trustee. Also the trustee has certain powers under Sections 60, 67 and 70 which deal with liens specifically for example, partly with liens, partly with transfers, preferences etcetera to bring plenary suits in order to get a turnover or in order to have the Court, take the property and return it to the trustee and the bankruptcy court. The trustee has no right, however, to bring any other type of suit in order to get our -- if our lien is valid an indeed it is a valid lien at least for -- well, for analytical purposes outside the bankruptcy at least when we are in position, our lien is valid and our debt is valid because it's given a specific validity in the Income Tax Code of 19 --
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No.
Felix Frankfurter: (Inaudible)
Richard J. Medalie : That's -- well yes, that's right. They create --
Felix Frankfurter: (Inaudible) admit underlying before Government (Inaudible) --
Richard J. Medalie : No.
Felix Frankfurter: (Inaudible)
Richard J. Medalie : -- in other words the penalties really are a creation of the statute and the statute which creates those penalties and creates the lien for the penalties has specifically validated that. Now, to be sure in bankruptcy again we combine that 57j disallows as we say unsecured claims but a lien has that fundamental difference from an unsecured claim. For example, contrast -- consider if you will, what would happen if you were to hold that 57j were to knock out liens itself, a lien for penalties? What you would do I think in the first place would create a discordance between the secured creditor in possession and the secured creditor not in possession when the property is before the bankruptcy court. Well, maybe that's perfectly alright, but at least it'll create that discordance but more importantly and this was something that this Court expressed grave concern about in Goggin, more important, you would create or allow -- what I would term in unseemly race between the trustee and the lien holder in order to gain possession of the property and under those circumstances far from aiding the unsecured creditors, I should -- the very holding of 57j as a applicable -- applicable to secured claims would operate as a detriment to the unsecured creditors and I -- at this stage I conclude exactly what you said in Goggin in page 131. It would -- because it would compel a lien holder to retain his actual possession of the property in order to be sure of his priority in payment of this tax claims. Thus, the actual amount of property which would be available for general distribution would be proportionately diminished and this is precisely the -- what you said --
Hugo L. Black: (Inaudible) proportionately diminished unless the court took the position that the bankrupt estate was entitled not to have that penalty ii court with regard to where the property was.
Richard J. Medalie : Whether or not it's in possession or out of possession? Well, I suppose -- no question about it. If you were to interpret it -- if you were to interpret the Bankruptcy Act to say that regardless of where the property was the trustee would have the powers to attack the property for the penalty. I suppose this --
Hugo L. Black: If you construed -- what I'm saying is, if you construe this as meaning, direct unequivocal which you could say -- you'd raise the question (Voice Overlap) --
Richard J. Medalie : Yes.
Hugo L. Black: (Inaudible)
Richard J. Medalie : Yes.
Hugo L. Black: Is construed as meaning (Inaudible) on the part of Congress that in an estate, bankrupt estate not (Inaudible) burdened by the collection of a tax penalty. Then it wouldn't make any difference who had possession of the property, wouldn't it?
Richard J. Medalie : Well, I suppose -- I suppose if you read into the actual Act. However, I really --
Hugo L. Black: (Inaudible) -- I think --
Richard J. Medalie : Well I --
Hugo L. Black: -- with that question --
Richard J. Medalie : Well, I submit -- naturally if you read into the Act the intention of Congress to say that secured as well as unsecured claims maybe knocked down if they're penalties and that the trustee may have the power of knocking it down whether the property is in possession or out --
Hugo L. Black: Well, (Inaudible) differently --
Richard J. Medalie : Pardon?
Hugo L. Black: If you -- one might express that as being -- if you refused to read into the Act that is -- that it intended to exempt -- secured debt (Inaudible) rather than the other way.
Felix Frankfurter: (Inaudible)
Richard J. Medalie : There is --
Felix Frankfurter: (Inaudible)
Richard J. Medalie : Well, there is nothing, nothing in the legislative history --
Hugo L. Black: (Inaudible)
Richard J. Medalie : Well, alright. There's --
Felix Frankfurter: What --
Richard J. Medalie : What I'm talking --
Felix Frankfurter: (Inaudible)
Richard J. Medalie : That's a --
Felix Frankfurter: You don't need to (Inaudible) --
Richard J. Medalie : Well, it's a -- there is --
Hugo L. Black: Well, I think (Voice Overlap) --
Richard J. Medalie : -- not as -- well, there's nothing -- there's not a single sentence in the Bankruptcy Act which indicates, I suppose either for or against.
