Opinion ID: 226726
Heading Depth: 1
Heading Rank: 1

Heading: Distribution of the balance.

Text: 8 The question in this appeal resolves itself into two basic issues: First, did the District Court for the Eastern District of Pennsylvania have discretion with respect to the disposition of the fund realized from the sale of the assets of Kensington; and, second, if the answer to that question be in the affirmative, did that court abuse its discretion? 9 The United States, in effect, contends that the district court had no discretion to remit the fund to Smith. Its argument is that the instant proceeding is completely independent of, and not ancillary to, the action in the District of Columbia. The reason advanced is that the United States, by making an assessment against Kensington under Section 311 7 of the Internal Revenue Code, 26 U.S.C.A. § 311, and obtaining an immediate lien, has treated Kensington as if it were the taxpayer primarily liable; and hence, under Section 3678, 26 U.S.C.A. § 3678, the district court is obliged to order payment directly to the United States, as the holder of the outstanding lien. This, it is argued, is a logical result of the government election to proceed under Section 311 of the Internal Revenue Code, rather than to bring an equitable action to set aside the fraudulent transfer. 10 Section 3678(c) of the Internal Revenue Code, 26 U.S.C.A. § 3678(c), declares that the proceeds of a sale shall be distributed according to the findings of the court in respect to the interests of the parties and of the United States. The scope, if any, of the district court's discretion is not made crystal clear by this passage; but, if it is read in the light of Section 3678(b), the meaning is more readily perceived. Section 3678(b) provides that the court shall make parties to the proceedings all persons claiming any interest in the property. Since both Smith and the government, inter alia, are necessary, or at least, proper parties, the court below must use its discretion in ascertaining what are the respective interests of Smith and the government. Certainly, Congress could easily have specified that the amount due the United States on its tax claim should be paid to the Collector of Internal Revenue in the district where the assets were sold; that it did not do so seems to us highly significant. 11 Since the transferee assessment against Kensington was made on the basis of Section 311 8 of the Internal Revenue Code, 26 U.S.C.A. § 311, it is necessary to examine this section, which provides that the liability of a transferee of property of a taxpayer shall be assessed, collected, and paid in the same manner as the liability of the taxpayer. This section was first incorporated into the Internal Revenue Code by the Act of February 26, 1926, c. 27, § 280, 44 Stat. 61. Prior to that enactment, the only remedies of the government were to proceed in equity to set aside the fraudulent transfer or, if the debts of the transferor had been assumed, to bring an action at law. Phillips v. Commissioner of Internal Revenue, 1931, 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289; Continental Oil Co. v. Helvering, 1938, 69 App.D.C. 236, 100 F.2d 101, 109. 12 No new obligation was imposed upon the transferee by the statute; it merely created a new remedy in the form of a summary and expeditious method of proceeding by assessment directly against the transferee. Although, under some circumstances, for some procedural purposes, the transferee is treated as a taxpayer, the liability of the transferee is clearly secondary, not primary. Phillips-Jones Corp. v. Parmley, 1937, 302 U.S. 233, 235, 58 S.Ct. 197, 82 L.Ed. 221; Continental Oil Co. v. Helvering, supra; Harrison v. Commissioner of Internal Revenue, 5 Cir., 1949, 173 F.2d 736, 737. 13 To state the problem in its simplest terms, this court is faced with a transfer of assets by an insolvent debtor in fraud of the government's superior claim for taxes; therefore, it is in the light of the law of fraudulent conveyances that the problem should be considered. 14 At common law there were three possible remedies available to the creditor in cases of fraudulent transfers. A judgment creditor could elect to treat the conveyance as void and proceed to levy execution upon the property; or, in some jurisdictions, the judgment creditor could either bring an action in equity to set aside the transfer or bring a creditor's bill in equity to reach the debtor's equitable assets. 9 15 Section 311 of the Internal Revenue Code, by permitting the government to make an assessment against the fraudulent transferee to the extent of the value of the assets fradulently conveyed, should be considered an efficient, modern statutory heir to the common law remedy of ignoring the transfer and executing directly against the property. 16 The term ancillary has been used throughout this case in varying ways. 10 It is true that the instant action is not ancillary to any other from a strictly jurisdictional standpoint. 