The opinion of the court was delivered by: COXE
These are petitions by the United States and the City of New York to review orders of a referee in bankruptcy.
On April 20, 1937, Wil-Low Cafeterias, Inc., filed a petition for reorganization under former Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, which petition was approved by order of this court dated April 20, 1937, and that order allowed the debtor temporarily to remain in possession of its assets and to continue its business.
The order of April 20, 1937, authorized the debtor "* * * in its discretion and subject to the approval of this Court, to appoint and employ such managers, agents, employees, servants, accountants, attorneys and counsel as may in its judgment be advisable or necessary in the management, conduct, control or custody of the affairs of the debtor and the subsidiary companies and of the assets thereof, and to make such payments and disbursements as may be needful or proper for the purposes aforesaid or otherwise for the preservation of the properties of the debtor, including authority to make payment of debts entitled to priority and of the wages and salaries of agents, employees, laborers and servants of said debtor, and of the expenses and charges of the successor trustees and their counsel, accrued or to accrue, which are entitled to priority by statute, or which the debtor shall deem to be necessary or expedient to pay to secure the continuation of their services or to avoid detriment to the working organization of the business".
Subsequent to the filing of the petition and on various dates between April 30, 1937, and April 29, 1938, the debtor in possession paid the United States the sum of $3,483.04 on account of taxes which had accrued prior to the filing of the petition. Of that sum, $2,222.34 represented payment of taxes due under Title VIII of the Social Security Act, 42 U.S.C.A. § 1001 et seq., for the months of March and April, 1937. The debtor in possession also paid the City of New York the sum of $2,810.19 on June 17, 1937, for business taxes, which sum on the debtor's books represented payment of a tax of $889.92 which had accrued prior to April 20, 1937, and payment of a tax of $1,921.27 on business done from April 20, 1937, to June 15, 1937; it further paid the City of New York the sum of $298.01 on July 16, 1937, for sales taxes which had accrued from April 1, 1937, to April 20, 1937, and the sum of $442.92 on August 3, 1937, for water taxes of $435.30 for the period from November 17, 1936, to March 4, 1937, plus interest thereon of $7.62.
On June 7, 1937, an order was made by this court continuing the debtor in possession, and approving the filing by it, on May 17, 1937, of a summary report of operations in compliance with subdivision (4) of subsection c of former Section 77B. Exhibit B of the summary report of operations listed disbursements of $2,901.61 "on account of taxes due at 4/20/37", and the report itself referred to the fact that some taxes which had accrued prior to April 20 had been paid. However, there was nothing in the summary report or in any schedule annexed thereto which indicated to whom the taxes had been paid.
The City of New York has stipulated that the payments made by the debtor in possession "were made voluntarily by or on behalf of the debtor in possession and were not authorized by any specific order of this Court".
There is no showing that the debtor prior or subsequent to the filing of the petition collected City sales taxes and held such taxes as a separate fund nor that the taxes can be traced. There is also no showing that the debtor collected or withheld the employees' social security taxes under Title VIII.
On June 7, 1938, an order of liquidation was entered. It now appears that the estate is insufficient to pay any dividends to creditors; there is not enough even to pay the administration expenses, including in that term the debts of the debtor in possession.
The trustee concedes that the City has a claim against the estate in the amount of $889.94 representing the balance due on sales taxes which accrued from April 20, 1937, to June 7, 1938, after crediting a payment of $915.15 made by the debtor in possession to the City on July 16, 1937, and that the City has a claim for business taxes in the sum of $2,444.97 on business done from July 1, 1937, to June 7, 1938. The trustee also concedes that the sum of $3,171.35 is the correct amount of the business tax which became due and payable on June 15, 1937, for the privilege of doing business from July 1, 1936, to April 20, 1937, if the City's petition with respect to this item is sustained.
The trustee sought before the referee to compel the United States and the City of New York to refund the amounts received by them on account of claims in existence at the date of the filing of the petition, and to make such refunds conditions to the allowance of their respective claims for taxes which accrued during the operation of the business by the debtor in possession. The City by cross-motion sought to compel the trustee to pay its claims for current taxes.
The trustee did not challenge the payments made by the debtor in possession after the filing of the petition for taxes accruing thereafter. The payment of such taxes was clearly proper. Standard Oil Co. v. Grand Rapids Trust Co., 6 Cir., 98 F.2d 207; Kennebec Box Co. v. O.S. Richards Corp., 2 Cir., 7 F.2d 290.
The referee ordered that the claim of the United States for current taxes filed in the sum of $857.62, as well as any other claims filed, be abated and expunged unless there is paid to the trustee the sum of $3,483.04, and that the claim for old and current taxes filed by the City of New York be abated and expunged "in such amounts as to effect an equitable distribution under the bankruptcy act", unless there is paid to the trustee the sum of $3,543.50. The referee also ruled that if such sum is paid to the trustee, the City of New York shall be deemed to have a valid and subsisting claim against the debtor in possession in the sum of $3,873.84. The City's cross-motion was denied.
The referee by his order ruled that the payment of $2,810.19 made to the City of New York on June 17, 1937, was for a tax which had accrued prior to the filing of the petition, and that the business tax liability of the debtor in possession on business done ...