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No, no and --
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No (Inaudible)
Felix Frankfurter: -- to infuse--
Richard J. Medalie : Right --
Felix Frankfurter: -- (Inaudible)
Richard J. Medalie : I think -- precise -- what we have to do is approach this problem from I suppose a historical from -- from a historical perspective --
Hugo L. Black: We don't of course eliminate what Congress said --
Richard J. Medalie : No, we don't eliminate what Congress said but -- but you see, the thing is facts. My feeling is that facts are entirely neutral that one must give a slam to this facts if -- depending on what you read into it. I mean, what Congress said is not that it is for secured claims. Indeed, if you look at the --
Hugo L. Black: It doesn't say it's not.
Richard J. Medalie : No, that's right, but I mean -- I think you --
Hugo L. Black: Its broad enough to include them, isn't it?
Richard J. Medalie : If we are dealing with claim and natural meaning, if we go on that ground itself, I think that --
Hugo L. Black: Sometimes I have an inclination to do that.
Richard J. Medalie : (Inaudible) --
Hugo L. Black: (Inaudible)
Richard J. Medalie : Well supposing --
Hugo L. Black: (Inaudible)
Richard J. Medalie : Well, alright, supposing I -- thank you -- thank you Mr. Justice Black, on your word and say let's approach this from a plain and natural meaning.
Potter Stewart: That didn't get you very far--
Richard J. Medalie : No.
Potter Stewart: -- because you can say lien means lien. On the other hand, you'd say penalty means penalty.
Richard J. Medalie : That's right and my -- our opposition is that when you look at the context, first of all when you look at the context, the 57j itself, there is not a single – the whole context of Section 57 and Chapter 6 and which Chapter 57 deals generally almost exclusively with unsecured claims and the unsecured portion of secured claims. It has nothing to do with secured claims. In fact, historically the concept of provability, the concept of allowability only related to unsecured claims because --
Speaker: (Inaudible)
Richard J. Medalie : No, it was proof in allowance of claim is because --
Speaker: (Inaudible)
Richard J. Medalie : No. I mean, I should think that --
Speaker: There'd be no difference between me and my brother (Inaudible) --
Richard J. Medalie : I --
Speaker: (Inaudible) --
Richard J. Medalie : But he -- if you go back to --
Speaker: There might be a difference on how much emphasis we put on the little language --
Richard J. Medalie : That's right. The proof and allowance of --
Speaker: (Inaudible)
Richard J. Medalie : The proof and allowance of claims however has always historically meant a proof and allowance of unsecured claims. When you discuss the concept of liens, you discuss --
Speaker: (Inaudible)
Richard J. Medalie : Well --
Speaker: -- is that to be the same?
Richard J. Medalie : Oh, I can document it in this way. For example, originally secured creditors where never even considered -- the Legislators never considered it, concerned themselves with --
Speaker: (Inaudible)
Richard J. Medalie : 1803.
