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PHELPS v. UNITED STATES

May 19, 1975

PHELPS, RECEIVER IN BANKRUPTCY
v.
UNITED STATES



CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Burger, Douglas, Brennan, Stewart, White, Marshall, Blackmun, Powell, Rehnquist

Author: Brennan

[ 421 U.S. Page 331]

 MR. JUSTICE BRENNAN delivered the opinion of the Court.

Between March and June 1971 the Internal Revenue Service (IRS) made assessments of federal taxes in the amount of $140,831.59 against Chicagoland Ideel Cleaners, Inc. Chicagoland failed to pay the taxes after formal demand. Instead, on June 28, 1971, Chicagoland transferred its assets to an assignee for the benefit of creditors. The assignee promptly converted the assets into cash of approximately $38,000. On August 25, 1971, the IRS filed a notice of tax lien respecting the March-June assessments in the office of the Recorder of Deeds of Cook County, Ill. and on the same day served a notice of levy on the assignee. The notice of levy stated that the proceeds in the assignee's hands "are hereby levied upon and seized for satisfaction" of the taxes, "and demand is hereby made upon you for the [proceeds]." On September 14, 1971, an involuntary petition in bankruptcy was filed against Chicagoland. Chicagoland was adjudicated bankrupt and petitioner Phelps was appointed receiver in bankruptcy.

Petitioner receiver, on October 19, 1971, filed an application with the Referee in Bankruptcy for an order requiring the assignee, who had not complied with the IRS demand for payment, to turn over to petitioner the $38,000 proceeds from the sale of Chicagoland's assets. The IRS opposed the application on the ground that "[t]his court of bankruptcy lacks jurisdiction over the subject matter of the application because the United States is entitled to the possession of the moneys now held by [the] assignee of the bankrupt...." The Referee in Bankruptcy rejected the contention, holding that "the

[ 421 U.S. Page 332]

     assignment... passed inalienable title to the assets of Chicagoland... to the assignee" and therefore "the notice of levy of the Internal Revenue Service is a nullity...." The Referee accordingly entered an order directing the assignee to "surrender and turn over to" petitioner "all sums in his possession...." The District Court for the Northern District of Illinois, on petition for review on behalf of the IRS, approved the Referee's turnover order. The Court of Appeals for the Seventh Circuit reversed. 495 F.2d 1283 (1974). The Court of Appeals held: "Since possession of the property resided in the United States as against the [petitioner] receiver, the bankruptcy court lacked jurisdiction summarily to adjudicate the controversy without the Government's consent.... The United States is now entitled to have its claim adjudicated in a plenary suit. We respectfully decline to follow the contrary holding [of the Court of Appeals for the Ninth Circuit] in In re United General Wood Products Corp., 483 F.2d 975 (9th Cir. 1973)." 495 F.2d, at 1285-1286. We granted certiorari to resolve the conflict between the Courts of Appeals, 419 U.S. 1068 (1974).*fn1 We agree with the holding of the

[ 421 U.S. Page 333]

     Court of Appeals for the Seventh Circuit and affirm its judgment.*fn2

I

The assignee claims no interest in the proceeds of the $38,000. The Court of Appeals for the Ninth Circuit, in In re United General Wood Products Corp., 483 F.2d 975, 976 (1973), held that that circumstance, without more, subjected property to the bankruptcy court's summary jurisdiction to enter a turnover order. Wood Products Corp. relied on the statement in Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 432-433 (1924), that constructive possession of the property by the bankruptcy court "exists... where the property is held by some other person who makes no claim to it." That reliance is misplaced. The statement read in the context of the facts of that case and its holding applied only to property in the hands of a nonadverse

[ 421 U.S. Page 334]

     third person who was not holding it as agent for a bona fide adverse claimant. Taubel itself held that the bankruptcy court had not been given jurisdiction by summary proceedings to avoid a lien created by levy under a judgment of a state court where the sheriff possessed the property for the judgment creditor, and neither he nor the judgment creditor had consented to adjudication of the controversy by the bankruptcy court. Similarly, in this case the United States is a bona fide ...


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