Appeal from the District Court of the United States for the Western District of Pennsylvania; Frederic P. Schoonmaker, Judge.
Before BIGGS, JONES, and GOODRICH, Circuit Judges.
Each of the bankrupts above named respectively filed with the District Court on the same day a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. Because of prior commingling of the assets, debts and business affairs in general of the several corporate petitioners, the reorganization proceedings were later consolidated by order of court. A satisfactory plan of reorganization not having materialized, the petitioners were thereafter duly adjudged bankrupt and a trustee of their estates in bankruptcy was appointed.
The commonwealth of Pennsylvania filed proofs of claim with the referee in the bankruptcy proceeding for taxes in specified amounts allegedly due it by each of the bankrupts. The claims thus made were for capital stock, corporate loan and corporate income taxes for the year of the bankruptcy and for four years prior thereto. The tax claims were based upon estimates of liability which had been made by the Pennsylvania Department of Revenue with the approval of the State Auditor General upon failure by the corporations to file proper returns.
About the time of the filing of the Commonwealth's tax claims in the bankruptcy proceeding, the trustee filed with the Board of Arbitration of Claims (an andministrative board in the Pennsylvania Auditor General's Department) a claim, which was later amended, for a large sum of money allegedly due the bankrupts for liquors sold and delivered by them to the Pennsylvania Liquor Control Board, a State instrumentality having control of the purchase and sale of liquors in Pennsylvania. See 47 P.S. § 744 - 1 et seq. The Commonwealth filed an answer to the claims of the trustee and a counterclaim for damages in an amount in excess of the trustee's claims.The damages for which the Commonwealth counterclaimed before the Board of Arbitration were alleged to have been caused the State Liquor Control Board by reason of its allegedly necessary resale of the liquors in question at a loss because of an asserted shortage in the bottle fill due to the wrongful conduct of the bankrupt corporations. Before a hearing was had before the Board of Arbitration of Claims on the merits of the liquor controversy, the trustee in bankruptcy, upon application, withdrew from the Board of Arbitration his claim against the Commonwealth.
Contemporaneously, the trustee filed with the referee objections to the tax claims of the Commonwealth and petitioned for their redetermination by the bankruptcy court under the provisions of Sec. 64, sub. a (4) of the bankruptcy Act, 11 U.S.C.A. § 104, sub. a(4). The trustee averred substantially that the amounts of all of the Commonwealth's claims for taxes for the year of the bankruptcy were dependent in part upon the validity and fair value of the claims of the bankrupts against the commonwealth for the liquor sold and delivered by them to the Liquor Control Board; that the corporate loans subject to tax were much less than the amount shown on the proofs of claim; that the claims for tax on corporate loans and net income were excessive; and that the income and capital stock tax items were based, in part at least, upon arbitrary assesseents and could not be accurately determined until the trustee's counterclaims were paid, reduced, or determined never to have accrued. In his objections to the Commonwealth's tax claims the tustee in bankruptcy also sought set-off or recoupment for the bankrupts' claims for the liquor sold and delivered to the Liquor Control Board. This claim of set-off was the same claim that had been filed by the trustee with the Board of Arbitration of Claims and thereafter withdrawn.
To the objections filed by the trustee with the referee the Commonwealth of Pennsylvania filed a motion to dismiss under Rule 12(b) and a motion to strike under Rule 12(f) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, on the grounds as summarized by the referee, "(1) that the [bankruptcy] court has no jurisdiction to redetermine the legality or the value of the various tax claims, (2) that the court lacks jurisdiction of the counterclaim, (3) that the counterclaim fails to state a claim against the Commonwealth upon which relief can be granted, (4) that the alleged recoupment is not a defense arising out of the transaction upon which the Commonwealth's claim is grounded, (5) that the Pennsylvania statutes provide a procedure to determine the legality of a claim against the Pennsylvania Liquor Control Board and (6) that the tax claims have a priority status while the counterclaim has a different status."
The questions thus raised fall into two groups, viz., (1) whether the bankruptcy court had jurisdiction to pass upon and redetermine the Commonwealth's tax claims and (2) whether the trustee had a right of set-ooff or recoupment against the Commonwealth's tax claims for alleged causes of action not related to the Commonwealth's claims. The referee, in an exhaustive and well reasoned opinion, upheld the power of the bankruptcy court to redetermine the Commonwealth's tax claims under the circumstances here obtaining, but denied the trustee a right of set-off or recoupment for the bankrupts' independent claims against the Commonwealth and entered an order accordingly. Both the Commonwealth and the trustee filed petitions for review. The District Court sustained the action of the referee for the reasons contained in the opinion of the latter. The respective pending appeals followed.