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : Yes. I could establish that whatever -- first of all, the original act did have -- didn't -- said nothing about secured claims, whatsoever. The secured creditor was left to his common law remedies of it because this was the natural thing. A lien or property was a charge. He had his lien regardless of what happened to it. So that --
Speaker: (Inaudible)
Richard J. Medalie : It wasn't the proper --
Speaker: (Inaudible)
Richard J. Medalie : That's right. The bankrupt -- the bankruptcy estate, it was never a concerned -- it was never considered relating to liens. The liens were to be realized first and then we dealt with the bankrupt estate. And therefore, the concept of disallowance or allowance only concerned those claims which were relating to the bankrupt's estate, but because a lien was a charge upon property, because it -- if it was valid before, it was -- it had to be valid after even though it passed through the hands of the trustee. That was the end of it. Indeed, a similar concept was given by this Court in the Safer case dealing with interest when the Government had its original priority on taxes, this Court in the Safer case said that the priority for taxes was not a claim on the estate whatsoever. That had to be realized. That had to be paid off before the claims of the bankrupt estate were to be allowed or disallowed and if you turn to the pages of Safer, this was made perfectly clear by this Court. Now --
Speaker: (Inaudible)
Richard J. Medalie : No, this never --
Speaker: (Inaudible)
Richard J. Medalie : No. 57J -- there are -- no, these early acts only dealt with unsecured claims and it was only at 1898 that --
Speaker: (Inaudible)
Richard J. Medalie : It was the -- no, 1898 was the first Bankruptcy Act in which 57J found --
Speaker: (Inaudible)
Richard J. Medalie : No. 1803, 1843, 1874, we point out, at page 20 of our brief, we point out that in the early Acts, Congress did indicate that secured claims should be preserved and protected and the rights denies (Inaudible) should not be impaired. Now that doesn't necessarily help our argument one way or the other, but it does indicate that the Congress has always been aware of this --
Speaker: (Inaudible)
Richard J. Medalie : Not at all, not at all. That's quite true. Our fundamental position -- as far as this portion of the argument, I think that there's no point in prolonging this discussion, because I think the issue, the line has been drawn. The Government contends that there is fundamental distinction of status between secured and unsecured claims, that if 57J were to apply to secure claims, there would be created this discordance between the lien holder in possession and out of possession and that the whole structure of the act and all concept of proof and allowance of claims clearly indicates that 57J being part of a section dealing only with unsecured claims --
Speaker: (Inaudible)
Richard J. Medalie : Yes, indeed. Yes, they – it goes all the way to the N.
Speaker: All the way to the N.
Richard J. Medalie : Yes, A to N.
Speaker: (Inaudible)
Richard J. Medalie : Well --
Speaker: Isn't that almost --
Richard J. Medalie : Yes.
Speaker: (Inaudible) --
Richard J. Medalie : That's right, that's right. For example, I'll quote in -- there are about three or four that deal with secured claims, but only to the extent of the unsecured portions of those claims. In other words, they deal with secured creditors. They say that secured creditors may come in and they may file their claims and so on. And the priority is temporarily allowed, for example, 57E participate in the proceedings of creditors leading so prior to determination, but shall be temporarily allowed for such sums only as to the Courts which the Court seemed to be owing over and above the value of the securities and priorities.
Speaker: (Inaudible)
Richard J. Medalie : That's right.
Speaker: (Inaudible)
Richard J. Medalie : That's right. No, it's -- 57 does mention secured creditors.
Speaker: (Inaudible)
Richard J. Medalie : But it mentions only in terms of their -- the unsecured portion of their claims. When they come in, they may file their claim, their secured claim and realize that nevertheless come in --
Speaker: (Inaudible)
Richard J. Medalie : It would be in a disadvantage --
Speaker: (Inaudible)
Richard J. Medalie : That's right. There's no -- then it would be no advantage seems to come in at all. You may as well just keep the security and try to realize as much as possible out of that security. The reason why a secured -- really, the reason why a secured creditors comes in the bankruptcy at all is because when the trustee sells the property, he generally can get more money for it than when the secured creditor sells it and again, in Goggin you pointed this out and this --
Charles E. Whittaker: (Inaudible) now before he can get possession of the property to file a petition for reclamation in the bankruptcy court and get possession of it before he can sell it?
Richard J. Medalie : No, if he has possession already or what I meant is -- if he has possession right, he doesn't have to file a petition at all. It's just -- when the -- are you talking about the trustee or the secured creditor?
Charles E. Whittaker: The trustee.
Richard J. Medalie : Oh, yes. He must get permission to sell the property and then --
Charles E. Whittaker: No, the secured creditor too would have (Inaudible) --
Richard J. Medalie : Oh, yes. Well, if he were out of possession, what the -- the usual manners that he comes in, the Bankruptcy court allows the trustee to realize the proceeds and then indeed 57, g or h I'm not sure which, deals with the sale by the trustee of these proceeds in parceling out of the liens and then the unsecured claims depending on how much proceeds come to the bankruptcy court. That's quite true. Now even if Section 57J were to be held to apply to -- not to apply to secured creditors. The trustee in Simonson makes one additional argument, namely in Simonson it should be pointed out, the Government -- the notice of the Government's lien was filed after bankruptcy and the trustee then makes the contention that therefore that federal tax lien should be disallowed as to him because the notice was not filed. Now, our argument is two-fold. First of all, we say that Section 67b again of this statute, only the other provision of 67b is a complete answer. 67b --
Speaker: B?
