Simonson v. Granquist, 369 U.S. 38 (1962)

369 U.S.
38
82 S.Ct. 537
7 L.Ed.2d 557
Hattiebelle O. SIMONSON, Trustee in Bankruptcy, etc., et al.,

Petitioners,
v.
R. C. GRANQUIST, District Director of Internal Revenue, et
al.
No. 83.
Argued Jan. 18, 1962.
Decided March 5, 1962.
Donald A. Schmechel, Seattle, Wash., and Fred A. Granata, Portland, Or.,

for petitioners.
Richard J. Medalie, Washington, D.C., for respondents.
Mr. Justice BLACK delivered the opinion of the Court.
These two cases, consolidated for argument here, involve controversies

between the United States and bankruptcy trustees concerning the right of the
Government to recover federal tax penalties against the estate of a bankrupt. 1
Because the tax penalties constituted perfected liens on the estate of the
bankrupt,2 the Court of Appeals for the Ninth Circuit, following one of its own
prior decisions which subsequently had been supported by both the Sixth and
the Tenth Circuits,3 sustained District Court judgments holding the penalty
claims allowable. 9 Cir., 287 F.2d 489, 491. Since the Fourth and Fifth Circuits
have held to the contrary,4 we granted certiorari to resolve the conflict. 366
U.S. 943, 81 S.Ct. 1673, 6 L.Ed.2d 854.
Two provisions of the Bankruptcy Act, 57, sub. j and 67, sub. b, are asserted
to have particular relevance to the question. Section 57, sub. j provides:
'Debts owing to the United States or to any State or any subdivision thereof as a
penalty or forfeiture shall not be allowed, except for the amount of the
pecuniary loss sustained by the act, transaction, or proceeding out of which the
penalty or forfeiture arose * * *.'5
Section 67, sub. b provides, however:
4
'(S)tatutory liens * * * for taxes and debts owing to the United States * * * may
be valid against the trustee, even though arising or perfected * * * within four
months prior to the filing of the petition initiating a proceeding under this Act
by or against him. * * *'6
Despite the fact that the language of 57, sub. j broadly prohibits the
allowance of penalty claims in bankruptcy without regard to whether such
claims are secured or unsecured, the Government argues that this section
should be interpreted to apply to unsecured penalty claims only and that
secured claims, even though for penalties, should be allowed under 67, sub. b.
Its argument starts from the fact that the Bankruptcy Act primarily provides a
way to gather the unencumbered assets of an insolvent debtor for distribution
among his unsecured creditors, but, though containing some provisions
applicable to secured creditors, generally leaves those creditors secured by
mortgages and liens free to enforce their claims directly against the property by
which those claims are secured. From this and a section-by-section analysis of
the Act, the Government reasons that the 'claims' referred to in 57, which
governs the 'Proof and allowance of claims,' are not the claims of secured
creditors but only the 'claims' of unsecured creditors against the fund created by
unencumbered assets, with which the Act primarily deals. On this basis the
Government contends that 57, sub. j, being a part of 57, must be read as
barring only those penalties that have not yet ripened into a lien so as to become
a charge upon the bankrupt's property.
We think, however, that the language of 57, sub. j is itself a more dependable
guide to its meaning than this argument from the general structure of the
Bankruptcy Act. Unquestionably that language is broad enough to bar all
penalties, whether secured by lien or not, and we think the section was
designed to do precisely that. For it plainly manifests a congressional purpose
to bar all claims of any kind against a bankrupt except those based on a
'pecuniary' loss. So understood, this section, which has been a part of the
Bankruptcy Act since its enactment in 1898, is in keeping with the broad aim of
the Act to provide for the conservation of the estates of insolvents to the end
that there may be as equitable a distribution of assets as is consistent with the
type of claims involved. Moreover, the prohibition of all tax penalties in
bankruptcy is wholly consistent with the policy of the penalty provisions
themselves. Tax penalties are imposed at least in part as punitive measures
against persons who have been guilty of some default or wrong.7 Enforcement
of penalties against the estates of bankrupts, however, would serve not to
punish the delinquent taxpayers, but rather their entirely innocent creditors.
7
When we turn to the language of 67, sub. b, we find nothing that indicates a
purpose to require the general creditors of a bankrupt to suffer because of
penalties designed to be inflicted upon the bankrupt himself. Indeed, there is
not a single word in that section regarding penalties, and the plain purpose of
the section is merely to prevent certain liens, including statutory tax liens,
'arising or perfected * * * within four months prior to the filing of the
(bankruptcy) petition,' from being set aside and declared invalid under 60 as
preferential.8 Thus 67, sub. b expressly declares that it is to take precedence
over any 'provisions of section 60 of this Act to the contrary * * *.' Section 67,
sub. b cannot therefore be read as showing a congressional purpose to make
penalties allowable contrary to the special and specific language of 57, sub. j
which makes them not allowable.9
The Government argues, however, that the legislative history of the two
sections supports the allowance of penalties when they have ripened into liens.
Without discussing the varied arguments to this effect in detail, we think the
legislative history cited supports no such conclusion.10 Nor do we think that any
inference can be drawn from the failure of Congress to amend the Act for
although some courts have held liened penalty claims allowable, others have
held precisely the opposite.11
It is true that the United States has long had an absolute priority for debts due
from insolvent debtors and that the Bankruptcy Act generally accords secured
creditors a preferred position. But 57, sub. j places penalties in a category
quite different from ordinary debts, one not favored in bankruptcy, and the
character of a penalty is by no means changed by calling it a lien.
10
Reversed.
11
Mr. Justice FRANKFURTER, whom Mr. Justice HARLAN joins, dissenting.
12
Of course one agrees with the Court that an important purpose of the
Bankruptcy Act was to ensure an equitable distribution of assets among
creditors. I also agree that 57, sub. j, 11 U.S.C. 93, sub. j, 11 U.S.C.A. 93,
sub. j, denying claims for penalties against the estate, reflects a policy against
disadvantaging innocent creditors for the wrongs of the bankrupt. If that were
the only policy of the Act, 57, sub. j would hold the exclusive field and there
would be no problem. As it is, if there be a countervailing policy as a matter of

