The opinion of the court was delivered by: FOLEY
Memorandum Decision and Order
In this action by its amended complaint filed November 21, 1969, the government plaintiff seeks to recover substantial tax penalties and interest from defendant Roberts Motor Express, Inc. (Roberts) that relate to its federal tax obligations. Roberts had petitioned for and completed a 1968 Arrangement under Chapter XI of the Bankruptcy Act. Under the Arrangement, the principal sum of federal taxes were paid. The issue presented for decision herein is the government claim of alleged personal liability of Roberts after this completed Arrangement and payment of federal principal for unpaid penalties and interests on these taxes. The plaintiff moves for summary judgment as a matter of law; and defendant Roberts moves to dismiss the complaint and describes its brief as one in opposition to plaintiff's motion for summary judgment and in support of its cross motion to dismiss.
Simply put the contention of Roberts is that the Arrangement and payment of the principal sum of federal taxes discharged all tax liabilities including principal, interest and penalties. To the contrary, the government contends that the liabilities for penalties and interest cannot be discharged by any bankruptcy proceeding, and such survive as a personal obligation for which the debtor in the completed and approved Arrangement remains responsible. Under settled law and provisions of the Bankruptcy Act, it is my judgment that the government contention must be upheld.
The facts involved can be briefly stated. On March 27, 1958, Roberts filed a petition in bankruptcy in the Northern District of New York seeking relief under Chapter XI of the Bankruptcy Act. On May 28, 1959, the District Director of Internal Revenue, Albany, New York, filed a proof of claim against the estate in the amount of $67,365.41. Of this figure, $8,044.22 represented penalties which had arisen before the petition had been filed. The Referee in Bankruptcy ruled that penalties were not "allowable" against the debtor's estate, and the Government then reduced its claim against the estate by the amount of $8,044.22.
On September 27, 1963, an order of the Referee was entered confirming a plan for arrangement. By that time, as a result of payments and applications, federal tax claims -- not including the penalties or accrued interest -- had been reduced to $10,000.00. The order provided that payment of $10,000.00 would constitute "final payment of all Federal Tax Obligations of Roberts Motor Express, Inc. which were heretofore allowed and determined by this Court". The $10,000.00 was subsequently paid, and on August 2, 1966, a final order was entered closing the proceedings.
In the amended complaint, the plaintiff seeks a judgment against Roberts for (1) the penalties that were not allowed by the Referee against the estate and interest on those penalties, (2) other penalties never asserted before the Referee, (3) interest on those penalties, all in the amount of $14,849.56 plus continuing interest. The Government also seeks a further amount representing not penalties, but the unpaid interest on Roberts' original principal tax debt going back to the date that Roberts filed its petition for an arrangement -- March 27, 1958. The amount sought for such post-petition interest is $14,650.77.
The issue is whether these penalties and interest are now collectible from Roberts despite the completion of the bankruptcy arrangement. Resolving this issue requires a construction of the provisions of the Bankruptcy Act, for it is only pursuant to that Act that debts are discharged, and the extent of any discharge can only go as far as the Act itself permits.
It is apparent from the specific wording of the Bankruptcy Act that the federal government in asserting tax claims against a debtor stands in a different -- and favored -- position from almost all other creditors. The Act expressly provides, in Section 371, 11 U.S.C. § 771, that in a Chapter XI proceeding, as here:
"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."
Section 17, 11 U.S.C. § 35, provides that "taxes which became legally due and owing by the bankrupt to the United States" are not released by a discharge in bankruptcy. Thus federal "taxes" are not discharged by an arrangement such as Roberts underwent here, and may be collected personally from the debtor after the arrangement. The principal amount of such federal taxes has been paid by Roberts, but not the penalties and interest.
While Section 17 of the Act does not expressly state that "taxes" includes "penalties" and "interest", the Courts have construed the Act to have that meaning, at least as far as interest is concerned. In Bruning v. United States, 376 U.S. 358 at 360, 11 L. Ed. 2d 772, 84 S. Ct. 906, it is expressly and clearly held that post-petition interest of a tax claim excepted from discharge by Section 17 of the Act should be recoverable in a later action against the debtor personally. That such ruling may be anomalous to the purposes of the Bankruptcy Act and uncompassionate for debtors is recognized in Bruning, p. 361. The Court of Appeals, Second Circuit, In re Johnson Electrical Corporation, 2 Cir., 442 F.2d 281, followed Bruning, and disagreed with United States v. Mighell, 10 Cir. [160-1 USTC P 9202], 273 F.2d 682, relied upon here by Roberts, which held interest could not be collected personally from a discharged bankrupt. Referring to it, the Court of Appeals, Third Circuit, is in accord with the Second Circuit's Johnson reasoning and ruling. (Hugh H. Eby Co. v. United States, 3 Cir., 456 F.2d 923).
Roberts also relies upon Nicholas v. United States, 384 U.S. 678, 16 L. Ed. 2d 853, 86 S. Ct. 1674 (1966) and New York v. Saper, 336 U.S. 328, 93 L. Ed. 710, 69 S. Ct. 554 (1949) for the proposition that "tax claims bear interest only to the date of bankruptcy." This is correct as to tax claims payable out of the estate, but not as to claims that survive the bankruptcy and are collectible later from the former bankrupt personally.
The distinction is vital. The government is not permitted to deplete the assets of a bankrupt estate, and thus harm the other creditors by having its claim for interest keep running while the bankruptcy proceedings are under way. In holding that the United States cannot collect post-petition interest from the estate of a bankrupt, the Supreme Court based its reason on "the broad equitable principle that creditors should not be disadvantaged vis-a-vis one another by legal delays attributable solely to the time-consuming procedures inherent in the administration of the bankruptcy laws." [Nicholas v. ...