Richard J. Medalie : Yes, is a complete answer to this problem because 67b says that even if a federal or state tax lien arises but is not perfected before bankruptcy, that lien nevertheless maybe valid as against the trustee if perfected in accordance with the statute, which creates it. Now, what is the statute that creates it? What does it do? First of all, it says that the lien arises when the assessment is made. That's Section 63, 21 and 63, 22 of the Internal Revenue Code. The lien arises when assessment is made --
Speaker: (Inaudible)
Richard J. Medalie : Well, that's true. It doesn't say, if we read it, you will see that in the first sentence of 67b, it says, valid as against the trustee with respect to federal and state tax liens and as you go to the second sentence, it says it shall be valid and we read elliptically as against the trustee. Now, Collier in his analysis of this does discuss the Section and he says, “Well, it doesn't necessarily mean as against the trustee,” but then goes to say, “Well, grammatically speaking, it is elliptical and I suppose you could read it that way.” The Government contends that this does mean as against the trustee. That in fact it has to -- and in one second, I'll show why. So, that the lien therefore arises at assessment and is perfected upon demand for payment. Thereafter notice of the lien maybe filed and once perfected that lien relates back to the time of assessment. This is the normal law on tax liens. Now, what happened in the present case? The lean arose at assessment about a full month a half before bankruptcy and the demand was made indeed 10 days thereafter, so the notice and demand were made prior to bankruptcy. Then the notice, the filing of the notice of our lien was made after bankruptcy but this is entirely within the scope of the lien provision because then our argument goes -- the lien was perfected in accordance with the statute which created it. It related back as of the time of assessment which was a month and a half prior to bankruptcy and therefore it has to be considered as against the trustee whose rights only arise at the time the petition for bankruptcy is filed.
Hugo L. Black: Was anything involved in this one except the penalty?
Richard J. Medalie : No. Nothing is involved and indeed -- if you decide against the Government in the first case, you needn't get to this -- you needn't get to this argument. If you decide for the Government on this case, you must get to this second issue and decide this issue either for or against the Government and it only relates to the penalty in Simonson because if -- as you'll note at record, page 7 of Simonson, the trustee paid the amount of the taxes and the only -- the lien for penalties is contention here.
Charles E. Whittaker: Mr. Medalie --
Richard J. Medalie : Yes.
Charles E. Whittaker: (Inaudible)
Richard J. Medalie : As of the time -- as of the time of assessment. It's been held and you'll notice in our brief, we cite the (Inaudible) case and indeed in the In re Fidelity Tube case which was a Third Circuit case, there's a discussion of this and it again, virtually black letter law that when a lien is perfected it relates back as of the time of the assessment so that -- as against the rights of the trustee, we maintain that under 67b itself we should take precedence. Any other holding would create a very peculiar situation, because what it would do would be to grant a state tax lien which may in fact be junior to the Government's federal tax lien, but nevertheless give it priority over the Government, not only over the Government's lien, but knock out the Government's lien and allow all the state tax liens to be realized on first prior to the trustees' rights. If the statutes which create the state tax liens allow perfection prior -- subsequent to bankruptcy. Clearly it would seem that Congress did not have this intention in mind. It didn't have the intention of allowing the state tax lien to come over the federal tax lien. Now our second argument deals with the particular -- the contention of the petitioner that under Section 6 -- under Section 70c, the judgment creditor is given the rights of a -- the trustees are given the rights of a judgment creditor for purposes of the tax lien statute, and since notice is filed subsequent to bankruptcy, he should take priority because the tax lien statute says that, our tax lien is not valid as against a purchaser, mortgagee, pledgee or judgment creditor if notice has not been filed. We believe that this Court's opinion in Gilbert Associates really the complete answer to this problem. In other words, there it said that a judgment creditor must be one in the usual conventional sense namely having a judgment of a Court of record before it may realize this. And every Court of Appeals which has followed Gilbert Associates -- which has considered Gilbert Associates in relationship to the bankruptcy have said that although Section 70c gives the judgment, gives the trustee the rights of hypothetical judicial lien creditor, he's not a judgment creditor for purposes of this statute.
Potter Stewart: The Gilbert case didn't get involve at all (Inaudible) --
Richard J. Medalie : No, that's right.
