Appeal from the District Court of the United States for the Eastern District of Illinois; Fred L. Wham, Judge.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
ALSCHULER, Circuit Judge.
The District Court allowed as a preferential or prior claim the demand of the State of Illinois by its director of finance against the bankrupt estate for $4,525.78. The trustee appeals.
The bankrupt sold motor fuel at his filling station in Illinois, and the state demand is for collections made by bankrupt of taxes on such fuel sales due the State of Illinois under the then recently enacted Motor Fuel Tax Law (Smith-Hurd Rev. St. Ill. 1929, c. 120, § 417 et seq.) and unpaid to the state at the time of the bankruptcy.
In order to qualify as a licensed distributor under the act, bankrupt had tendered the director the required bond for $5,000 to secure proper accounting for and payment of collections of taxes on sales of motor fuel he would make as a distributor. The director refused to accept the bond and returned it to him; but, for several months next preceding the bankruptcy, bankrupt nevertheless continued to sell and distribute motor fuel and to collect the tax thereon without having given any bond or received a license as a distributor. The amount realized from all the assets of the estate was but slightly larger than the priority claim awarded the state.
The contention of priority over general creditors is not based on section 64a of the Bankruptcy Act, as amended [11 USCA § 104 (a)] which allows priority for taxes due a state, but upon section 64b (7), which awards priority for "debts owing to any person who by the laws of the States or the United States is entitled to priority: Provided, That the term "person" as used in this section shall include corporations, the United States and several States and Territories of the United States." 11 U.S.C. § 104 (b) (7), 11 USCA § 104 (b) (7).
Whether the sum thus collected by bankrupt is such a debt due the state as to entitle the state to priority under section 64b (7) is the main question for review.
Appellee maintains that under the common law in force in Illinois any debt which is due the state is entitled to priority in payment as against other debts of the debtor. Smith-Hurd Rev. St. Ill. 1933, c. 28, § 1; par. 1, c. 28, Cahill's Ill. Rev. Stat. 1933, which was approved March 5, 1874, provides: "* * * the common law of England, so far as the same is applicable and of a general nature, and all statutes or Acts of the British parliament made in aid of, and to supply the defects of the common law, prior to the fourth year of James the First, excepting the second section of the sixth chapter of 43d Elizabeth, the eighth chapter of 13th Elizabeth, and ninth chapter of 37th Henry Eighth, and which are of a general nature and not local to that kingdom, shall be the rule of decision, and shall be considered as of full force until repealed by legislative authority."
That by the common law of England debts due the sovereign have priority over other creditors of the same debtor was declared in Giles v. Grover, 9 Bing. 128, 139, 157, 183, and in In re Henley & Co., 9 Ch. D. 469 (see Marshall v. New York, 254 U.S. 380, 41 S. Ct. 143, 65 L. Ed. 315). The Supreme Court of Illinois has declared it to be the law of the state that, under the common law as it exists in Illinois, debts due the state are entitled to priority in payment over those due to the debtor's general creditors. People v. Farmers' State Bank, 335 Ill. 617, 167 N.E. 804, 65 A.L.R. 1327; People v. Bank of Chebanse, 340 Ill. 124, 172 N.E. 50; People v. West Englewood Bank, 353 Ill. 451, 187 N.E. 525.
That this is the law of the state is not seriously controverted. But is it contended that the Motor Fuel Tax Law is in itself a complete code upon its subject-matter; and as it fails to specify that the state shall have a prior claim upon the assets of a debtor who collects and fails to pay over motor fuel tax, the common law, as applied to priority for debts in general owed the state, was repealed in respect to claims arising under the Motor Fuel Tax Law. The act makes provision for the appointment of distributors of motor fuel, and for the giving by the distributor of a bond to the state to secure payment to the state of collected motor fuel taxes; but such bond, if given, is further security to the state that the person collecting such tax will pay it over. If for any reason the state could not or did not realize on any such security, the relation of the state toward one who had collected and withheld payment of such taxes would in our judgment be the same as if such bond had not been required by the law.
There is no inconsistency between the state's common-law right of priority for a debt thus arising and the taking of security by bond as provided by the act. We perceive no valid reason why the common law and the statutory securities to the state may not co-exist. Even had a bond been accepted by the state, the state's right of priority, as of a debt due the state from one who had collected and converted its revenues, would remain unaffected and undisturbed. No intent or purpose to forego the state's common-law right of priority in such a case can be gathered from the Motor Fuel Tax Law, or from any other legislation to which we have been referred. Repeals of law by implication are not favored. People v. West Englewood Bank, supra; People v. Waukegan State Bank, 351 Ill. 548, 184 N.E. 811.
Appellant makes the contention that because the representatives of the state permitted bankrupt to continue for several months distributing motor fuel and collecting the tax without his having complied with the law by giving the state a bond and receiving a distributor's license, the state is in no event such a creditor of the bankrupt as to be entitled to priority. Bankrupt assumed to act in the capacity of a disbributor and collected the fuel tax to which the state, under the law, was entitled. Surely it was not for bankrupt to interpose his want of compliance with the law as a defense against the state's recovery of what he had thus collected. What so came into his hands was money had and received by him for the use of the state, in virtue whereof the relation of debtor and creditor came into being, a relation all-sufficient, regardless of how brought about, to invoke the application of the bankruptcy law giving a state priority for its debt. We are satisfied the omission of the state to require a bond of the bankrupt, and its failure to restrain him from vending motor fuel and collecting the tax, does not affect the state's position as a creditor entitled to priority under section 64b (7) of the Bankruptcy Act, as amended.
Appellant makes the point that none of the tax so collected by bankrupt was traced into the funds which came to the trustee in bankruptcy. If this were an undertaking to recover trust funds from the bankrupt estate it would, in general, be necessary to trace them in some way into the assets. The claim of the state is not predicated upon any trust theory, but upon its right of priority in its debtor's assets which the common law in force in Illinois gives the state for debts due it. The tracing ...