New York v. Irving Trust Co.

Background

A publishing company was declared bankrupt in March 1929 and a bank became its trustee. The bankruptcy referee ordered all claims by the State of New York to be filed within sixty days after service; the State filed a vague notice in October 1929 of possible franchise taxes for 1917–1928 but never submitted a definite, auditable claim. The trustee moved in 1931 to strike that notice, the lower courts approved the expungement, and the question reached the Court whether the district bankruptcy court had power to do this against a State.

Reasoning

The Court examined whether federal bankruptcy law allows bankruptcy courts to control administration of estates and to bar late claims. It relied on the Constitution’s grant of power to Congress to create uniform bankruptcy laws and on provisions of the Bankruptcy Act that give district courts authority to collect, reduce to money, distribute estates, and determine tax claims. The Court explained that because states are not bound by the ordinary six-month proof period, bar orders are necessary to close estates, and that hearing and expunging an untimely state tax notice falls within the bankruptcy court’s authority. The opinion rejected the argument that this power improperly infringes state sovereignty.

Real world impact

The decision affirms that trustees and bankruptcy courts can remove vague or late state tax claims so estates can be settled promptly. States that want a share in an estate must present definite, auditable claims in a timely way or risk being barred. The judgment of the lower courts was affirmed.