Potter Stewart: (Inaudible) of this Section 7 --
Richard J. Medalie : That's right, all the cases which have followed Gilbert and in relationship to trustees as -- have said so. Now we agree that Gilbert only related the state tax liens and the reasons why the Gilbert case was decided the way it was may very well be said to relate to state liens and the requirement of uniformity. And we also agree that when it comes to the concepts of uniformity between the Bankruptcy Act and the tax lien statute, there is no virtually no problem. So that on one hand, you could say that Gilbert Associates under those circumstances would not necessarily apply. But we think that the perfect answer, in face a conclusive proof that Gilbert Associates must apply, even though it is a federal statute, was given in -- is given in the legislative of history of the federal tax lien statute itself. Because when -- in the 1954 Code, when Congress passed the -- when the House Version of Code was pending, the House had a subsection C which stated that the tax lien statute shall not be extended to a judgment creditor who does not have a valid judgment obtained in the court of record. And the House Committee in its report, we cite these but we don't quote it and that's why I would like to quote some of this language now, because we feel that it highlights really the intention of Congress there. That the House Committee in its report explained that the subsection was --
Hugo L. Black: (Inaudible) the intention of Congress.
Richard J. Medalie : Well, here -- well, one should -- if the Congress has made its intention clear.
Hugo L. Black: Well, you find the facts where?
Richard J. Medalie : Well, that's right. I mean one -- when Congress directs itself to a particular problem, one may --
Speaker: (Inaudible)
Richard J. Medalie : Pardon? Did it direct itself to the --
Speaker: (Inaudible)
Richard J. Medalie : In the tax act statute, it had reference to the Bankruptcy Act when it was discussing the survivability of the lien. I'm just about certain. It said that protection of the statute to categorize a person is now denied protection under existing court decisions, should not -- that the lien should not be extended there and presumably, this had to mean to Gilbert Associates. But it went on to make it smoothly clear, and this is the language which we feel is very crucial here, it went on to make clear of that, particular persons shall not be treated as judgment creditors because state or federal law, artificially provides or concedes such person's rights or privileges of judgment creditors or even designates them as such when they have not actually obtained a judgment in the conventional sense. Now, when that provision went to the Senate, the Senate did knock it out and the question is why did they knock it out? They knocked it out as unnecessary because they said that the rules which it sets up with respect to tax liens had “already been developed under existing law by judicial construction.” And then went on to say as under existing law, a person who is in fact, a mortgagee or pledgee, purchaser our judgment creditor will be entitled as such for the protection of the statute. Finally in the conference, the House agreed to the deletion of subsection C. It's own subsection C only after satisfying itself that in any event, the existing law as to judicial liens under the statute and I presume this had to mean to Gilbert Associates case, would continue in effect by the passage of the present subsection C.
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No. But Congress read into the tax lien statute the general language of Gilbert Associates to mean that even though the state law -- even though federal law were to give the trustee or to give anyone the rights and remedies of a judicial lien or a judgment creditor, nevertheless that was not sufficient under 6323 because the trustee has not received a judgment of a court of record. Now, it is conceivable that --
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No. It talked about state or federal law which artificially provides or concedes such persons' rights. It didn't refer to bankruptcy law at such --
Speaker: (Inaudible)
Richard J. Medalie : But the crucial thing -- but I'd say that, it couldn't have been clearer by implication that it had to be -- because there's only one statute in all the federal enactments that do create this type of situation by which a person who is not a judgment creditor has nevertheless given the powers and rights of the judgment creditor. They had to refer to this and when they refer to existing court decision and incidentally, when I say Gilbert Associates --
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No.
Felix Frankfurter: (Inaudible)
Richard J. Medalie : No, that's right, but I should point that prior to the 1954 Code there were a number of Court of Appeals decisions which rightly or wrongly had related Gilbert Associates to the Bankruptcy Act and those two were the existing judicial construction.
Speaker: (Inaudible)
Richard J. Medalie : Well, it maybe. All I request in this Court is that if you do read the language of the Internal Revenue Code of 1954, I think that the language is perfectly clear that this is precisely with Congress. At any rate, because as we feel that liens are valid and timely, the judgments below should be affirmed.
Potter Stewart: Mr. Medalie before you --
Richard J. Medalie : Yes.
