Opinion ID: 272229
Heading Depth: 1
Heading Rank: 1

Heading: the injunction of april 24, 1964.

Text: 11 In his order of January 2, 1964 and in his order and injunction of April 24, 1964, the referee in bankruptcy relied exclusively upon sections 57j and 64a(4) of the Bankruptcy Act in disallowing all but $350 of appellee Mozley's tax claims and in enjoining him from ever attempting to collect the taxes. It was not until Mozley had recorded his tax claims and thus converted them into statutory liens that the referee considered section 17 of the Bankruptcy Act and the case of Bruning v. United States, supra, and found that the recorded tax liens were nondischargeable debts the collection of which could not be enjoined. We believe that the referee fell into error when he failed to apply section 17 of the Bankruptcy Act and the reasoning of Bruning v. United States, supra, to the tax claims of appellee even before those tax claims were recorded and thereby converted into liens. We believe that the application of such reasoning would have revealed that the tax claims were nondischargeable debts even before they acquired lien status, and their collection should therefore not have been enjoined, even prior to their recordation and conversion into statutory liens. 12 Section 17a(1) of the Bankruptcy Act, 11 U.S.C. 35a(1), provides in pertinent part that '(a) A discharge in bnakruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are due as a tax levied by the United States, or any State, county, district, or municipality;   .' Section 371 of the Bankruptcy Act, 11 U.S.C. 771 (which is one of the provisions of the Chapter XI arrangement provisions) provides that 'The confirmation of an arrangement shall discharge a debtor from all his unsecured debts and liabilities provided for by the arrangement, except as provided in the arrangement or the order confirming the arrangement, but excluding such debts as, under section 17 of this act, are not dischargeable.' The effect of section 17 is to make county taxes such as those involved in this case nondischargeable in bankruptcy, and to leave the bankrupt still liable for the taxes even after he has received a discharge in bankruptcy. The effect of section 371 is to specifically carry section 17 into the Chapter XI arrangement proceedings and in effect to provide that while the confirmation of a Chapter XI arrangement acts the same as a discharge in bankruptcy as to most debts and liabilities, it does not act as a discharge from liability for county taxes which are made nondischargeable by section 17. See 9 Collier, Bankruptcy 9.25(6), 9.32(9). 13 The rule that tax claims are nondischargeable debts which survive bankruptcy or arrangement proceedings was recognized in the recent Supreme Court decision in Bruning v. United States, supra. Although the Bruning decision deals primarily with liability for interest on tax claims, the Court had occasion to note the continuing liability of the bankrupt for tax claims not satisfied out of the bankrupt estate: 14 'It is undisputed that, under 17, petitioner remained personally liable after his discharge for that part of the principal amount of the tax debt and pre-petition interest not satisfied out of the bankruptcy estate. 'As the Court of Appeals noted, 17 is not a compassionate section for debtors. Rather, it demonstrates congressional judgment that certain problems-- e.g., those of financind government-- override the value of giving the debtor a wholly fresh start. Congress clearly intended that personal liability for unpaid tax debts survive bankruptcy.' 376 U.S. at 360-361, 84 S.Ct. at 907-908. 15 While a tax claim not made into a lien might be subject to a limitation on its payment during the course of bankruptcy or arrangement proceedings by section 64a(4), the fact that such a limitation could be imposed would not mean that the rest of the claim ceased to exist. On the contrary, the effect of limiting the amount of the claim allowed through application of section 64a(4) would seem to be that the remainder of the claim continues in existence and may be enforced against the bankrupt or, as here, against the reorganized owner of the property, even after a discharge, it is because the tax claims are nondischargeable and continue in existence after the bankruptcy or arrangement proceedings have been completed that counsel have not been able to cite any cases where collection of taxes was permanently enjoined. We thus conclude that it was error for the referee to issue his April 24, 1964 injunction restraining the collection of a nondischargeable debt. That error was cured when the referee lifted the injunction in his decision of July 22, 1964. 16