59 Wn.2d 670, BENNETT-IRELAND, INC., Plaintiff, v. AMERICAN ALUMINUM PRODUCTS CO., INC., Respondent, KING COUNTY et al., Appellants

[No. 35990. En Banc.      Supreme Court      March 22, 1962.]

BENNETT-IRELAND, INC., Plaintiff, v. AMERICAN ALUMINUM
                PRODUCTS CO., INC., Respondent, KING COUNTY
                          et al., Appellants.*

[1] INSOLVENCY - DISTRIBUTION OF INSOLVENT'S ESTATE - PRIORITIES -CLAIMS OF THE UNITED STATES - LAW APPLICABLE. The trial court in a receivership proceeding erred in applying the priorities of the Federal Bankruptcy Act, pursuant to RCW 23.01.610, so as to give wage claimants priority over a tax claim of the United States, since 31 U.S.C. 191, which is applicable to nonbankruptcy proceedings, provides that debts due the United States shall be satisfied first, and the relative priority of a federal claim is subject to governing federal law, which is supreme over state law.

[2] CONSTITUTIONAL LAW - PERSONS ENTITLED TO RAISE CONSTITUTIONAL QUESTIONS. In considering an attack on the constitutionality of a statute, the Supreme Court will first consider whether the attacking party has standing to make the contention.

[3] SAME - COUNTIES - FINANCIAL INTEREST AS BASIS FOR ATTACKING STATUTE. A county's financial interest affords it no right to challenge the constitutionality of a statute.

[4] INSOLVENCY - DISTRIBUTION OF INSOLVENT'S ESTATE - PRIORITIES -NON-POSSESSORY LIENS. In a receivership proceeding, the trial court properly subordinated a county's statutory tax lien, on certain personal property of which it had never taken actual possession, to a lien of the State Tax Commission which had been perfected by possession, a tax claim of the United States, and certain wage claims, since the United States has first priority under 31 U.S.C. 191, and the priorities of the Bankruptcy Act, which is made applicable to such a proceeding by RCW 23.01.610, recognizes the possessory lien of the State Tax Commission. but postpones payment of a non-possessory lien until after payment of costs and expenses, and wage claims.

* Reported in 369 P. (2d) 957.

[1] See Ann. 83 A. L. R. 1089, 84 A. L. R. 1530; Am. Jur., Insolvency      68.

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[5] APPEAL AND ERROR - NATURE OF REMEDY - BURDEN OF PERSUASION. On appeal, the burden of persuasion is upon the appellant; and a contention failed where it was not shown how the authorities cited were applicable to the facts in the present case.

[6] INSOLVENCY - APPEAL AND ERROR - DECISIONS REVIEWABLE - MOOT QUESTIONS. A claimant's contention, on appeal from a receivership proceeding, that certain wage claims which had been afforded a higher priority were not entitled to preferential treatment, was moot and could not be decided by the Supreme Court, where, even if the contested claims were relegated to general creditors' claims, the remaining higher-priority claims would use up all of the available funds, and a favorable disposition of the contention would avail the appealing claimant nothing.

Appeal from a judgment of the Superior Court for King County, No. 546894, Lloyd Shorett, J., entered February 3, 1961. Affirmed in part; reversed in part; remanded.

Action for the appointment of a receiver and liquidation of assets. Certain claimants appeal from an order of distribution.

Charles O. Carroll, James J. Caplinger and William L. Paul, Jr., for appellant King County.

Charles P. Moriarty and James F. McAteer (Louis F. Oberdorfer, Lee A. Jackson, A. F. Prescott, and George F. Lynch, of counsel), for appellant United States of America.

The Attorney General and James A. Furber, Assistant, for respondent.

DONWORTH, J. -

This is a receivership proceeding in which we are called upon to review the relative priorities of certain claims as fixed by the trial court.

The case originated in an action instituted by a materialman in which it sought judgment against American Aluminum Products Co., Inc., for materials sold and delivered, and asked for the appointment of a receiver to liquidate the corporation's assets for the benefit of its creditors. The corporation admitted it was insolvent, and on February 17, 1960, the appointment of a receiver was ordered. Prior to that time, the Washington State Tax Commission, pursuant to certain judgments, had levied on and taken possession of all stocks, fixtures, and equipment belonging to

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the insolvent corporation; and had posted a notice of tax sale of this property. On February 24, 1960, the day that the receiver was appointed, the Tax Commission relinquished possession of the property in consideration of a stipulation by all the parties that its rights would be preserved in the receivership. Various claimants, including the United States, the State of Washington, King County, Washington, and wage claimants filed claims.

The property was sold after the various claimants had stipulated that the property could be sold free and clear of all liens, encumbrances, and claims. There was no waiver of rights by any party since, under the stipulation, any rights which each party had in the property were to attach to the proceeds of the sale, and the validity and priority of the various claims were to be determined at a later hearing held for such purpose.