Potter Stewart: -- sit down, may I ask you a question?
Richard J. Medalie : Yes.
Potter Stewart: I understood you to say that if the Court should decide against the government on the first point that has been argued --
Richard J. Medalie : Yes.
Potter Stewart: -- then the Court would not reach the second point, is that right?
Richard J. Medalie : It wouldn't have to, no.
Potter Stewart: No. Am I right in thinking that there's a decision on the Third Circuit in which a petition for certiorari is pending here or am I mistaken about that, involving the second point? Well, we should know certainly (Voice Overlap) --
Richard J. Medalie : It was denied.
Potter Stewart: It was denied?
Speaker: (Inaudible)
Potter Stewart: I -- if you don't know, never mind.
Richard J. Medalie : The other side as he said had petitioned and it was denied. That was previous I think to this --
Potter Stewart: And that it get involved the second point?
Richard J. Medalie : That did involve the second point, but that was denied.
Potter Stewart: Alright, thank you.
Earl Warren: Mr. Schmechel.
Donald A. Schmechel: Mr. Chief Justice, if it please the Court. I'm not surprised if there is confusion in the bankruptcy laws and the law of no regulation apparently and there are many reasons for this and I -- in all the sincerity and the seriousness would say that there -- two of the reasons for these areas of doubt, not only referred to us of penalty but other areas the bankruptcy law as well relate to this fact that over a long period of years in the courts of this land including the Supreme Court, the position of the Government with respect to taxes insofar as they relate to bankruptcy has been generally within this context. They started out basically in insisting that regardless of the absence of specific language in the Bankruptcy Act at some point or not that the general language of the Internal Revenue Codes superseded are superior to the Bankruptcy Act. And secondly, throughout their efforts to collect is a practical matter in the Bankruptcy Actions over the years, the one thread that runs through there more than anything else is that the Government as in other tax cases has been very considerably influenced by which position will bring it most revenue and I fully recognize does this Court a necessity is the revenue necessities to the Government. But this is the reason in part, one of the reasons why it has been difficult to resolve that in early stage, some of these problems of the Bankruptcy Act. And I again remind the Court that in 1939 on the Knox-Powell-Stockton case came before the Ninth Circuit, the First Circuit court opinion on this matter of penalty that although these provisions, 57J had been in the bankruptcy statute since 1898, some 41 years the initial position of the Government in that case was to say the State of California cannot recover a tax penalty because it's precluded from doing so under 57J. And the next two cases that came up as I indicated were actually state court cases where the Government admittedly did -- take the other position this Court's following Knox-Powell-Stockton. Now I cited to the Court the Gardner case, but I did not read the language from it and I want to come back to that because I think it may answer some of the questions that this Court has had. Reading and its cited in our brief on page 14, reading from page 580 of the Gardner case and the decision by Mr. Justice Douglas. This was a case incidentally where New Jersey was asserting under its statutes a generalized tax lien against all the properties of the bankrupt railroad including not only principle of taxes and interest, but penalties as well in very substantial amounts and granted it is dicta and nevertheless here's what the Court said and I am quoting, “The reorganization court may also adjudicate questions pertaining to the amount of a tax claim secured by a lien.” We're not crossing the forbidden line marked by Arkansas Corporation Commission versus Thompson, 313 US 132. There is for example the question whether the amount of the claim is topping now by the security tax claim, 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 57J of the Bankruptcy Act provides that debts owing estate as a penalty or forfeiture shall not be allowed and then the Court in its footnote cites Section 57J of the Bankruptcy Act as is it today in full. Now granted that's dicta, nevertheless it comes precisely to the point that is before the Court here today. And it applies not only in the reorganization proceedings where if anything the powers of the Court are broader or in addition to what they are in the bankruptcy, but it comes right down to an ordinary bankruptcy proceedings as well. The machinery of the Bankruptcy Act and this was urged to the Court of the Gardner case is the machinery for the handling of secured as well as unsecured claims. Despite the language that the Government has used in this argument, in a secured claim the Government does come in, it files the claim, it asks for an order which whether you use the word allowance or denying or granting it's claim in part, the Court goes behind that claim to determine whether the amount of the tax claim is correct with reference to its principal, with reference to its interest and we say under 57J and along with other things love to see whether any part of the lien, the tax lien is for penalties and if so, disregard that part of it, but give full respect and accord to the lien of the taxes for the principal. Now, I submit that the language in the Gardner case is directly in point with the problem that we have here. That it applies not only in the