Appeal from the District Court of the United States for the Western District of Pennsylvania; Robert M. Gibson, Judge.
Before BUFFINGTON and BIGGS, Circuit Judges, and DICKINSON, District Judge.
The State of New Jersey seeks to recover in the pending proceedings corporation franchise taxes for the years 1933, 1934 and 1935*fn1 imposed by the laws of New Jersey (Ptmphlet Laws 1884, Chapter 159, p. 232; 1919, Chapter 195, p. 431; 1931, Chapter 102, p. 171; 1932, Chapter 98, p. 168) upon the debtor, Pressed Steel Car company, a corporation of the State of New Jersey, all of the tangible assets of which were within the Commonwealth of Pennsylvania.
Receivers were appointed for the corporation upon May 10, 1933, as the result of a bill in equity filed in the court below. The receivers were authorized to carry on the business of the corporation*fn2 and did so until June 13, 1934, at which time a voluntary petition was filed by the debtor pursuant to the provisions of Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. This petition was approved by the court below upon the same day that it was filed and two of the equity receivers were appointed temporary trustees for the debtor*fn3 with all the powers theretofore possessed and enjoyed by the equity receivers. The trustees specifically were authorized by order of the court to carry on the business of the debtor. They did so until July 27, 1936, when the learned District Judge entered an order approving proving a plan of reorganization whereby the assets of the debtor were transferred to a new corporation formed for that purpose.
In view of the foregoing it will be apparent that the obligation of the 1933 taxes arose prior to the receivership; the obligation for the 1934 taxes arose after the inception of the receivership and that of the 1935 taxes after the commencement of the proceedings under Section 77B. Claims were filed by the State of New Jersey for these taxes in the proceedings at bar and were disallowed. From such disallowance the appeal is taken.
The plan of reorganization provides that the "Current liabilities of the Receivers and Trustees * * * " to the extent not paid by the trustees, shall be paid or assumed by the new company. The order confirming the plan of reorganization requires this disposition of the current liabilities of the receivers and trustees.
We think that the questions presented by the controversy at bar may be disposed of most expeditiously by considering first the status of the claim for franchise taxes for the year 1934 which arose during the period of the receivership. we think that it is obvious that if the franchise tax for 1934 enjoys a status which will require its payment, it enjoys such as an expense of administration incurred by the receivers. If it is an expense of administration it fits within the category of the current liabilities of the receivers referred to as payable in the plan of reorganization and there is no necessity of ascertaining its position in the hierarchy of payment and priority as a claim under the provisions of the Bankruptcy Act as amended by the provisions of Section 77B.
We must determine therefore whether the 1934 franchise tax must be deemed to constitute an expense of administration of the receivership estate. Though the answer to this question turns in its final analysis upon the nature of the Pennsylvania proceedings, we think that it would be helpful to consider first authorities generally upon this question.
Speaking generally, when a franchise tax is construed as a tax upon the privilege of exercising the corporate franchise, viz., the right "to do" business as a corporation, franchise taxes arising after receivership are deemed to be payable by the receivers if the receivers have continued the business of the corporation.People of New York v. Hopkins, 2 Cir., 18 F.2d 731, 733; Bright v. Arkansas, 8 Cir., 249 F. 950; McFarland v. Hurley, 5 Cir., 286 F. 365; Ohio v. Harris, 6 Cir., 229 F. 892; Coy v. Title Guarantee & Trust Co., D.C., 212 F. 520. The cases cited deal with liability of receivers for franchise taxes of domestic corporations operating in what may be termed domestic receiverships.
There are authorities, however, to the effect that a franchise tax is payable as an expense of administration when the receivers have operated the business of the corporation, even though the corporation is of a state other than that in which the receivership takes place. In New York Trust Co. v. Island Oil & Transport Corporation, 7 F.2d 416, franchise taxes of the State of Virginia were ordered paid in receivership proceedings in the District Court for the Southern District of New York.In the cited case Judge Knox stated: "But the equities of the situation appeal to me as demanding the payment of the taxes. By this I mean that, in administering the estate, the receivers have carried on the business of the corporation. In so doing, they have exercised its right to existence, conferred upon it by the commonwealth of Virginia. Why should the price of that right to existence, as determined by the state, not be paid?" The decision of Judge Knox was affirmed by the Circuit Court of Appeals for the Second Circuit in 11 F.2d 698, though upon the ground that it was within the discretion of the District Judge to order the payment in question. A statement similar in substance to that of Judge Knox is made by Circuit Judge Chase in his opinion in Re International Match Corporation, 2 Cir., 79 F.2d 203, 204. See, also, People of New York v. Hopkins, supra.