The receiver filed a final report on January 16, 1961, and a hearing thereon was had in the Superior Court for King County on February 3, 1961. On that date, orders were entered approving the report and allowing claims. The court directed that the claims were to be paid in the following order from the $5,578.31 remaining after payment of expenses of administration:
1. Tax Commission of the State of Washington     31.309.48
2. Wage claims                                    2.781.02
3. United States of America                     3.421.96
4. King County, Washington                          826.37
5. Rent                                             600.00
6. Prior (nonlien) tax claims
a. City of Seattle                              29.54
b. State Dept. of Labor & Industries           317.44
c. State Employment Security Dept           497.87
7. Unsecured general creditors

After the denial of motions for rehearing and reconsideration, the United States and King County appealed.1

1 The brief of the state says: " . . . the State of Washington appealed on behalf of the Department of Labor & Industries and Employment Security Department solely to protect their rights in the event that RCW 23.01.610 is declared unconstitutional." The state's cross-appeal is expressly contingent, and since the contingency does not arise in this case, we shall treat the state simply as a respondent.

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The first appellant we shall deal with is the United States, which merely seeks a reversal as to the finding that the wage claimants take priority over the claims of the United States.2

[1] The trial court applied the priorities of the Federal Bankruptcy Act, as provided by RCW 23.01.610, in giving the wage claimants priority over the tax claim of the United States. This was error. The relative priority of a federal claim is subject to governing federal law, which is supreme over state law. In re Shoptaw's Estate, 54 Wn. (2d) 602, 343 P. (2d) 740 (1959). 31 U.S.C. yx 191 (U. S. Rev. Stat. yx 3466) provides that "Whenever any person indebted to the United States is insolvent . . . the debts due to the United States shall be first satisfied; . . ." This statute is applicable in any nonbankruptcy proceeding, such as the present case. In such proceedings, claims of the United States have uniformly been afforded priority over wage claims. See, e.g., United States v. Emory, 314 U. S. 423, 86 L. Ed. 315, 62 S. Ct. 317. See, generally, 63 Yale L. J. 905 (1954). The debts due to the United States are to be satisfied before any of the wage claims are paid.

We now turn our consideration to the second appellant, King County. The county has advanced four arguments in its effort to raise its priority from the rank assigned it by the trial court. If none of the four arguments is successful, King County will receive nothing.

2 A footnote in its brief explains the position of the United States:

"While the United States does not challenge the priority accorded to the State of Washington Tax Commission, which, prior to the receivership had distrained and actually taken possession of property belonging to the taxpayer to satisfy taxes with respect to which it had obtained judgments, such failure is not to be deemed a concession that it has priority. Under the Government's contention that the state statute is inapplicable, the wage claimants must yield to the United States; if that contention is sustained by this Court. the claims of both the United States and the State Tax Commission will be satisfied from available funds, and there will be no necessity to resolve the priority between the two."

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King County first contends that RCW 23.01.610 is unconstitutional. Based on that contention, the county advances several arguments which, if accepted, would result in reversal or modification of the holding of the trial court.

[2] In considering an attack on the constitutionality of a statute, this court first considers whether the attacking party has standing to make the contention. See State v. Bell, ante p. 338, 368 P. (2d) 177 (1962).

[3] We have consistently held that a county's financial interest affords it no right to challenge the constitutionality of a statute. Kitsap Cy. v. Bremerton, 46 Wn. (2d) 362, 281 P. (2d) 841 (1955); State ex rel. Evans v. Brotherhood of Friends, 41 Wn. (2d) 133, 247 P. (2d) 787 (1952); King Cy. v. Port of Seattle, 37 Wn. (2d) 338, 223 P. (2d) 834 (1950); Vance Lbr. Co. v. King Cy., 184 Wash. 402, 51 P. (2d) 623 (1935). Since King County has no standing to challenge the constitutionality of RCW 2d.01.610, we cannot consider the question, and we must give the statute its intended effect.

RCW 23.01.610, which is part of the uniform business corporation act, provides that:

"In a proceeding for dissolution subject to the supervision of the court, all questions in respect to proof, allowance, payment and priority of claims shall be governed by the same rules as are applicable in bankruptcy proceedings under the national bankruptcy act as in force at the time of the dissolution proceedings." Reference will be made directly to the Federal Bankruptcy Act in discussing King County's remaining contentions.

[4] The second contention made by the county is that it has a prior lien, which is specific and perfected. However, the lien of the county is a statutory floating tax lien on the personal property owned by the insolvent corporation for taxes payable in 1960 and 1961. The county never actually took possession of the property. Section 67.c (1) of the Bankruptcy Act (11 U.S.C. 107) provides that such valid statutory liens on personal property, if unaccompanied by possessions. shall be postponed in payment until after the payment of debts within the first two priorities in

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64.a.3 Section 64.a (11 U.S.C. 104) assigns priorities to debts whose security, if any, is insufficient or unrecognized under the Bankruptcy Act. First priority: "(1) the actual and necessary costs and expenses of preserving the estate subsequent to filing the petition; . . . Second, to be paid only after the first is paid in full: "(2) wages . . . not to exceed $600 to each claimant, which have been earned within three months before the date of the commencement of the proceeding, . . . " Section 67.c (1) postpones the county to a position after that of the wage claimants, because its non-possessory lien is payable after the wage claims, which have second priority, according to the statute.

