Appeal from the District Court of the United States for the District of Connecticut.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The Beardsley & Wolcott Manufacturing Company instituted a proceeding for reorganization under section 77B of the Bankruptcy Act, as added by Act of June 7, 1934, § 1, 48 Stat. 912 (11 U.S.C.A. § 207).On February 19, 1935, the city of Waterbury filed a claim with the trustees of the debtor for taxes assessed upon the latter's real estate for the years 1930, 1931, 1932, and 1933, amounting to $32,327.38, together with statutory interest thereon amounting to $7,085.46. The District Judge allowed as a priority claim the principal amount of the taxes but rejected the interest items because they really did not constitute interest but were essentially penalties that, under section 57j of the Bankruptcy Act (11 U.S.C.A. § 93 (j), could not be allowed. It is from the rejection of the claim for interest that this appeal has been taken.
Section 57j of the Bankruptcy Act (11 U.S.C.A. § 93 (j) provides that: "Debts owing to the United States, a State, a county, a district, or a municipality as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued thereon according to law."
The District Judge held that the items claimed as interest represented penalties because in certain situations the statutes of Connecticut impose a lower rate of interest upon delinquent taxes than is claimed by virtue of the statute applicable to the taxes in the present case.
Section 380c of 1931-1933-1935 Supplement to Connecticut Statutes, pp. 145, 146, effective June 5, 1935, provides for "interest" on delinquent taxes and states in part that: "The delinquent portion of any tax shall be subject to interest at the rate of three-fourths of one per cent for each month or fraction thereof which shall elapse from the time when it shall have become due and payable until the same shall be paid; provided, if the lien for any real estate tax, unpaid in whole or in part, was or shall be continued by certificate under the provisions of any past or present general statute or public or special act, interest, for such part of the total period as shall elapse from the date of such continuance to the date of payment, shall be charged at the rate of seven per cent per annum. Each addition of interest shall become, and shall be collectible as, a part of such tax."
The same statute provides as follows: "This section shall apply to all uncollected taxes whether due and payable prior to or subsequent to June 5, 1935. Effective June 5, 1935."
It is said that when the decision of the lower court was rendered the 1935 Supplement to the General Statutes of the State of Connecticut was not available in published form, but, whether or not it was available, it was in terms applicable to the taxes before that court at the time the decision was rendered.
The items claimed as "interest" are sought to be recovered under a statute which denominates them interest. While nomenclature is not conclusive, it is of probative force, particularly when the rate of 3/4 per cent. per month (or 9 per cent. per year), that is applied, is below the statutory limitation, which in Connecticut is 12 per cent. General Statutes of Connecticut, § 4732 (1930).
In United States v. Childs, 266 U.S. 304, 45 S. Ct. 110, 69 L. Ed. 299, a rate of 12 per cent. was allowed as interest upon a claim for unpaid income taxes proved in bankruptcy; and in Horn v. Boone County, Neb., 44 F.2d 920 (C.C.A. 8), a rate of 10 per cent. imposed upon unpaid taxes by a statute of Nebraska was allowed on a claim of a county for personal taxes due from a bankrupt. In New York v. Jersawit, 263 U.S. 493, 44 S. Ct. 167, 68 L. Ed. 405, a penalty of 10 per cent. was imposed for delinquent taxes by a New York statute. The Supreme Court held that a further imposition in the statute of 1 per cent. per month was "more than the value of the use of the money," and when added to the penalty of 10 per cent. "to make a single sum * * * must be treated as part of one corpus and must fall with that." The separability in the Revenue Act of 1916 of the flat rates imposed by that act as penalties from the provisions imposing 1 per cent. per month as interest on unpaid taxes was the factor that distinguished United States v. Childs, 266 U.S. 304, 45 S. Ct. 110, 69 L. Ed. 299, from the earlier decision in New York v. Jersawit, 263 U.S. 493, 44 S. Ct. 167, 68 L. Ed. 405, and determined the court in United States v. Childs to treat the 1 per cent. per month as provable in bankruptcy.
In Re Semon, 80 F.2d 81, we recently held that the imposition of different rates of interest on unpaid federal income taxes in varying situations did not render a rate of 1 per cent. per month on the arrears of taxes a penalty even though that rate was higher than some rates imposed by the act under other circumstances.
Moreover, it seems unlikely that the rate of 7 per cent. fixed under the Connecticut laws where a lien for taxes has been continued by the collector is an indication that the higher rate of 9 per cent. is a penalty. In the face of a statute which denominates each percentage interest, it is more reasonable to assume that the Legislature fixed each rate as fair compensation for delay and expense occasioned by the nonpayment of the taxes under particular circumstances.
Section 384c of the 1931-1933-1935 Supplement to the General Statutes of Connecticut provides that liens for taxes shall exist from the first day of October or other assessment date in the year previous to that in which the tax shall have become due until two years thereafter and "during its existence, shall take precedence of all transfers and incumbrances thereon." Section 389 (c) provides that the collector may continue any tax lien by filing his certificate. Perhaps the difference between the rate of 9 per cent. fixed by statute upon arrears of taxes during the first two years after a tax has become due and the lower rate of 7 per cent. fixed where the lien is continued arose because of the belief that if a municipality should be unable to raise money for its expenses owing to a sudden failure of taxpayers to meet their obligations during a financial ...