11 It is also true that the district court did not fasten the title ancillary receivers of Kensington on Heerman and Williams. 12 Labels, however, must not be permitted to camouflage realities. In a broader sense, the instant proceeding is ancillary to the District of Columbia action. It is ancillary in the sense that it is in aid of the District of Columbia proceeding. It is ancillary in the sense that its sole object is to apply toward the satisfaction of the government's tax claim against Aerodynamic, assets geographically beyond the jurisdiction of the District of Columbia court. This court, in a prior appeal in this case, involving a conflict between a state receivership action and the district court receivership, has remarked: The federal suit in the Eastern District of Pennsylvania derived directly from the original action in the District of Columbia. United States v. Kensington Shipyard and Drydock Corp., 3 Cir., 1948, 169 F.2d 9, 12. 13 17 The decision of this court in Trustees System Co. of Pennsylvania v. Payne, 3 Cir. 1933, 65 F.2d 103, 107, is strong authority for the result in the case at bar. In that case, an equity receiver for a parent corporation had been appointed in Illinois. Creditors of the parent corporation petitioned another district court for the appointment of receivers for five subsidiaries, on the theory that the latter were so organized and controlled that they were mere instrumentalities of the parent corporation. The court affirmed the lower court's decree which pierced the corporate veil by appointing receivers — in reality ancillary receivers — for the subsidiaries. 14 18 Having decided in the instant case that the proceeding in the District Court for the Eastern District of Pennsylvania was ancillary in nature to the receivership of Aerodynamic in the District of Columbia, we are thus led directly to the conclusion that the district court had discretion to determine whether the balance of the fund realized from the sale of Kensington assets should be distributed to Smith, receiver, or to the government. See Sands v. E. S. Greely & Co., 2 Cir., 1898, 88 F. 130, 133; In re Schulte-United, 8 Cir., 1932, 59 F.2d 553, 560. 15 19 We come now to the second question: Did the district court abuse its discretion in decreeing that the fund be turned over to Smith, as receiver for Aerodynamic in the District of Columbia? 20 The government asserts in the case at bar that, as a local lienor, it is entitled to immediate distribution from local assets, and cites as authority therefor United States v. O. K. Tool Co., D.C.Conn. 1950, 91 F.Supp. 157, wherein such distribution was made. 16 It is not necessary to pass on the validity of this contention, for the status of the United States in this proceeding is not that of a typical local lienor. 21 What factors should be considered by a court in deciding whether local creditors should be paid? Section 553 of the Restatement of Conflict of Laws states that a court, in the exercise of its discretion, should balance the orderly administration of the estate as a whole against the inconvenience resulting to creditors who have proved their claims locally. 22 We cannot discern any appreciable inconvenience resulting to the government by its receiving the fund via Smith, receiver of Aerodynamic. The government, unlike most creditors, possesses the rare attribute of omnipresence. 23 Undoubtedly, the decree of the court will aid in the orderly administration of the estate as a whole. Since the lien against Kensington is based on a transferee assessment, the amount of the lien is not an absolute sum, but is subject to reduction when funds are realized from Aerodynamic or any of the other corporations to which Aerodynamic apparently made fraudulent transfers. 24 Certainly the district court did not abuse its discretion in deciding that orderly administration dictated that the fund in Philadelphia and the one in the District of Columbia be consolidated and then distributed by one administration. 25 In so deciding, this court is not necessarily rejecting the decision of the District Court of Connecticut in United States v. O. K. Tool Co., supra. That court, in the exercise of its discretion, distributed the fund subject to its jurisdiction directly to the local Collector of Internal Revenue. The decision of this court is merely that the district judge in the instant case properly exercised his discretion in turning the fund over to Smith, receiver for Aerodynamic. The decision in the O. K. Tool case is also distinguishable in that the taxpayer therein was, realistically speaking, the original taxpayer, which had merely assumed a slightly different corporate garb. 17 In the instant case, however, Aerodynamic, by virtue of its acquisition of the Philadelphia shipyard, assumed no tax liability. The liability of Kensington is thus that of a transferee of a transferee, and is genuinely secondary. 26