The type of lien held by the county cannot defeat the priority of the United States, under 31 U.S.C. 191, according to the authorities mentioned in the previous discussion of the claims of the United States. See, also, United States v. City of New Britain, 347 U. S. 81, 98 L. Ed. 520, 74 S. Ct. 367 (1954), wherein the supreme court pointed out that:

"When the debtor is insolvent, Congress has expressly given priority to the payment of indebtedness owing the United States, whether secured by liens or otherwise, by 3466 of the Revised Statutes, 31 U.S.C. (1946 ed.) 191. In that circumstance, where all the property of the debtor is involved, Congress has protected the federal revenues by imposing an absolute priority.

Since the lien of the State Tax Commission was perfected by actual possession, it clearly defeats the county's lien. In fact, the lien of the State Tax Commission is recognized by 67 of the Bankruptcy Act, and is not postponed by 67.c, which postpones King County's claim.

The county's relative priority is not improved by arguing that it has a valid lien, since the lien of the county cannot defeat the higher priorities of the claims ranked above it by the trial court.

[5] King County contends, thirdly, that its claim is an

3 Section 67.c(2) invalidates such liens completely, if there is not at least a levy, sequestration, or distraint. The lien of King County is probably valid under this test, but we are not called upon to decide that question in this case.

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expense of administration. If yx 64.a of the Bankruptcy Act includes such debts within the meaning of "actual and necessary costs and expenses of preserving the estate subsequent to filing the petition," then yx 64.a provides for the payment of the taxes due to the county, prior to payment of wage claims. That is, the county would have priority over the wage claimants.

In its brief, King County quotes extensively from many cases which held that receivers who operate a business, rather than liquidate it, are obligated to pay taxes accruing during administration (e.g. Swarts v. Hammer, 194 U. S. 441, 48 L. Ed. 1060, 24 S. Ct. 695 (1904); and Ingels v. Boteler, 100 F. (2d) 915 (1938)). The county has not given this court the benefit of any argument as to why those cases apply to this case, or why such taxes should be classified as the kind of "expenses of administration" which are contemplated by yx 64.a of the Bankruptcy Act.

Apparently, the contention is that whenever the receiver is required to pay taxes accruing during administration, such taxes are an "expense of administration" within the meaning of the statute. No language has been quoted to this court, from either state or federal cases, which so holds. Even if there had been such a holding, the receiver here simply liquidated the business rather than continuing to operate it under the supervision of the court. Furthermore, there has been no showing that the taxes (which King County is seeking to recover) actually accrued during the administration of the receivership. As an appellant, King County has not sustained the burden of persuading this court that its claim is entitled to priority as an "expense of administration."

[6] The fourth and final contention of King County is that three of the claims which were afforded priority as wage claims were not entitled to preferential treatment. The total amount that the trial court ordered to be paid on the three contested claims is $1,534.56. Thus, $1,246.46 would remain to be paid to the other wage claimants, out of the fund of $846.87 remaining after payment of higher-priority

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claims.4 Therefore, it is apparent that even if the county were correct in its contention that these three wage claimants should have been treated as general creditors, the remaining wage claims would use up all of the remaining funds. Since a favorable disposition of this contention would avail King County nothing, the question is moot, and we cannot decide the issue.

As to the contentions of King County, the judgment of the trial court is affirmed.

Our disposition of these appeals is as follows:

1. The order of the trial court is reversed on the appeal of the United States and its claim is to be paid in full.

2. The order is affirmed as to the claim of the Tax Commission and its claim is to be paid in full.

3. The order is affirmed on the appeal of King County and its claim is subordinated to the wage claims.

4. As to the remainder of the original fund ($5,578.31) in the hands of the receiver (after the payment of the cost of administration), the cause is remanded for such further proceedings as the trial court deems necessary to determine the rights of the remaining claimants to monies then remaining in custodia legis, according to provisions of RCW 23.01.610, in a manner consistent with this opinion.

5. None of the parties to this appeal shall recover its costs in this court.

It is so ordered.

FINLEY, C. J., HILL, WEAVER, ROSELLINI, OTT, FOSTER, and HUNTER, JJ., concur.

July 6, 1962. Petition for rehearing denied.

4 This sum was arrived at by subtracting the Tax Commission's claim of $1,309.48 and the United States' claim of $3,421.96 from the sum of $5,578.31 available for distribution after payment of the cost of administration.