The opinion of the court was delivered by: BRYAN
The principal issue raised by the trustee's petition to review is the same as that in Matter of Airline-Arista Printing Corporation, Bankrupt, 156 F.Supp. 403 (S.D.N.Y.1957), aff'd per curiam 2 Cir., 267 F.2d 333. In that case I held that federal income and social security taxes withheld by a debtor in possession from the salaries of its employees in a superseded proceeding for arrangement constituted a trust res in favor of the United States and were to be paid prior to costs and expenses of administration incurred either in the arrangement proceeding or in the ensuing bankruptcy proceeding. Such a trust was impressed upon all assets of the estate coming into the trustee's hands even though the taxes withheld held were not segregated and could not be traced.
The trustee frankly concedes that the same question is presented here and that it is controlled by the Airline-Arista decisions. He asserts, however, that my decision below and the affirmance of that decision by the Court of Appeals is erroneous. He urges that I should reconsider the Airline-Arista decision and now decide that administration expenses in the bankruptcy proceeding take priority over the claim of the United States for withholding taxes withheld by the debtor in possession. Thus, what the trustee asks me to do is to overrule both my own prior decision in Airline-Arista and the decision of the Court of Appeals affirming it, as well as the prior decisions in this and other circuits on which the Airline-Arista decision was based. See City of New York v. Rassner, 127 F.2d 703 (2 Cir. 1942); United States v. Sampsell, 193 F.2d 154 (9 Cir., 1951), and Hercules Service Parts Corp. v. United States, 202 F.2d 938 (6 Cir. 1953).
I am, of course, bound by the determination of the Court of Appeals in Airline-Arista and required to follow it, but even if I were not I am not persuaded that the Airline-Arista case was incorrectly decided. On the contrary, I believe the decision is sound and well reasoned and I adhere to it. The decision and order of the referee in so far as it provides that the funds in the hands of the trustee are impressed with a trust in favor of the United States an that no part of the costs and expenses of administration may be paid therefrom is therefore affirmed.
The petitioner trustee, however, maintains that the referee was in error in refusing to make an allowance out of the fund to the attorney for the trustee for services alleged to have been rendered in creating or preserving the fund. He also urges that similar allowances should have been made to the trustee and the appraiser.
The record on this phase of the proceeding is confusing. In so far as the question was raised at the hearing before the referee, it came up in the following manner:
Toward the conclusion of the hearing counsel for the Government announced in open court that the Government consented to the payment out of the funds to which the United States was entitled to a sum not exceeding $ 200 'to the attorney for the trustee, who rendered services for the benefit of the United States'. The attorney for the trustee then agreed to accept the amount offered or any lessor sum allowed him by the referee. He also mentioned, in passing, an endeavor 'to convince the Government that compensation should be made to the trustee and the appraiser along the same line'.
This passage between counsel occurred after the referee had granted a motion to strike the separate defenses in the trustee's answer to the Government's petition. The fifth such defense included an allegation 'that the funds sought to be impressed with a trust by the petitioner is chargeable with the value of the services rendered to create such fund by the trustee, his attorney, and for other services rendered in these proceedings as more particularly set forth in the trustee's final report, the application of his attorney and the application of the appraiser which were filed prior to the final meeting and the which no objection was taken by the petitioner'. The answer prayed, in the alternative, 'that the value of the services rendered in creating the alleged trust fund be determined and paid out of said fund prior to any payment thereof to the United States'.
There was no proof offered before the referee and there is nothing in the record as to what services, if any, the trustee or his attorney performed in creating the fund for the alleged benefit of the United States or what the reasonable value of such services was.
On this petition to review the Government vigorously opposes the trustee's attempt to have the holding of Airline-Arista reconsidered, but it has not withdrawn its original consent to the allowance of a fee up to $ 200 for the trustee's attorney for services rendered in creating the fund and has not opposed the petition in so far as it seeks to reverse the referee's finding on this singly issue.
The referee denied the application for payment of $ 200 out of the fund despite the Government's consent. It was his view that the United States Attorney lacked authority to consent to such a payment, that no such allowance could be made under § 64, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a, since costs and expenses of administration could be paid only out of the bankrupt estate and not out of trust funds coming into the trustee's hands, and that he had no power to make such an allowance under the circumstances.
In City of New York v. Rassner, supra, on which the holding in the Airline-Arista case was mainly predicated, the Court of Appeals held that the City of New York was entitled to restitution of city sales taxes collected by the debtor in possession in a superseded arrangement proceeding from any funds of the estate in the trustee's hands ahead of expenses of administration, though the taxes collected had not been segregated and were not traceable. This was on the theory that the sales taxes collected, like the federal taxes withheld in the case at bar, constituted a trust in favor of the governmental claimant and such a trust was impressed upon all the assets of the estate for the claimant's benefit. However, at the conclusion of its opinion the court went on to say:
'Other questions are present in this case, but they cannot be decided on this record. The city agrees that the trustee may receive the value of his services in creating the fund, and we think that a reasonable view. * * * All such matters will be left to the bankruptcy court on remand.' (p. 707 of 127 F.2d).
Thereafter the district court in its order on remand provided 'that the Referee's and Trustee's statutory commissions, computed on the amount brought into the estate by the setting aside of the chattel mortgage, and the value of the services of the attorney for the trustee in setting aside such chattel mortgage, shall be first paid out of the total funds in the estate, the amount of such payments to be determined by the Referee on motion of any party, and provided further that the balance of the Referee's and Trustee's commissions and the balance of the fee of the trustee's attorney shall be treated as administration expenses, subordinate to the aforesaid claim of the City of New York'.
Plainly the Court of Appeals in the Rassner case was of the view that the Bankruptcy Court could determine whether the trustee had performed any services in creating the trust fund to which the City was entitled, and direct payment of the reasonable value of such services out of the fund. This view is consistent with the numerous cases holding that allowances may be made out of funds in the hands of the trustee payable to lienors, or others having special equities, for services by the trustee and his attorney which directly resulted in the preservation or the creation of the funds payable, e.g., Byrer v. Bushong, 108 F.2d 954 (4 Cir. 1940); In re Prindible, 115 F.2d 21 (3 Cir. 1940); In re Centralia Refining Co., 35 F.Supp. 599 (E.D.Ill.1940); In re Beardsley, 38 F.Supp. 799 (D.Md.1941); 6 Remington on Bankruptcy §§ 2606-2612, 2629 (5th Ed. 1952); 3 Collier on Bankruptcy § 64:02, ftn 10 (14th Ed. 1956), and cases cited in both ...