The opinion of the court was delivered by: SMITH
This matter is before the Court on petitions for review, filed herein by the United States and the State of New Jersey, pursuant to Section 39, sub. c, of the Bankruptcy Act, 11 U.S.C.A. § 67, sub. c. The matter was heretofore before Judge Morrill of this Court, now deceased, on a petition for review filed by the Bankrupt. The principal question here raised was decided by Judge Morrill. It is our opinion, however, that the present petitioners are entitled to a reconsideration of this question, and it is necessary, therefore, to review the proceedings in their entirety. It should be observed that we are handicapped by a somewhat inadequate record, resulting from a casual presentation in the hearings before the Referee in Bankruptcy.
A corporate reorganization proceeding was initiated by the Bankrupt on February 28, 1955, pursuant to Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501, and particularly Section 128 thereof, 11 U.S.C.A. § 528. The petition for reorganization was filed on February 28, 1955, and at that time there was on deposit in the 'general account' and the 'tax account' of the Debtor the sums of $ 55,834.85 and $ 127.53, respectively. When the attempt to effect a plan of reorganization failed, the Debtor was adjudged bankrupt; the order of adjudication was entered on August 17, 1955. The date of adjudication related back to the date when the petition for reorganization was filed and was effective as of that date. Section 238(1) of the Bankruptcy Act, 11 U.S.C.A. § 638(1).
The business of the Debtor was operated by a duly appointed trustee during the period of the attempted reorganization. It would appear from the record that during this period the funds on deposit in the general account of the Debtor were used to finance the operations and to meet current expenses. The funds on deposit in the general account were partially depleted in the operation of the business, and as of April 30, 1955, there remained on deposit a balance of $ 15,309.42. Whether or not the balance was further depleted prior to the order of adjudication does not appear.
At the time the corporate reorganization was initiated the assets of the Debtor were subject to tax liens in the total amount of $ 145,514.31. These liens included, in addition to other taxes, the assessments for the unpaid withholding taxes which the Debtor, as an employer, was required to deduct from the wages of the employees, pursuant to Sections 3102(a) and 3402 of the Internal Revenue Code of 1954, 26 U.S.C.A. §§ 3102(a) and 3402. (See also their earlier counterparts: Sections 1401(a) and 1622 of the Internal Revenue Code of 1939, 26 U.S.C.A.) The assessments for the third and fourth calendar quarters of 1954 were in the amount of $ 57,085.70 and $ 74,246.67, respectively.
There was due the State of New Jersey the sum of $ 6,223.60, representing the total amount of employees' contributions which the Debtor was required to deduct from wages pursuant to the provisions of the Unemployment Compensation Law, and particularly R.S. 43:21-7(d), 43 N.J.S.A. 43:21-7(d). Whether or not the deductions were in fact made, we do not know. These contributions, periodically reportable and payable by the Debtor, as the employer, under the provisions of R.S. 43:21-14, 43 N.J.S.A. 43:21-14, were made the subject of a proof of claim in which a right to priority of payment was asserted.
While the bankruptcy proceedings were pending, the trustee in bankruptcy paid the sum of $ 100,000 to the Director of Internal Revenue 'on account of taxes,' pursuant to an order of the Referee in Bankruptcy entered on September 10, 1958. This payment exceeded by approximately $ 85,000 the balance remaining in the 'general account' of the Debtor as of April 30, 1955. It therefore seems rather obvious that the sum of $ 85,000 was realized from the collection or upon the sale of assets remaining in the Bankrupt's estate.
The matter came before the Referee in Bankruptcy on a petition filed on behalf of the Bankrupt on July 22, 1958. The said petitioner, apparently relying on Section 7501(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. 7501(a), alleged that the funds in the general account of the Debtor as of February 28, 1955, constituted trust funds. It petitioned the Referee in Bankruptcy to direct 'that any proposed partial payment to be made * * * to the Director of Internal Revenue, * * * be allocated to payment of the first quarter 1955, withholding and social security taxes, in the sum of $ 36,357.10, and the third and fourth quarters of 1954.' The petition was dismissed on the ground that the Bankrupt was not the real party in interest, and on a further ground hereinafter discussed.
Notwithstanding his determination that the Bankrupt was not the real party in interest, the Referee considered the issue raised by the allegation that the funds in the general account of the Debtor constituted trust funds. He held that the provisions of Section 7501 of the Internal Revenue Code, supra, did not 'automatically create a trust in favor of the Federal Government or give it a general lien on any funds of a debtor or bankrupt.' (Emphasis by this Court) We agree with this conclusion for reasons hereinafter stated.
The matter came before Judge Morrill on a petition for review filed by the Bankrupt, and a certificate of review prepared and filed by the Referee in Bankruptcy. The petition for review was dismissed on the ground that the Bankrupt was 'not an aggrieved person under § 39(c) of the Bankruptcy Act, and is, therefore, not entitled to * * * review.' (Order of February 24, 1959). It appears from the said order and the opinion of Judge Morrill, delivered from the bench, that he, like the Referee in Bankruptcy, gave consideration to the issue raised by the allegation that the funds constituted trust funds.
When the matter again came before the Referee in Bankruptcy he held that the statutory tax liens, in the amount of $ 145,514.31, for the third and fourth calendar quarters of 1954, entitled the United States to priority of payment. This determination is not challenged by either of the petitioners. He held further that the 'equitable lien' survived only as to the withholding taxes for the first two months of 1955, and, in compliance with the order entered by Judge Morrill, ordered that the amount of $ 36,357.10 of the monies paid to the Director of Internal Revenue be applied first to the ...