reorganization, but it applies in the ordinary bankruptcy as well and if the Goggin case which followed it -- follows it, it seems to me is explainable as I indicated as on a very narrow point that there they were concerned with the priorities under Section 64 of the Act where expenses of administration and secondary wage claimants, Congress has given a priority even over tax lien to some extent, but said that with respect to tax liens on personal property that they shall not take precedence over labor of claims under 64, unless accompanied by possession. In the Goggin case, the Government had possessions of the personal property and under a valid tax lien prior to the bankruptcy, so really that decision does no more than to say yes under those circumstances, there rights must be treated as the date of bankruptcy, they had a possession, they had a lien on the personal property, therefore, they are not subordinated to the claims of labor under Section 64. The Goggin case in effect does in our opinion, no more than that. Now, the Government in its brief and its argument has made the fair amount out of this matter of reading of Section 57J in its context. The suggestion is because the general context of just that area of the Bankruptcy Act has to do with proof and allowability of claims and they argue, this means only unsecured claims that therefore it can have no effect in -- with reference to Section 67. Now that argument is good for the Government in that respect seems to me we are open to raise the same argument with respect to Section 67 as I tried to indicate before. When you get the 67b, the thing which the section starts out with that it is primary concerned with is, "The provisions of Section 60 of this Act to the contrary notwithstanding statutory liens" and it goes on in various ways. This is the context of this provision of 67b, if the Court please, following the attack of the Government in analyzing 57J, it is to try and protect the tax, secured tax claimant and other lien claimants against certain hazards which it would be exposed to under Section 60 which deals -- Section 60 dealing with preferences and fraudulent transfers and various things of that kind. Now, it seems to me that if that is to be the test of how you analyze these two sections of the statute, well then we're just as entitled as the Government if not more so to that benefit, but I would say that it is more important for this Court in analyzing both Section 67 and 57J to look to the general purpose and tenor of the Bankruptcy Act in what it's seeking to accomplish and certainly if you look to the purpose and tenor of the Bankruptcy Act and the decisions under it, then I suggest indeed that this Court in interpreting any one single section of a very complex related act to that kind should come out with the result which a result petitioners urge here which gives effect to both sections and is consistent with the general purposes of the Act and consistent with the thought that penalties are peculiarly something which should not be recovered in bankruptcy. Now, the Government has also made considerable contention about this matter of possession. Of course it's not an unusual thing in the law for the Courts to find that someone in possession property may find the rights are little greater or little easier to defend and when he doesn't have possession. I will say this that after all possession even as to non-secured creditor with the Bankruptcy Act is an important thing. An insolvent can pay even a general creditor and accept to the extent that it may be a preference within a four-month period under the statute or fraudulent transfer or something and he will be entitled to keep his money. And in the same way a secured creditor whether it's a secured creditor with the lien for taxes or otherwise if he gets payment, whether it's by attaching and getting property, whether its money or whatever it is of course, the fact that possession has certain consequences. And if the property in case for example is not worth any more than the principal of these taxes, you wouldn't even get to the issue of penalty. I'm not prepared to answer completely what the effect would be under all circumstances and the Court raised this question as to whether if a person had possession of property that this would preclude a reorganization trustee or an ordinary bankruptcy trustee from bringing the government or any other lien claimant into court to determine the extent or circumstances if any under which it might be necessary for -- to reclaim possession. Of course, in many cases the amount of the tax might be such that it exceeds the value of the property that the issue wouldn't be before it. But in connection with reorganizations which are basically governed by the same law here as your ordinary bankruptcy and ours is a corporate reorganization of the utility, I want to remind the Court that if the various state and the local authorities, the taxing authorities pursuant to liens which might include penalties or the Federal Government itself proceed to take possession of property, in particular, if there's a real debate as to the value of their property being in access of the amount of the taxes, obviously, there could be a frustration of the purposes of the reorganization statutes. And I myself think that there may be a question as to whether or not a reorganization trustee, for example, or bankruptcy trustee might bring them before the Court and under certain circumstances, the property might be turned in. Of course, frequently the Government as they've indicated voluntarily to a property and other lien claimants too