US SUPREME COURT DECISIONS

A railroad petitioned for reorganization under § 77 of the Bankruptcy Act after New Jersey taxes had accrued against it in an aggregate amount exceeding the value of its liquid assets and extensive litigation over the tax assessments had resulted adversely to it. The state comptroller filed on behalf of the State a claim for taxes, plus interest, claiming that, under the state law, the sums owed were secured by "a lien paramount to all other liens upon all the lands and tangible property and franchises of the company in this State." Objections to the claim were filed by the debtor, the trustee, security holders, and an indenture trustee, who claimed, inter alia, that the debtor's property was grossly overvalued, that the debtor had been intentionally and systematically discriminated against in making the assessments, that no interest accrued after the petition for reorganization was filed or during the period when collection of the taxes was enjoined and the debtor was contesting their validity, that the State had no lien on the debtor's personal property, and that no part of the State's claim except the principal amount of taxes was entitled to a lien equal or paramount to the debtor's general chanrobles.com-red

Page 329 U. S. 566

mortgage. After an attempt by the trustee to compromise the State's tax claims pursuant to state legislation facilitating such compromises had been frustrated by a declaration of the invalidity of the legislation, the trustee petitioned the reorganization court for adjudication of these claims. Appearing specially, the state attorney general claimed that entertainment of the petition would constitute a prohibited suit against the State.

Held:

1. The reorganization court had jurisdiction over proof and allowance of the tax claims, and the exercise of that power was not a suit against the State. P. 329 U. S. 572.

2. As so construed, § 77 is constitutional. New York v. Irvin Trust Co., 288 U. S. 329. P. 329 U. S. 574.

3. The conclusion of the Federal District Court in New Jersey that the state comptroller had authority under New Jersey law to file the claim is entitled to special weight, and this Court finds nothing to impeach it. P. 329 U. S. 574.

4. The reorganization court has jurisdiction over all property of the debtor, including that on which the State asserts a lien, and the court's power to deal with liens extends to the lien claimed by the State. P. 329 U. S. 575.

5. The reorganization court has no power to redetermine for state tax purposes the valuations of the railroad's property underlying the assessments or the validity of the assessments. Arkansas Corporation Commission v. Thompson, 313 U. S. 132. P. 329 U. S. 578.

6. The reorganization court is not precluded, however, from adjudicating other issues raised by objections to the State's claim. P. 329 U. S. 579.

(a) The validity and priority of one lien, whether or not claimed by a State, as against other liens, are questions for the reorganization court. P. 329 U. S. 579.

(b) The extent of the lien -- to what property it applies and whether it is restricted to realty or covers personal property or revenues as well -- is a question for the reorganization court. P. 329 U. S. 580.

(c) Excepting questions involving the valuations underlying the assessments and the validity of the assessments, the reorganization court may adjudicate questions pertaining to the amount of a tax claim secured by a lien -- e.g., whether the amount of the claim has been swollen by the inclusion of forbidden penalties, what claims sought to be proved by the State are "penalties," the applicability of § 57j to reorganizations under § 77, the liability of the estate for penalties incurred by the trustee in the operation of the business, chanrobles.com-red

Page 329 U. S. 567

and what interest, if any, accrues after the petition for reorganization has been filed. P. 329 U. S. 580.

(d) Through appropriate exercise of the power to compromise or settle claims, the court may authorize the trustee to compromise claims, secured or unsecured, and may approve equitable adjustments of them, thus reducing or otherwise affecting the participation that the claimant, whether a State or another, may have in the res which is in custodia legis. P. 329 U. S. 581.

7. This Court will not pass on questions of local law as to the validity or effect of settlements made in accordance with state legislation later held invalid, since those questions have not been passed upon by either the reorganization court or the Circuit Court of Appeals, both of which have greater familiarity than this Court with local law and local practice. Pp. 329 U. S. 582-583.

8. These rulings are subject to the limitation that res judicata may have made binding on the reorganization court various questions of local law, including the amount and validity of the taxes under the state law and the character and extent of the lien which that law affords them. P. 329 U. S. 584.

152 F.2d 408 affirmed in part and reversed in part.

In a proceeding for the reorganization of a railroad under § 77 of the Bankruptcy Act, the reorganization court confirmed a report of a special master finding that (1) certain proofs of claim of New Jersey for taxes were properly filed by state officers acting in pursuance of their statutory authority, (2) § 77 confers on the reorganization court jurisdiction over the kind of claims asserted by the State in the proceeding, and such construction of the Act is not unconstitutional, and (3) the entire property of the debtor is in custodia legis, subject to the rights of lienholders, and the reorganization court is the proper court to determine the validity and amount of the tax claims, subject to certain limitations. New Jersey appealed and petitioned for a writ of prohibition. The Circuit Court of Appeals reversed the order of the reorganization court and dismissed the application for a writ of prohibition. 152 F.2d 408. This Court granted certiorari. 328 U.S. 876. Affirmed in part and reversed in part, p. 329 U. S. 584. chanrobles.com-red

Page 329 U. S. 568