In Michigan v. Michigan Trust Co., 286 U.S. 334, 52 S. Ct. 512, 76 L. Ed. 1136, Mr. Justice Cardozo, delivering the opinion of the Supreme Court, while stating that the Supreme Court of Michigan by its decision in Re Detroit Properties Corporation, 254 Mich. 523, 236 N.W. 850, had held that a receiver appointed for a Michigan corporation by a Michigan court was by the order appointing him simply nominated as the person who was to exercise the "'powers belonging to the corporation by legislative grant'", also said, "To protect through a receiver the enjoyment of the corporate privilege and then to use the appointment as a barrier to the collection of the tax that should accompany enjoyment would be an injustice to the state and a reproach to equity." [pages 514, 515.] 1
The franchise taxes of the State of New Jersey were defined by the Supreme Court of the United States in New Jersey v. Anderson, 203 U.S. 483, at page 490, 27 S. Ct. 137, at page 139, 51 L. Ed. 284, as " * * * a tax imposed upon the right of the corporation to continue to be a corporation, with power to exercise its corporate franchises, based upon the amount of its capital stock issued and outstanding." In Re United States Car Co., 60 N.J.Eq. 514, 43 A. 673, it was held that [page 674] "Although the statute designates an imposition of this kind as a license fee or franchise tax, it plainly is not a tax upon corporate franchises. In fact, it is not, strictly speaking, a tax at all, nor has it the elements of one. It is in reality an arbitrary imposition laid upon the corporation, without regard to the value of its property or of its franchises, and without regard to whether it exercises the latter or not, solely as a condition of its continued existence." It seems to us that a fair interpretation of the decisions cited requires a holding that the franchise taxes of the State of New Jersey are imposed upon the corporation in return for its privilege "to be" a corporation, but we can perceive no substantial difference in so far as an obligation to pay franchise taxes is concerned between a right conferred upon a corporation by a franchise "to be" or a franchise "to do". It is obvious that if receivers are to carry on the business of the corporation under its charter, they must maintain the right of the corporation "to be" if they are "to do" its business. The distinction, which is largely a distinction without a difference, disappears.
To return now to the law of Pennsylvania, we are of the opinion that a receiver conducting the corporate business must make use of the corporate franchise. Legal title to all assets remains in the corporation, though the property is in the custody of the court. The receiver has possession of the property subject to the orders of the court. Singerly v. Fox, 75 Pa. 112; United States Brick Co. v. Brick Co., 228 Pa. 81, 77 A. 395; Blum Bros. v. Girard National Bank, 248 Pa. 148, 93 A. 940, Ann. Cas. 1916D, 609; Standard Pennsylvania Practice, Vol. 8, Sec. 77, pp. 541, 542. It follows therefore that the receivers in the case at bar exercised the privileges conferred by the corporate franchise, that is to say, they carried on the business of the corporation through the medium of the corporate franchise and were therefore charged with the duty of maintaining that franchise, the right of the corporation "to be". They also received, pursuant to the order of the court, as one of the corporate assets, the franchise of the corporation, and they were charged by the order of the court with the duty of protecting and conserving it. Therefore they were charged with the duty of maintaining the franchise of the corporation. It follows that they must be deemed to have incurred as a necessary expense of their administration the cost of maintaining the corporate existence of the debtor, a privilege measured by the State of New Jersey by the amount of the franchise tax now under discussion. We think that the payment or the withholding of payment of this sum was not a matter which rested within the discretion of the District Court after its order appointing receivers was made. The terms of the order are such as to require the protection of the franchise by the receivers and to require the exercise of the ...