Swarts v. Hammer

Background

A trustee was handling the estate of a bankrupt dry goods company and had $68,320 on deposit for the estate. The city’s tax collector said state, school, and city taxes for 1901 had been assessed against that sum on June 1, 1900, and presented a certified tax bill. A referee ordered the trustee to pay $1,298.08 plus penalties and fees; the District Court approved the tax amount but not the penalties and fees, and the lower appellate court affirmed that result.

Reasoning

The narrow question was what Congress meant in the Bankruptcy Act of 1898 about property held by a trustee. The Court noted that section seven gives the trustee title to the bankrupt’s property, but that transfer does not create a special kind of ownership that frees the property from state and municipal obligations. The opinion explained that, unless Congress clearly says otherwise, property in a trustee’s hands remains subject to lawful state and local taxes. Applying that view, the Court affirmed the order requiring payment of the assessed taxes while leaving out the added penalties and fees.

Real world impact

The decision means money held by a bankruptcy trustee can be reached to pay valid state and local taxes assessed before bankruptcy, so municipalities and school districts can collect such taxes from estate funds. Trustees and creditors should expect taxes to be paid from estate deposits, though extra penalties and fees may not always be allowed.