historic bankruptcy law, it can neither be discarded nor disregarded in giving
57, sub. j its proper setting and its resulting scope.
13
In bankruptcy a sharp distinction has always been drawn between secured and
unsecured creditors. Secured creditors may not vote at creditors' meetings,
56, sub. b, 11 U.S.C.A. 92, sub. b, nor may their claims be allowed against
the bankrupt estate, 57, sub. e, except to the extent that these claims exceed
the value of the security. Fully secured creditors are not counted in determining
the total number of creditors in order to ascertain the number required to initiate
involuntary bankruptcy, 59, sub. e, 11 U.S.C.A. 95, sub. e. Liens have been
held unaffected by a discharge under 17, e.g., Prebyl v. Prudential Ins. Co., 8
Cir., 98 F.2d 199; see 1 Collier, Bankruptcy 17.29 (14th ed. 1961).
14
Sections 64, 65, and 67, 11 U.S.C.A. 104, 105, 107 establish three classes of
debts: those which are secured by lien, those which are given priority and all
others. Those having neither security nor priority are satisfied on a pro rata
basis, 65. Those with priority, as listed in 64, are to be paid in full in
specified order before the distribution of pro rata dividends to other claimants.
Liens, in 67, sub. d of the statute as enacted in 1898, 30 Stat. 544, 564, were
declared to be unaffected by the statutethey were entirely without its scope.
Consequently they were entitled to precedence over claims granted priority by
64. City of Richmond v. Bird, 249 U.S. 174, 39 S.Ct. 186, 63 L.Ed. 543. This
section was omitted in the 1938 revision because its wording permitted
inferences that by negative implication it disallowed certain liens not otherwise
invalidated by the Act, and because the substance of the provision was thought
to be preserved in other sectionsnot because of disapproval in policy. S.Rep.
No. 1916, 75th Cong., 3d Sess. 17 (1938); see 4 Collier, supra, 67.20. This
Court has held that liens remain immune from and are not displaced by the
Act's priorities under the 1938 Act, Goggin v. California Labor Div., 336 U.S.
118, 126127, 69 S.Ct. 469, 473, 474, 93 L.Ed. 543, and liens for federal
taxes are expressly preserved by 67, sub. b. A limited exception to the
immunity of liens was made in 67, sub. c, but the extent of the invalidation or
subordination of liens to other debts was carefully circumscribed, and the basic
lien immunity remains. 4 Collier, supra, 67.20(3)67.20(7).
15
Congress has thus treated liens as outside the policy of equal treatment of
creditors in bankruptcy. 3 Collier, supra, 57.07. A lienor does not hold simply a
first priority; he has 'a right to enforcement independent of bankruptcy,' id.,
64.02, at 2061. The Bankruptcy Act deals with the distribution of
unencumbered assets among unsecured creditors. Id., 60.01. Lienholders need
no Bankruptcy Act. Liens are independent of and essentially unaffected by
bankruptcy proceedings. I agree with the court below that liens are unaffected
by 57, sub. j; they are outside its scope.
In the first case, Simonson v. Granquist, there is another point which we need
not reach because of the disposition made here.
In Simonson v. Granquist the liens arose under Int.Rev.Code of 1954, 6321,