because there're advantages to them, they can -- it can be sold more readily in the machinery of the bankruptcy court taking clear of liens and they may realize more for their money. So frequently, the problem resolves itself at a practical level. Now, the Court asked a question with regard to the -- whether or not this taxes generally and the penalties are dischargeable in bankruptcy. Now we have raised this question in our brief, and I'd like to comment a little further on it also. Now, keep in mind that the penalty is the penalty against the taxpayer, because he doesn't filed his return on time or paid his tax on time or something else. The Government whether its state or federal has not lost anything in the normal sense if they get their tax plus interest to the date of bankruptcy. And the person who has defaulted is the taxpayer, but if you allow the penalty to be collected as part of a lien in bankruptcy, why then of course you're penalizing the labor claimants and the cost of administration under some circumstances and in most cases, the general creditors. Now, actually the Government does try to collect the penalty tax under Section 17 of the Bankruptcy Act. The language just says that taxes are not dischargeable in bankruptcy without defining what is included in taxes. So there's no question for that as to the principal of taxes that the Government can and does try to collect from the bankrupt even after his discharge. Now in the U.S. versus Michelle, a Tenth -- the Tenth Circuit case, 273 F.2d 682 which is cited in our brief and which is the second decision of the Tenth Circuit in which they decided on this penalty issue, this was actually an effort on the part of the Government to collect that tax penalty after bankruptcy, after discharge from the bankrupt. Now this is the only case of that kind, but I suggest we can well assume that the Government will in other Circuits as far as possible, or at least until there's a decision by this Court will attempt to collect tax penalties from the bankrupt after a discharge. And we have no objection to that. We say that that's where they should try to collect it rather than seeking to collect it in the bankruptcy proceeding where it necessarily penalizes the other creditors and corrupts in many ways the administration of the Bankruptcy Act itself. Take for example in the reorganization such as the reorganization in the Harris case of a small telephone company and keep in mind as the record shows that before bankruptcy, the Government had an offer and compromise and was apparently giving consideration to accepting 57,000 of principle of the taxes and (Inaudible) end of it. What happens in the reorganization is exactly this? If the reorganization is successful to the extent it's successful and the Government begins to see that the chances are so good and after all they should ride along, and they should collect not only the principal of their taxes, but the interest to the date of bankruptcy and the penalties that they're supported by a lien and they're also as they did in this case, seeking to recover post petition interest as well. This was denied under a recent Ninth Circuit decision and the Harrington case also denied it to them in another Circuit so there are now two Circuit Court decisions saying they can't get post petition interest in a reorganization or bankruptcy even though its supported by a lien, but that issue has not been before this Court for settled. And this is merely illustration again of my point that the one consistent thread through all this is that indeed bankruptcy cases at the practical level, in the District Court and Circuit Court, the government's basic position; first with reference to the interest on non lien tax claims which they finally lost in the Safer case, then with respect to penalties, next with respect to post petition interest on lien claims and so it go, the one thread running through all of it is that the Government consistently tries to take the position which will net it the most revenue. And this unfortunately has not easy before the trustees or the bankruptcy courts to resolve these issues. Now, let me close by only one other comment. I think that in addition as I mentioned to the fact that the language of the statute we think can be read to disallow these penalties or deny them, whatever phrase you want to use. It doesn't make much difference and that this is the real -- the only really sensible construction in our opinion of these sections of the statute. In addition to that, if the Court feels that the languages 57J is -- leaves something to be desired and I don't pretend that it's as clear as it might be, I think the Court still can rely upon the general purpose of the bankruptcy and the fact that where there is a conflict between it and a revenue act that it ought to prevail and take cognizance of this matter and the equity power of the court with respect to penalties. And this for example is cited by Professor Moore in his bankruptcy treaties and which he says in effect that disallowance theory needs talking about the disallowance of penalties can also be supported without resort to either section of the Act exclusively but rather upon established equitable principles applicable to individual's rights which prohibit enforcement of penalty or forfeiture clauses in context, (Inaudible) 6307. In other words, if there is in the court's mind any thought that the language of 57J is perhaps a little inept, nevertheless, the court use that as an additional reason to sustain our contention that the penalty should not be recovered or payable in the bankruptcy. Thank you.