Citizens Savings Bank v. City of Paducah

Opinion of the Court by William Rogers Clay, Commissioner Affirming. The Paducah Glass Company, a corporation, was adjudged a bankrupt. Prior to the bankruptcy, it had mortgaged its property to the Citizens Savings Bank for a sum in excess of its value. The City of Paducah likewise had a lien on the same property for taxes due for 1908. This lien was prior to the mortgage lien of the bank. On petition of the trustee in bankruptcy, a sale of the property of the bankrupt was ordered. The bank purchased the property. Before acquiring a deed, it was compelled to pay certain costs incurred in the bankruptcy proceeding. The City of Paducah instituted this action against the purchaser, Citizens Savings Bank, to enforce its lien for taxes. On final hearing there was a judgment in favor of the city for the amount sued for, and the bank appeals. Section 64a of the Bankruptcy Act provides, in part, as follows: “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 upon filing the receipts of the proper public officers for such payment he shall be credited with the amount thereof, 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. ’ ’ For the bank it is insisted that the City of Paducah is now estopped from asserting any claim against it or its property for taxes due by the bankrupt, by its failure to assert a claim for taxes in the bankrupt court, and by [585] reason of the failure of the court to make an order directing the trustee to pay the taxes. In the present case the order is silent as to how the property was sold; whether free of liens or subject to liens. It is well settled that a court of bankruptcy, including the referee, has authority to direct a sale of property by the trustee in bankruptcy free and clear of all liens and encumbrances, in which event the liens are transferred to the proceeds according to their priority. In re Worland, 1 A. B. R., 450, 92 Fed., 893; McNair v. McIntyre, 113 Fed., 113; Brandenburg on Bankruptcy, Sec. 1195. However, it is well settled that a trustee should not be required to sell any portion of the estate where the appraisers return shows it to be so heavily encumbered with valid liens that nothing can be realized for the unsecured creditors. In re Cogley, 107 Fed., 73, 5 A. B. R., 731. It is further held that a sale free of liens does not affect a lien in the nature of a tax assessment against the property, but in such a case the trustee should protect the purchaser by providing for the payment of the taxes. In re Keller, 109 Fed., 131, 6 A. B. R., 334. In the present case there was no sale free of tax liens. It is further shown that the trustee had on hand no assets, and acquired by virtue of the sale no assets, out of which he could pay the taxes. For failing to provide for the payment of the taxes under these circumstances, neither the court nor the trustee can be blamed. The property not being sold free of tax liens, the purchaser acquired it subject to the tax lien in question. If the trustee had any assets out of which to pay the taxes, the purchaser might» require that this be done. Here the trustee could not pay the taxes unless the purchaser furnished the money. The purchaser is therefore in no position to complain of the fact that the taxes were not paid by the trustee. Whether the purchaser furnished the money to the trustee in the first instance, or is now required to pay the taxes, the result is the same. It does not appear that the city had notice of the bankruptcy proceeding, or that its claim for taxes was therein adjudicated; hence, it is in nowise concluded by the bankruptcy proceeding. Judgment affirmed.