Prior to the decision by the Supreme Court in Arkansas Corporation Commission v. Thompson, 313 U.S. 132, 61 S. Ct. 888, 85 L. Ed. 1244, it had been pretty generally considered that a bankruptcy court possessed broad power in the matter of reviewing and redetermining claims for taxes allegedly due by a bankrupt. See 2 Remington on Bankruptcy (1940) § 799, and 6 ibid. § 2804; 3 Collier on Bankruptcy (1941) p. 2143, et seq. The leading decision was New Jersey v. Anderson, 203 U.S. 483, 27 S. Ct. 137, 51 L. Ed. 284. The power has been exercised by courts of bankruptcy a number of times.*fn1 And so far as any conflict existed in the decisions, it would seem to have been limited to the power of a bankruptcy court with respect to a redetermination of the taxable valuation ascribed to real estate by local taxing agencies.*fn2
The Chandler Act, to which the instant case is subject, not only appears not to have taken away or restricted whatever may have been a bankruptcy court's jurisdiction to redetermine tax claims but, on the contrary, seems to indicate more clearly the existence of the power. Subdivision a of Sec. 64 of the Bankruptcy Act of 1898, 30 Stat. 563, had provided that "The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, State, county, district, or municipality in advance of the payment of dividends to creditors, * * * and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court." The taxes so ordered to be paid were, by amendment of 1926, 44 Stat. 666, 667, given priority of payment in category (6) of subdivision (b) of former Sec. 64. But in the Chandler Act Sec. 64, sub. a of the earlier Act was eliminated, Sec. 64, sub. a of the Amendment, 52 Stat. 874, being devoted to priorites and their order of payment. Under category (4) of that subdivision, as amended, 11 U.S.C.A. § 104, sub. a(4), priorty is now accorded "taxes legally due nand owing by the bankrupt to the United States or any State or any subdivision thereof: * * * provided further, That, in case any question arises as to the amount or legality of any taxes, such question shall be heard and determined by the court; * * * ." But, the former requirement of Sec. 64, sub. a, that the bankruptcy court should order the trustee to pay all taxes legally due and owing by the bankrupt was entirely dispensed with in the Chandler Act. At the same time, former Sec. 57, sub. n, was amended, 11 U.S.C.A. § 93, sub. n, so as to require that all claims due the United States or any State should be filed and proved like other claims against bankrupt estates. In the light of a bankruptcy court's jurisdiction under Sec. 2 of the Act, 11 U.S.C.A. § 11, to allow, disallow, or reconsider claims against bankrupt estates, the plain implication from the requirement in Sec. 57, sub. n, as amended, that tax claims should be filed and proved as in the case of other claims, is that such tax claims are subject to hearing and determination by the bankruptcy court.
Generally speaking, therefore, we think that a bankruptcy court has the power to redetermine tax claims in the exercise of its jurisdiction under the Chandler Act. But we also think that certain factual determinations in respect of such claims, when competently made in another forum, may be conclusive at a hearing thereon in a bankruptcy court. Such we believe is indicated by a comparative reading of the decisions in New Jersey v. Anderson and Arkansas Corporation Commission v. Thompson, supra.
In the Anderson case, New Jersey had imposed a franchise tax upon domestic corporations of a certain percentage on the amount of a corporation's issued and outstanding capital stock on the first of January in each year. If any corporation failed to make a return, the State Board of Assessors was authorized to ascertain and fix the amount of the tax. Prior to the bankruptcy of the corporation involved in the Anderson case, it had an authorized capital stock of $40,000,000, but only $10,000,000 of such stock was outstanding. The corporation not having made a return, the State Board of Assessors assessed a tax against the corporation on the basis of its $40,000,000 authorized capital stock; and, after the bankruptcy of the corporation, the State presented its tax claim in the amount assessed by the State Board of Assessors. The referee reduced the State's claim by computing the tax on the basis of the capital stock actually outstanding. The referee's action in such regard was ultimately affirmed by the Supreme Court, that Court saying, 203 U.S. at pages 493, 494, 27 S. Ct. at page 141, 51 L. Ed. 284, " * * * § 64a specifically provides that in case any question arises as to the amount or legality of taxes, the same shall be heard and determined by the court, with a view to ascertaining the amount really due. We do not think it was the intention of Congress to conclude the bankruptcy courts by the findings of boards of this character, * * * ." In that regard the opinion would seem to have been the unanimous view of the Court. The dissenting Justices did not question the bankruptcy court's power to redetermine the State's tax claim. They would have denied the claim priority of payment (in whatever amount it was allowed) because it did not represent "in reality 'taxes,' as distinguished from governmental exactions for [corporate] privileges granted."
In the Thompson case, upon which the Commonwealth of Pennsylvania largely relies as support for its pending appeal, a different situation was presented. There, in a proceeding for the reorganization of a railroad under Sec. 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, the State of Arkansas presented a tax claim based on a property valuation for the railroad which had been ascertained by the Arkansas Corporation Commission, a quasi-judicial body, charged by the law of that State with the duty of determining such valuations. The State Commission's determination had been made only after due hearing in which the trustee in bankruptcy had participated and had been fully heard, including his motion for a rehearing which the Commission considered and overruled. Nor did the trustee seek a review of the assessment in the courts of the State, as he was entitled to do, even by appeal to the highest court of the State. But, several months after the determination had become final under the law of the State, the trustee petitioned the bankruptcy court to determine the "amount or legality" of the Arkansas tax by revising the property value found by the State's Corporation Commission. It was in that situation that the Supreme Court said (313 U.S. page 142, 61 S. Ct. 891, ...