26 U.S.C.A. 6321; in Harris v. United States, they arose under Int.Rev.Code
of 1939, 3670, 26 U.S.C.A. 3670.
In re Knox-Powell-Stockton Co. (C.A.9th Cir.), 100 F.2d 979; Commonwealth

of Kentucky v. Farmers Bank (C.A.6th Cir.), 139 F.2d 266; United States v.
Mighell (C.A.10th Cir.), 273 F.2d 682, 77 A.L.R.2d 1119.
United States v. Harrington (C.A.4th Cir.), 269 F.2d 719; United States v.
Phillips (C.A.5th Cir.), 267 F.2d 374.
30 Stat. 561, as amended, 11 U.S.C. 93, sub. j, 11 U.S.C.A. 93, sub. j.
52 Stat. 876, as amended, 11 U.S.C. 107, sub. b, 11 U.S.C.A. 107, sub. b.
See, e.g., United States v. Childs, 266 U.S. 304, 307, 45 S.Ct. 110, 69 L.Ed.
299.
30 Stat. 562, as amended, 11 U.S.C. 96, 11 U.S.C.A. 96. See Analysis of

H.R. 12889, 74th Cong., 2d Sess. 211, note 1; 4 Collier, Bankruptcy 183,
particularly note 12.
Cf. Gardner v. State of New Jersey, 329 U.S. 565, 580581, 67 S.Ct. 467, 475,
91 L.Ed. 504.
10
Indeed what little legislative history there is might well be taken to indicate an
intent to bar penalties whether liened or not. Thus, the minority report on the
Torrey Bill which eventually became the Bankruptcy Act of 1898 stated as an
objection to 57, sub. j, the fact that although 'penalties and forfeitures, when
merged into judgment * * * are liens upon the debtor's estate, this bill treats
them as worthless and forbids their payment.' H.R.R.ep. No. 1674, 52d Cong.,
1st Sess., pt. 2, pp. 1314.
11
Compare, e.g., In re Knox-Powell-Stockton Co., 9 Cir., 100 F.2d 979, and

Commonwealth of Kentucky v. Farmers Bank, 139 F.2d 266, with United
States v. Phillips, 5 Cir., 267 F.2d 374, and In re Burch, D.C., 89 F.Supp. 249.
In 1960 Congress passed an Act containing a provision applying 57, sub. j, to
penalties 'whether or not secured by lien,' but this was vetoed by the President.
106 Cong.Rec. 19168.

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369 U.S.

Hattiebelle O. SIMONSON, Trustee in Bankruptcy, etc., et al.,

Donald A. Schmechel, Seattle, Wash., and Fred A. Granata, Portland, Or.,

These two cases, consolidated for argument here, involve controversies

Mr. Justice FRANKFURTER, whom Mr. Justice HARLAN joins, dissenting.

would be no problem. As it is, if there be a countervailing policy as a matter of

In Simonson v. Granquist the liens arose under Int.Rev.Code of 1954, 6321,

In re Knox-Powell-Stockton Co. (C.A.9th Cir.), 100 F.2d 979; Commonwealth

30 Stat. 561, as amended, 11 U.S.C. 93, sub. j, 11 U.S.C.A. 93, sub. j.

52 Stat. 876, as amended, 11 U.S.C. 107, sub. b, 11 U.S.C.A. 107, sub. b.

30 Stat. 562, as amended, 11 U.S.C. 96, 11 U.S.C.A. 96. See Analysis of

Compare, e.g., In re Knox-Powell-Stockton Co., 9 Cir., 100 F.2d 979, and

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